Int'l Experiment Proposes Cross-Border Retail CBDC Run as Two Domestic Payments

by Solomon Oladipupo
  • BIS' model requires FX providers to submit quotes to settle transactions.
  • The cross-border retail CBDC system is to be run on bridge currencies.
Bank of international settlements (BIS) and Financial Stability Board (FSB) G20 headquarters
Bloomberg
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The Bank for International Settlement (BIS) and its partners, the central banks of Israel, Norway and Sweden have completed a joint experiment on cross-border retail central bank digital currency (CBDC). The experiment was tagged ‘Project Icebreaker.’ Retail CBDCs are government-backed digital currencies used for payment purposes by consumers and businesses.

The experiment, which studied the potential advantages and challenges of using retail CBDCs in international payment, found that foreign exchange (FX) providers can be used to facilitate cross-border retail CBDCs by breaking down a cross-border transaction into two domestic payments.

‘The Hub-and-Spoke Model’

In a statement released on Thursday, BIS explained that it has developed a “hub-and-spoke solution” through which cross-border retail CBDCs never have to exit their systems. This system works by requiring many forex providers to submit quotes to a retail CBDC system’s hub which then selects the cheapest alternatives for end users to settle their transactions.

This model differs from most of the existing cross-border payment systems under which users or payers have no choice about the exchange rate or who provides the forex conversion, the international financial institution noted. BIS added that its new solution uses bridge currencies to fight the problems of insufficient liquidity for currency pairs, thereby preventing the attendant issues of higher fees and delay in cross-border payments.

“The project also demonstrated that the hub-and-spoke model can reduce settlement and counterparty risk by using coordinated payments in central bank money; and complete cross-border transactions within seconds,” BIS explained.

Furthermore, BIS said the new model means that countries considering the development of their domestic CBDCs can introduce these features and other innovative services into their cross-border transactions. It added that the project provides a “deeper understanding of the technologies that can be used and the technical and policy choices available.”

“Project Icebreaker is unique in its proposition. It first allows central banks to have almost full autonomy in designing a domestic retail CBDC. Then it provides a model for that same CBDC to be used for international payments,” explained Cecilia Skingsley, the Head of the BIS Innovation Hub.

US, Australia Make New Moves on CBDC

Meanwhile, the United States and Australia both recently provided new updates on their efforts towards assessing the feasibility of a CBDC. While the United States says it is planning to establish a new Treasury Department-led working group to deliberate on the possible launch of a digital dollar, the Reserve Bank of Australia unveiled 14 firms that proposed various CBDC uses cases to be tested in its limited-scale CBDC pilot that “will take place over the coming months.”

The Bank for International Settlement (BIS) and its partners, the central banks of Israel, Norway and Sweden have completed a joint experiment on cross-border retail central bank digital currency (CBDC). The experiment was tagged ‘Project Icebreaker.’ Retail CBDCs are government-backed digital currencies used for payment purposes by consumers and businesses.

The experiment, which studied the potential advantages and challenges of using retail CBDCs in international payment, found that foreign exchange (FX) providers can be used to facilitate cross-border retail CBDCs by breaking down a cross-border transaction into two domestic payments.

‘The Hub-and-Spoke Model’

In a statement released on Thursday, BIS explained that it has developed a “hub-and-spoke solution” through which cross-border retail CBDCs never have to exit their systems. This system works by requiring many forex providers to submit quotes to a retail CBDC system’s hub which then selects the cheapest alternatives for end users to settle their transactions.

This model differs from most of the existing cross-border payment systems under which users or payers have no choice about the exchange rate or who provides the forex conversion, the international financial institution noted. BIS added that its new solution uses bridge currencies to fight the problems of insufficient liquidity for currency pairs, thereby preventing the attendant issues of higher fees and delay in cross-border payments.

“The project also demonstrated that the hub-and-spoke model can reduce settlement and counterparty risk by using coordinated payments in central bank money; and complete cross-border transactions within seconds,” BIS explained.

Furthermore, BIS said the new model means that countries considering the development of their domestic CBDCs can introduce these features and other innovative services into their cross-border transactions. It added that the project provides a “deeper understanding of the technologies that can be used and the technical and policy choices available.”

“Project Icebreaker is unique in its proposition. It first allows central banks to have almost full autonomy in designing a domestic retail CBDC. Then it provides a model for that same CBDC to be used for international payments,” explained Cecilia Skingsley, the Head of the BIS Innovation Hub.

US, Australia Make New Moves on CBDC

Meanwhile, the United States and Australia both recently provided new updates on their efforts towards assessing the feasibility of a CBDC. While the United States says it is planning to establish a new Treasury Department-led working group to deliberate on the possible launch of a digital dollar, the Reserve Bank of Australia unveiled 14 firms that proposed various CBDC uses cases to be tested in its limited-scale CBDC pilot that “will take place over the coming months.”

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