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Central banks of Israel, Norway and Sweden team up with the BIS to explore retail CBDC for international payments.
The Bank for International Settlements (BIS) and the central banks of Israel, Norway and Sweden are launching Project Icebreaker, a joint exploration of how central bank digital currencies (CBDCs) can be used for international retail and remittance payments.
Cross-border payments continue to be plagued by high costs, low speed, limited access and insufficient transparency. The G20 has launched an ambitious programme to improve cross-border payments, aiming to achieve faster and cheaper, as well as more transparent and inclusive cross-border payments. One of the workstreams explores how CBDCs could play a role in enhancing cross-border payments. The BIS Innovation Hub and other international institutions and standard-setting committees have been working together to investigate the use of CBDCs for cross-border payments. The most recent report was published last July.
Project Icebreaker is a collaboration between the Bank of Israel, Norges Bank, Sveriges Riksbank and BIS Innovation Hub Nordic Centre to develop a “hub” to which participating central banks will connect their domestic proof-of-concept CBDC systems. The objective is to test some specific key functions and the technological feasibility of interlinking different domestic CBDC systems.
The architecture is designed to enable immediate retail CBDC payments across borders, at a significantly lower cost than with existing systems, which are typically based on payments being sent via several different banks to the final recipient (the so-called correspondent banking system).
“This first-of-a-kind experiment will dig deeper into the technology, architecture and design choices and trade-offs, and explore related policy questions. These learnings will be invaluable for central banks thinking about implementing CBDCs for cross-border payments,” said Beju Shah, Head of the BIS Innovation Hub Nordic Centre.
“Sveriges Riksbank is collaborating in this experiment as part of the e-krona project,” said Mithra Sundberg, Head of the E-krona Division.
“By interlinking our current e-krona platform, developed in a test environment, with the other countries we gain valuable lessons regarding cross-border payments using a CBDC. We also gain better understanding of important design and policy choices needed to secure cross-border functionalities if we decide to issue an e-krona.”
"Efficient and accessible cross border payments are of extreme importance for a small and open economy like Israel and this was identified as one of the main motivations for a potential issuance of a digital shekel. We are privileged to be exploring the topic in this project together with partners that have vast knowledge and experience on CBDCs as well as on cross-border payment policies. The results of the project will be very important in guiding our future work on the digital shekel,” said Bank of Israel Deputy Governor, Andrew Abir.
“We are delighted to be part of one of the first experimental test of cross border retail CBDC together with our partners BIS Innovation Hub, Sveriges Riksbank and Bank of Israel. This will add significant value to our experimental test of domestic retail CBDC payments,” said Torbjørn Hægeland, Norges Bank’s Executive Director for Financial Stability.
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Project Icebreaker finds retail CBDC can work for cross broder payments
Today the central banks of Israel, Norway and Sweden and the BIS Innovation Hub shared the results of Project Icebreaker, a cross border central bank digital currency (CDBC) research project.
There have been several cross border CBDC initiatives, but to date, they have all focused on using interbank or wholesale CBDC. Project Icebreaker is the first to explore connecting retail CBDCs in a hub and spoke model as a cross border CBDC application.
The domestic CBDC does not travel across borders. Instead, the payment goes to a foreign exchange (FX) provider who exchanges the domestic CBDC for a foreign CBDC. Unlike current payment systems where the payment provider is usually also the FX provider, in Icebreaker there’s price competition between FX providers which addresses one of the biggest cost issues with cross border payments.
For the FX, an intermediate currency can be used if there’s insufficient competition for a particular FX pair.
Icebreaker’s platform is designed as a hub and spoke model, with the central hub purely operating as a message exchange, not dissimilar to SWIFT.
All three CBDCs used distributed ledger technology (DLT), with Israel and Norway using private Ethereum-based ledgers (Quorum and Besu) and Sweden using Corda’s enterprise blockchain.
“When exploring CBDCs it is important to include cross currency opportunities from the start,” said Aino Bunge, Deputy Governor, Sveriges Riksbank. “Project Icebreaker is an interesting project that shows how different CBDC solutions in different countries could enable instant cross currency transactions in a way that would greatly benefit the end users.”
Despite needing to consider cross border issues at the beginning, the project found that the CBDCs could be very different, with a bare minimum of commonality. This includes conditional Hash Time Locked Contracts (HTLC) for interoperability and instant settlement and a CBDC that operates 24/7/365. Additionally, there needs to be several FX providers.
“If Israel is to issue a digital shekel, it would be very important that we do it according to the evolving global standards, so that Israelis could use it also for efficient and accessible cross border payments,” said Andrew Abir, Deputy Governor, Bank of Israel. “While there is still much work ahead of us for the Icebreaker model to become a global standard, the learnings from this successful project have been very important for us and for the central banking community.”
The project assumed that wallet providers would deal with anti money laundering (AML) processes. AML is one of the biggest frictions in cross border payments. “A wallet provider in one country may not know the origin of the funds sent by the payer in another country in a chain of cross-border payments,” the paper says. It suggests the hub owner might want to explore new technologies to address the friction.
Meanwhile, in Asia project MBridge, a wholesale cross border CBDC, is advancing towards production as a joint initiative between the BIS and the central banks of China, Hong Kong, Thailand and the UAE.
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UAE Makes First Cross Border CBDC Payment Using mBridge; Jan 2024
The UAE just sent the first cross border payment using the UAE’s central bank digital currency (CBDC), the Digital Dirham. According to Gulf News, the payment of Dirham 50 million ($13.6m) was made to China. It used the mBridge cross border CBDC platform, where both countries are participants alongside Hong Kong and China. Another 23 central banks are observers.
Last year the UAE and China agreed to promote digital currency payments between the countries.
The Central Bank of UAE executed the mBridge transaction during the bank’s fiftieth anniversary celebrations. Coincidentally, it was also the eve of the first BRICS meeting following its expansion from five to ten member countries. The UAE joined at the start of the year. That’s symbolic given the BRICS members are keen to encourage local currency payments and less dependence on the dollar, something which the mBridge platform might help.
Strictly speaking, the mBridge project is not yet live. There are plans to launch a minimum viable product (MVP) in the middle of the year. However, last week, the Bank for International Settlements (BIS) Innovation Hub said it was too early to talk about timescales.
One of the benefits of using central bank digital currencies for cross border payments is it should remove the need to use the correspondent banking system, which adds costs and delays to payments. In a speech this week, the Deputy Director of China’s Digital Currency Research Institute (DCRI) said that mBridge transactions take seven seconds and cut costs by 50%. The DCRI developed the technology that underpins mBridge.
Could mBridge FX costs be higher?
However, a recent report from the Carnegie Endowment highlighted that US dollar currency legs tend to be far more liquid, so higher foreign exchange (FX) costs could limit the benefits of local currency payments.
Last October the Financial Stability Board (FSB) published a paper for the G20 showing that FX makes up most of the costs of cross border payments – 60% for P2P payments, 97% for P2B payments and somewhere in between for B2B payments.
Notably, one of the outstanding work items for mBridge relates to novel technologies to support FX and liquidity.
