According to a report on Monday, the Bank for International Settlements, an association of the top central banks in the world, said the cross-border payment mechanism for the central bank digital currency, or CBDC, it investigated in Project Icebreaker, offers advantages to both banks and retail clients.
The initiative connected the various national CBDC systems of the three nations using a technique known as “hub-and-spoke,” with the assistance of the central banks of Israel, Norway, and Sweden. A retail CBDC is a digital currency that customers can use to make purchases and is issued by a central bank.
A cross-border transaction is divided into two domestic payments using the hub-and-spoke method, which is supported by a foreign currency supplier operating in both countries. As a result, central banks have practically total control over their CBDCs and are able to submit competitive exchange rate quotations to the hub so that end users can get the best deal.
The risk of insufficient liquidity in the targeted currency pair, which can increase fees and possibly cause a transaction to be delayed, is reduced by this competitive system, according to the BIS. The study also showed how the hub-and-spoke approach may speed up cross-border transactions while lowering counterparty and settlement risk by employing coordinated payments in central bank money.
Within ten years, many central banks want to issue CBDCs. One has already been issued by Nigeria, the Bahamas, the Eastern Caribbean, and Jamaica, while China is farther ahead of most nations with its CBDC trials. The investigation of cross-border payment systems has been prioritised by the Group of 20 industrialised nations, and Project Icebreaker was a reaction to the G-20’s call for action, according to the report. Other effective CBDC cross-border tests by the BIS include Project Dunbar, which concentrated on wholesale use, and money transfers between banks.
Every CBDC system involved must run continuously and contain a hash time-locked contract, which is a type of smart contract, a programme that automatically executes transactions when triggered, for the hub-and-spoke model to function.
The paper stated that a variety of technological, governmental, and legal issues would need to be taken into account in order to implement the Icebreaker concept in the real world. The governance structure, the feasibility of the business model, liquidity provision, privacy, AML/CFT compliance and monitoring, and payment initiation-related requirements are just a few examples of the policy considerations that could be made.
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