Project Icebreaker, a joint initiative from the Bank for International Settlements and the central banks of Israel, Norway, and Sweden, has successfully concluded a study on the potential benefits and challenges of using retail central bank digital currencies (CBDC) in international payments.
The project tested the technical feasibility of conducting cross-border and cross-currency transactions in a hub-and-spoke model between different experimental retail CBDC systems.
In the tests, a cross-border transaction is broken down into two domestic payments, facilitated by a foreign exchange provider active in both domestic systems.
In most existing cross-border payment systems, the payer has no choice regarding the exchange rate, as it has no control on who the provider of foreign exchange conversion is. In the model developed by the Icebreaker project, many foreign exchange providers can submit quotes to the system’s hub, which automatically selects the cheaper one for the end user.
This competitive set-up mitigates the risk of insufficient liquidity in the desired currency pair, which can drive fees up and even delay the transaction. The Icebreaker system implements the use of bridge currencies if transactions between two specific end currencies are unavailable, or not favourable, promoting competition among foreign exchange providers.
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.
The project presupposes very minimum technical requirements so as to be able to integrate domestic systems running on different technologies, thus promoting scalability, interoperability and simplicity.
Andrew Abir, deputy governor, Bank of Israel, says: “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. 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.”