In partnership with the central banks of Israel, Sweden, and Norway, the Bank for International Settlements (BIS) has finalized a project that explores the potential advantages and challenges of using central bank digital currencies (CBDC) in international payments.
The project, dubbed ‘the Icebreaker,’ aimed to observe the technical feasibility and prospective efficiency of cross-border and cross-currency transactions between experimental retail CBDC systems, as the BIS stated in the report published on March 6.
As per the report, the project involved the cooperation between the BIS Innovation Hub Nordic Center, Bank of Israel, Sveriges Riksbank, and Norges Bank, and it has allowed these organizations to understand the underlying technologies and related policies better, promoting scalability, interoperability, and simplicity.
To this end, the central banks’ project teams were testing specific methods of connecting domestic systems (a.k.a. ‘hub-and-spoke’ solutions) by breaking down cross-border transactions into two domestic payments, facilitated by a foreign exchange provider active in both, so retail CBDCs never needed to leave their own systems.
Furthermore, the BIS highlighted the advantages of such a model compared to traditional cross-border payments:
“In most existing cross-border payment systems, the payer has no choice regarding the exchange rate, as it has no control over 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.”
On top of that, the model used in the Icebreaker project has the ability to offset settlement and counterparty risk by using coordinated payments in central bank money, as well as to carry out international transactions transparently and nearly instantly, with minimum technical requirements for integration, in addition to compatibility with different technologies.
BIS and digital assets
Commenting on the project, Cecilia Skingsley, Head of the BIS Innovation Hub, explained:
“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.”
In November 2022, Finbold reported on the BIS’s plans to explore cross-border settlements and trading involving CBDCs powered by decentralized finance (DeFi) protocols. The organization has also argued that CBDCs were essential for modernizing finance, while its head, Agustín Carstens, has recently expressed skepticism that cryptocurrencies could replace fiat currency.
Meanwhile, Ben Broadbent, deputy governor for monetary policy at the Bank of England (BoE), stated in late February that CBDCs could ‘bring opportunities’ and benefits to the broad financial ecosystem, such as facilitating more streamlined payments.