A cross-border system connecting central bank digital currencies could allow for cheaper and safer global payments, according to a report published by the Bank for International Settlements on Monday.
The Basel-based bank for central banks’ Innovation Hub, in cooperation with the central banks of Israel, Norway and Sweden, has wrapped up “Project Icebreaker” to find solutions for DLT-based cross-border transactions.
The project “first allows central banks to have almost full autonomy” when designing their consumer-facing digital currencies before providing a “model for that same CBDC to be used for international payments,” said Cecilia Skingsley, who leads the BIS Innovation Hub, in the report.
As jurisdictions worldwide are racing to develop their own CBDCs, this proposal aims to allow for interoperability between national infrastructures and reduce settlement and counterparty risks while cutting time and costs for transactions.
“Although domestic payments have become less expensive, safer and more efficient, payments across currencies are still associated with high costs, slow speed and risk,” said Aino Bunge, deputy governor of Sweden’s Sveriges Riksbank. “When exploring CBDCs, it is important to include cross-currency opportunities from the start.”
A ‘hub-and-spoke’ model
Project Icebreaker proposes a model that bridges domestic retail CBDC systems through a “hub-and-spoke” model. The so-called Icebreaker hub would consist of foreign exchange providers on both sides picking the cheapest conversion path for the payer in a cross-border transaction.
“FX providers would hold and manage [retail CBDC] liquidity in their operating currencies,” the report reads. “Each FX provider would submit buy and sell rates for those currencies to the Icebreaker hub. The Icebreaker hub therefore maintains a live database of the submitted FX rates and returns the best available rate along with the identity of the FX provider to the payer upon request.”
The BIS has been supporting the acceleration of central bank-backed digital currencies. “CBDCs replicate existing forms of money in a technologically superior way,” general manager Agustin Carstens said in a speech in February.
The development of CBDCs is topping policymakers’ agendas this year, with major steps forward in countries like Australia and the UK. Last week, the Biden administration in the U.S. also announced it would start regular meetings to talk about a potential digital dollar to complement the Federal Reserve’s exploration.
Correction: updates to correct BIS's official name.
© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.