BIS Wraps Exploration Project on Retail CBDC Payment System

The Bank for International Settlements (BIS), in collaboration with the central banks of Israel, Norway, and Sweden, has officially concluded Project Icebreaker, a groundbreaking exploration into the potential of retail Central Bank Digital Currencies (CBDCs) for international payments. This initiative, spearheaded by the BIS Innovation Hub Nordic Centre, aimed to identify the benefits and challenges associated with launching retail CBDCs that possess cross-border functionalities. As the world moves towards increasingly digital economies, the need for efficient and secure cross-border payment solutions has become paramount. Project Icebreaker represents a significant step towards understanding how CBDCs can address these needs, offering faster, cheaper, and more transparent international transactions for individuals and businesses alike. The findings of this project will be invaluable for central banks globally as they consider the future of digital currencies and their role in the global financial system. It highlights the importance of interoperability and collaboration in shaping the future of money. This article dives deep into the details of Project Icebreaker, exploring its methodology, key findings, and implications for the future of retail CBDCs and international payments.

The Bank for International Settlements (BIS) and the central banks of Israel, Norway and Sweden have concluded Project Icebreaker, which studied the potential benefits and challenges of using retail central bank digital currencies (CBDC) in international payments. A collaboration between the BIS Innovation Hub Nordic Centre, Bank of Israel, Norges Bank, and Sveriges Riksbank, the

Project Icebreaker: A Deep Dive into Retail CBDC Interoperability

Project Icebreaker focused on addressing a critical question: How can different domestic CBDC systems be linked together to facilitate seamless and efficient cross-border payments? The project involved rigorous testing of key functions and technological feasibility, ultimately concluding that a hub-and-spoke model could be highly effective. This model envisions a central ""hub"" that connects various domestic CBDC systems (""spokes""), allowing for real-time settlements and reduced counterparty risk.

BIS wraps exploration project on retail CBDC payment system The Bank for International Settlements, or BIS, has reported it has concluded a project exploring international retail and remittance payments use cases for central bank digital currencies, or CBDCs, with the central banks of Israel, Norway and Sweden.

Understanding the Hub-and-Spoke Model

The hub-and-spoke model is a network topology that features a central node (the hub) which connects to multiple other nodes (the spokes). In the context of CBDCs, this means:

The Bank for International Settlements, or BIS, has reported it has concluded a project exploring international retail and remittance payments use cases for central bank digital currencies, or BIS wraps exploration project on retail CBDC payment system

• The Hub: A platform or system that acts as an intermediary, facilitating the exchange of CBDCs between different countries.
• The Spokes: Individual domestic CBDC systems operated by participating central banks.

This approach offers several advantages:

• Reduced Settlement Risk: By centralizing the settlement process through the hub, the risk of default or delays is minimized.
• Lower Counterparty Risk: The hub acts as a trusted intermediary, reducing the need for bilateral agreements and the associated risks.
• Faster Transactions: Cross-border payments can be completed in seconds, significantly faster than traditional methods.

For example, imagine a Swedish citizen wanting to send money to a friend in Israel. With a fully functional hub-and-spoke CBDC system, the transaction would involve:

1. The Swedish citizen initiates the payment using the Swedish CBDC system (the spoke).
2. The Swedish CBDC system communicates with the central hub.
3. The hub converts the Swedish CBDC to Israeli CBDC (if necessary).
4. The hub transfers the Israeli CBDC to the recipient's account in the Israeli CBDC system (the spoke).
5. The recipient receives the funds almost instantly.

Key Benefits and Challenges Identified by Project Icebreaker

While Project Icebreaker demonstrated the potential of retail CBDCs for cross-border payments, it also highlighted several challenges that need to be addressed before widespread implementation. The BIS report outlined the following key benefits:

• Improved Efficiency: CBDCs can streamline cross-border payments, eliminating intermediaries and reducing processing times.
• Lower Costs: By reducing the need for correspondent banking relationships and other intermediaries, CBDCs can significantly lower transaction costs.
• Increased Transparency: CBDC transactions are recorded on a blockchain or similar distributed ledger, providing greater transparency and traceability.
• Enhanced Financial Inclusion: CBDCs can provide access to financial services for underserved populations, particularly those who lack access to traditional banking.
• Reduced Risk: As mentioned earlier, the hub-and-spoke model reduces settlement and counterparty risk.

However, the project also identified several challenges that need to be carefully considered:

• Interoperability: Ensuring that different CBDC systems can communicate and interact seamlessly is crucial for the success of cross-border payments.
• Cybersecurity: CBDC systems must be robust and secure to prevent cyberattacks and fraud.
• Regulatory Framework: Clear and consistent regulatory frameworks are needed to govern the issuance, distribution, and use of CBDCs.
• Privacy Concerns: Balancing the need for transparency with the need to protect user privacy is a key challenge.
• Technological Infrastructure: Developing the necessary technological infrastructure to support CBDC systems requires significant investment and expertise.

Addressing the Interoperability Challenge

One of the most significant challenges is interoperability. Different countries might choose to implement CBDCs using different technologies and protocols. For cross-border payments to work effectively, these systems must be able to communicate and exchange value seamlessly. Several approaches can be used to address this challenge:

• Common Standards: Adopting common standards for CBDC design and operation can facilitate interoperability.
• APIs (Application Programming Interfaces): Using APIs to allow different CBDC systems to communicate with each other.
• Interoperability Platforms: Developing dedicated platforms that facilitate the exchange of CBDCs between different systems.

Seven Central Banks and the BIS: A Continued Focus on Retail CBDCs

The conclusion of Project Icebreaker is not the end of the story. Seven central banks, along with the BIS, are continuing their work on retail CBDCs, focusing on analyzing policy options and practical implementation issues. This ongoing effort underscores the importance of CBDCs as a potential solution for modernizing payment systems and promoting financial innovation.

Policy Options and Practical Implementation

The ongoing research will likely focus on several key areas:

• Monetary Policy Implications: How will CBDCs affect monetary policy and the role of central banks?
• Financial Stability: Will CBDCs enhance or undermine financial stability?
• Payment System Design: What is the optimal design for a CBDC system, considering factors such as security, scalability, and privacy?
• Legal and Regulatory Frameworks: What legal and regulatory frameworks are needed to govern CBDCs?
• User Adoption: How can central banks encourage user adoption of CBDCs?

The practical implementation of retail CBDCs will require careful consideration of various factors, including:

• Technology Selection: Choosing the right technology platform for the CBDC system.
• Security Measures: Implementing robust security measures to prevent cyberattacks and fraud.
• User Interface Design: Designing a user-friendly interface that makes it easy for people to use CBDCs.
• Public Education: Educating the public about the benefits and risks of CBDCs.

Meeting Future User Needs Through Interoperable Systems

A new set of reports explores how CBDCs could best meet users' future needs by developing interoperable systems that support private innovation while preserving public trust. This involves finding the right balance between innovation, security, and regulatory oversight.

Balancing Innovation and Public Trust

One of the key challenges is to foster innovation in the CBDC space while maintaining public trust. This requires a collaborative approach that involves central banks, private sector companies, and academic researchers. Several strategies can be used to achieve this balance:

• Open Innovation: Encouraging private sector companies to develop innovative applications and services that leverage CBDCs.
• Regulatory Sandboxes: Creating regulatory sandboxes where companies can test new CBDC-related products and services in a controlled environment.
• Public-Private Partnerships: Establishing public-private partnerships to develop and deploy CBDC systems.
• Transparency and Accountability: Ensuring transparency and accountability in the operation of CBDC systems to maintain public trust.

For instance, imagine a scenario where a small business owner in Norway wants to accept payments from customers in Sweden and Israel. With an interoperable CBDC system, the business owner could receive payments in Norwegian CBDC, Swedish CBDC, or Israeli CBDC, and seamlessly convert them to the currency of their choice. This would significantly reduce transaction costs and make it easier for small businesses to participate in international trade.

Extensive Cooperation and Dialogue: The Key to CBDC Success

As Project Icebreaker and ongoing initiatives demonstrate, extensive cooperation and dialogue are essential for the successful development and implementation of retail CBDCs. This involves collaboration between central banks, international organizations, private sector companies, and academic researchers.

The Importance of International Collaboration

International collaboration is particularly important for ensuring interoperability and promoting the adoption of CBDCs on a global scale. This requires:

• Sharing Best Practices: Central banks should share their experiences and best practices in developing and implementing CBDCs.
• Harmonizing Standards: Efforts should be made to harmonize standards for CBDC design and operation.
• Addressing Cross-Border Issues: Central banks should work together to address cross-border issues such as money laundering and terrorist financing.

Furthermore, ongoing dialogue with the public is crucial for building trust and ensuring that CBDCs meet the needs of users. This involves:

• Public Consultations: Central banks should conduct public consultations to gather feedback on CBDC design and implementation.
• Educational Initiatives: Educating the public about the benefits and risks of CBDCs.
• Addressing Concerns: Addressing public concerns about privacy, security, and other issues.

Practical Examples of Retail CBDC Use Cases

To truly understand the potential of retail CBDCs, it's helpful to consider some practical examples of how they could be used in everyday life:

• Cross-Border Remittances: Sending money to family members in other countries could become significantly cheaper and faster.
• International Trade: Businesses could use CBDCs to settle international transactions more efficiently.
• E-commerce: Consumers could use CBDCs to make online purchases from merchants around the world.
• Government Payments: Governments could use CBDCs to distribute social welfare benefits more efficiently and transparently.
• Financial Inclusion: CBDCs could provide access to financial services for underserved populations who lack access to traditional banking.

For example, consider a migrant worker in Sweden who regularly sends money back to their family in the Philippines. Using traditional remittance services, the worker might pay significant fees and wait several days for the money to arrive. With a CBDC system, the worker could send the money instantly and at a fraction of the cost.

Answering Common Questions About Retail CBDCs

As CBDCs gain more attention, many people have questions about their potential impact. Here are some answers to common questions:

What is a Retail CBDC?

A retail CBDC is a digital form of central bank money that is available to the general public. It is essentially a digital version of physical cash, issued and backed by the central bank.

How is a CBDC Different from Cryptocurrency?

While both CBDCs and cryptocurrencies are digital currencies, there are key differences:

• Issuer: CBDCs are issued and backed by central banks, while cryptocurrencies are typically decentralized and not backed by any central authority.
• Regulation: CBDCs are subject to government regulation, while cryptocurrencies are often unregulated.
• Volatility: CBDCs are typically designed to be stable in value, while cryptocurrencies can be highly volatile.

Are CBDCs Safe?

Central banks are committed to ensuring the security of CBDC systems. They will implement robust security measures to prevent cyberattacks and fraud.

Will CBDCs Replace Cash?

It is unlikely that CBDCs will completely replace cash. Central banks are likely to offer CBDCs as an additional payment option, alongside cash and other digital payment methods.

What are the Risks of CBDCs?

Some potential risks of CBDCs include:

• Cybersecurity Risks: CBDC systems could be vulnerable to cyberattacks.
• Privacy Concerns: CBDC transactions could be tracked by the government.
• Disintermediation of Banks: CBDCs could reduce the role of commercial banks in the financial system.

Conclusion: The Future of International Payments with Retail CBDCs

Project Icebreaker marks a significant milestone in the exploration of retail CBDCs and their potential to revolutionize international payments. The findings highlight the potential benefits of improved efficiency, lower costs, and increased transparency. While challenges remain, such as interoperability and cybersecurity, the ongoing work by central banks and the BIS demonstrates a commitment to addressing these issues and fostering innovation in the CBDC space. As the world becomes increasingly interconnected, the need for efficient and secure cross-border payment solutions will only grow. Retail CBDCs offer a promising pathway towards achieving this goal. The key takeaways from Project Icebreaker are the viability of the hub-and-spoke model, the importance of international collaboration, and the need for careful consideration of policy and regulatory frameworks. Ultimately, the success of retail CBDCs will depend on the ability of central banks to balance innovation with public trust and create systems that meet the needs of users while safeguarding the integrity of the financial system. The BIS, along with partnering central banks, will continue exploring options and sharing findings to help improve cross-border payments globally.