The Bank for International Settlements (BIS) and three individual central banks have teamed up to explore how central bank digital currencies (CBDCs) can be used to enable ‘immediate’ international retail and remittance payments – a project that constitutes one of the first experiments globally in testing the possibilities of cross-border retail CBDCs.
‘Project Icebreaker’ involves the BIS Innovation Hub’s Nordic centre working alongside the central banks of Israel, Norway and Sweden to test ‘some specific key functions’ and the technological feasibility of interlinking domestic CBDC systems.
The experiment – which will run until the end of the year – will see participants develop a ‘hub’ to which the central banks will connect their domestic proof-of-concept CBDC systems.
The project is announced less than three months after the BIS Innovation Hub, BIS-housed Committee on Payments and Market Infrastructures (CPMI), International Monetary Fund (IMF) and World Bank jointly published a report titled ‘Options for access to and interoperability of CBDCs for cross-border payments’. This set out how central banks face important decisions on interoperability and cross-border usage ‘if CBDCs are to fulfil their potential’.
Project Icebreaker involves architecture designed to enable ‘immediate’ retail CBDC payments across borders at a ‘significantly lower’ cost than with existing systems, according to a webpage on BIS’s website devoted to the project. Under existing systems, cross-border payments typically travel via several different banks to the final recipient (the so-called correspondent banking system through which a ‘correspondent bank’ provides local account and payment services for banks located abroad).
Looking for ‘valuable lessons’
Bank of Israel, Norges Bank (Central Bank of Norway), Sveriges Riksbank (Central Bank of Sweden) and the BIS Innovation Hub’s Nordic centre – which opened in June last year in Stockholm, and is hosted by the Riksbank in partnership with Norges Bank, Danmarks Nationalbank and Central Bank of Iceland – aim to publish a final report on the project in the first quarter of 2023.
The Riksbank, which is relatively well progressed in its explorations of a potential Swedish CBDC, issued a summary of its testing of a potential technical solution for an e-krona (its ‘E-krona pilot Phase 2’ report) in April. Norges Bank is also progressing CBDC technical explorations, having recently made the source code for a Norwegian CBDC sandbox publicly available and started working with two companies on developing ‘test cases’.
“By interlinking our current e-krona platform, developed in a test environment, with the other countries we gain valuable lessons regarding cross-border payments using a CBDC,” said Mithra Sundberg, who is head of the Riksbank’s e-krona division. “We also gain better understanding of important design and policy choices needed to secure cross-border functionalities if we decide to issue an e-krona.”
Torbjørn Hægeland, Norges Bank’s executive director for financial stability, said the project would “add significant value” to his authority’s “experimental test of domestic retail CBDC payments”.
Project’s focus of ‘extreme importance’
Bank of Israel ran a consultation on the potential issuance of a digital shekel last year, saying it was ‘accelerating its research and preparation’ for a potential CBDC. It has more recently teamed up with the Hong Kong Monetary Authority (HKMA) to jointly research CBDC’s cybersecurity aspects in a project being led by the BIS Innovation Hub’s Hong Kong centre.
“Efficient and accessible cross-border payments are of extreme importance for a small and open economy like Israel, and this was identified as one of the main motivations for a potential issuance of a digital shekel,” said Bank of Israel deputy governor, Andrew Abir. “We are privileged to be exploring the topic in this project together with partners that have vast knowledge and experience on CBDCs as well as on cross-border payment policies. The results of the project will be very important in guiding our future work on the digital shekel”.
Beju Shah, who is head of the BIS Innovation Hub Nordic Centre, described Project Icebreaker as a “first-of-a-kind” experiment that would produce lessons that “will be invaluable for central banks thinking about implementing CBDCs for cross-border payments.” Shah joined BIS at the start of the year from the Bank of England where cross-border payments was part of his remit in his then-role of special adviser for digital innovation.
When the Innovation Hub Nordic centre launched, the Riksbank’s then-first deputy governor Cecilia Skingsley said the Swedish Parliament had agreed a five-year commitment of 30 million krona (about £2.5m) per year to host the Innovation Hub, with three Riksbank staff to be assigned to its activities (and the other Nordic central banks each assigning one staff member). Skingsley left the Riksbank in August this year to join the BIS Innovation Hub as its overall head.
Focus increasing on CBDC interoperability
The ‘Options for access to and interoperability of CBDCs for cross-border payments’ report pointed out that there is no ‘one-size-fits-all’ model for access to and interoperability of CBDCs and, given that central banks have different motivations for pursue CBDC projects, they are likely to adopt different designs – and cross-border arrangements.
Meanwhile a working paper published by the European Central Bank (ECB) last month, ‘Towards the Holy Grail of Cross-Border Payments’, stated that the ‘holy grail’ of cross-border payments – defined as a solution allowing cross-border payments to be immediate, cheap, universal and settled ‘in a secure settlement medium’ – is within reach in 10 years.
Visions of how to achieve this holy grail were examined in the paper, which concluded that two routes could have highest potential for larger cross-border payment corridors: the interlinking of domestic instant payment systems and future central bank digital currencies (CBDCs), both with a ‘competitive’ FX (foreign exchange) conversion layer, are identified as the most promising avenues.
The importance of trends helping the achievement of the holy grail were outlined in the paper, including the ‘rapid’ fall in the costs of global electronic data transmission and computer processing; new payment systems technology (allowing for instant payments); innovative concepts such as the interlinking of payment systems including a currency conversion layer and CBDC; and what it described as ‘unprecedented’ political will and global collaboration such as through the G20.
The G20 Roadmap for Enhancing Cross-Border Payments, developed by the Financial Stability Board in co-ordination with the CPMI and other international bodies, was published two years ago (the FSB issued a progress report in October 2021). ‘Building block 19’ of the roadmap is ‘factoring an international dimension into CBDC design’.
In the wholesale CBDC space, ‘Project Jura’ saw the Banque de France (BdF) and Swiss National Bank (SNB), working with BIS and in collaboration with six private companies, explore whether CBDCs can be used effectively for cross-border settlement between financial institutions. Its conclusions were presented last December.