The Bank for International Settlements (BIS) has successfully completed a pilot retail central bank digital currency (CBDC) pilot called Project Icebreaker, according to a March 6 press release.
The BIS Innovation Hub Nordic Centre conducted the project in collaboration with the central banks of Israel, Norway, and Sweden.
The regulator said unlike domestic payments — which are now extremely cheap and efficient — cross-border payments remain expensive and slow. Project Icebreaker’s goal was to determine the efficacy of using CBDCs for cross-border payments.
Sveriges Riksbank Deputy Governor Aino Bunge said:
“Although domestic payments have become less expensive, safer and more efficient, payments across currencies are still associated with high costs, slow speed and risk… Project Icebreaker shows how different CBDC solutions in different countries could enable instant cross-currency transactions in a way that would greatly benefit the end users.”
Project Icebreaker aimed to test the “technical feasibility” of conducting transactions in different currencies across borders between different CBDC ecosystems by essentially connecting them through a “hub-and-spoke” system.
The regulator said that its pilot showed that a hub-and-spoke system allowed cross-border transactions to be settled within seconds and reduced both counterparty and settlement risk.
Under the system, cross-border transactions are facilitated by a foreign exchange provider that operates in both systems and conducts the currency exchange so that the retail CBDCs “never need to leave their own system.”
The system will allow multiple foreign exchange providers to participate in the ecosystem and submit “bids” on their rates. This allows the system to offer competitive exchange rates to retail users by choosing the lowest available rate for a transaction automatically.
Additionally, the project also implemented the use of “bridge currencies” which come into effect if “transactions between two end currencies are unavailable, or not favorable.”
The regulators did not share further details of the bridge currencies and how they function. It is unclear whether these will be developed in-house by central banks or whether the system will allow the use of private bridge currencies.
Bank of Israel Deputy Governor Andrew Abir:
“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.”