The Bank for International Settlements’ Innovation Hub Nordic Center, in partnership with the Central Bank of Israel, Sveriges Riksbank, and Norges Bank, has completed a project exploring the potential benefits and challenges of using central bank digital currencies (CBDCs) in international payments.
The project, dubbed Project Icebreaker, aimed to explore the technical feasibility and perceived efficiency of cross-border and cross-currency transactions between experimental CBDC retail systems.
Challenges in Cross-Border Payments
While domestic payments have improved significantly in many jurisdictions in recent years, cross-border payments continue to face challenges such as high cost, slow speed, limited access, and lack of transparency. “The G20 has made it a priority to expand cross-border payments, and in response to this call, the BIS Innovation Center is coordinating experiments on how this can be done.
Features of Project Icebreaker
The Icebreaker model splits a cross-border transaction into two internal payments, one each in the system. Thus, the rCBDC never leaves its internal system. Settlements are made through a coordinated payment-versus-payment (PvP) scheme using hash time locked contracts (HTLC), which eliminates counterparty risk in FX transactions.
FX providers send FX rates to the Icebreaker hub, which selects the best rate to be presented to the payer for each payment request. This allows the payer to access competitive FX rates independently of the PSP, providing the end user with an rCBDC-enabled digital wallet. The dependence on the liquidity of the preferred bilateral currency pair is reduced by the automatic use of intermediate currencies.
Compatibility and scalability are ensured through the “star-shaped” approach, minimizing the number of connections between rCBDC systems. The Icebreaker concentrator only sends payment messages but does not process them.
Advantages Over Traditional Cross-Border Payments
The model developed by the Icebreaker project allows for the selection of the cheapest foreign exchange rate for the end user by enabling multiple foreign exchange providers to send quotes to the system’s hub. The competitive system reduces the risk of insufficient liquidity in the desired currency pair, which often leads to increased fees and even transaction delays. The Icebreaker system implements the use of intermediate currencies if transactions between two specific final currencies are unavailable or unfavorable.
The model used in the Icebreaker project is able to offset settlement and counterparty risk through the use of coordinated payments in CBDCs, as well as transparently and almost instantly conduct international transactions with minimal technical requirements for integration (other than compatibility with different technologies).
Cecilia Skingsley, Head of the BIS Innovation Center, noted that the project allowed central banks to have almost complete autonomy in developing their domestic retail CBDC, while providing a model of the same CBDC for international payments. The Icebreaker project shows how different CBDC solutions in different countries can provide instant cross-currency transactions, which will greatly benefit end users.
The Icebreaker project is a valuable initiative and contribution to how cross-border payments can be improved. While there are still many issues that need to be further explored, the project has been an excellent example of cooperation and knowledge sharing between the participating central banks and the BIS.