BIS Says 'Hub-and-Spoke' Cross-Border Transfers Offer Benefits to Retail CBDC
The system is designed to offer users the best foreign-exchange rates and faster transactions while allowing central banks to keep almost total control of their currencies.
The Bank for International Settlements, an organization of the world's leading central banks, said the cross-border payment model for the central bank digital currency, or CBDC, it explored in Project Icebreaker offers benefits to both the banks and retail customers, according to a report on Monday.
The project, which was conducted with the help of the central banks of Israel, Norway and Sweden, used a so-called "hub-and-spoke" method to connect between the countries' different national CBDC systems. A retail CBDC is a digital currency issued by a central bank that can be used for payments by consumers.
In the hub-and-spoke process, a cross-border transaction is broken down into two domestic payments facilitated by a foreign-exchange provider active in both countries. That gives central banks almost complete control over their CBDCs, while allowing competitive quotes for the exchange rate to be submitted to the hub so that end users can benefit from the best rate.
"This competitive setup mitigates the risk of insufficient liquidity in the desired currency pair, which can drive fees up and even delay the transaction," the BIS said. "The project also demonstrated that the hub-and-spoke model can reduce settlement and counterparty risk by using coordinated payments in central bank money; and complete cross-border transactions within seconds."
Many central banks are looking to issue a CBDC within 10 years. Nigeria, Bahamas, Eastern Caribbean and Jamaica have already issued one, and China is further ahead than most countries with its CBDC trials. The Group of 20 industrialized nations has made exploring cross-border payment systems a priority, and Project Icebreaker was a response to G-20's call to action, the report said. The BIS has conducted other successful CBDC cross-border experiments, such as Project Dunbar, which focused on wholesale use, or money transfers between banks. .
For the hub-and-spoke model to work, every CBDC system involved needs to operate 24/7 and have a hash time-locked contract, which is a form of smart contract, a program that automatically execute transactions when triggered.
“Implementing the Icebreaker model in the real world would require a range of technology, policy and legal considerations to be addressed,” the report said. “Policy considerations could include the governance arrangement, the viability of the business model, liquidity provision, privacy, AML/CFT ( anti-money laundering/ combating the financing of terrorism) compliance and monitoring, and payment initiation-related standards.”
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