The approach enables central banks to maintain nearly complete control over their currencies while providing customers with the best foreign currency rates and speedier transactions.
The central bank digital currency (CBDC) cross-border payment mechanism, which the Bank for International Settlements, an association of the world's most influential central banks, studied in Project Icebreaker, offers advantages to banks and retail clients, according to a recent report.
The initiative connected the various national CBDC systems of the three nations using a technique known as "hub-and-spoke" with the assistance of the central banks of Israel, Norway, and Sweden. A retail CBDC is a digital currency that customers may use to purchase and is issued by a central bank. This might affect crypto regulation in the industry.
A cross-border transaction is divided into two domestic payments using the hub-and-spoke method, supported by a foreign currency supplier operating in both countries.
As a result, central banks have practically total control over their CBDCs and are able to send competitive exchange rate quotations to the hub so that end users may get the best deal.
The BIS said:
"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 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."
Within ten years, many central banks want to issue CBDCs. One has already been granted by Nigeria, the Bahamas, the Eastern Caribbean, and Jamaica, while China is farther ahead of most nations with its CBDC trials.
The Group of 20 industrialized nations has prioritized the investigation of cross-border payment systems, and Project Icebreaker was a reaction to the G-20's demand for action, according to the study.
Other cross-border CBDC trials successfully carried out by the BIS include Project Dunbar, which concentrated on wholesale use, and bank money transfers.
Every CBDC system involved must run continuously and contain a hash time-locked contract, which is a type of smart contract, a software that automatically executes transactions when triggered, for the hub-and-spoke architecture to function.
The report said:
“Implementing the Icebreaker model in the real world would require a range of technology, policy and legal considerations to be addressed.”
“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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