BIS Participates In The CBDC Experiment With Israel, Hong Kong
In order to test a retail CBDC, the BIS Innovation Hub collaborated with the Bank of Israel and the Hong Kong Monetary Authority.
Project Sela was recently finished by the Bank of International Settlements (BIS) in collaboration with the central banks of Israel and Hong Kong. Project Sela demonstrated that a retail central bank digital currency (rCBDC) may combine accessibility, competition, and proactive cyber security while preserving the key benefits of traditional paper money.
One of Sela's main objectives, according to the BIS, was to create an open, competitive, and innovative retail CBDC that can meet a range of use cases. In order to accomplish this, the project attempted to remove entry barriers for service providers, unbundle retail CBDC account-related operations, and redistribute them throughout the commercial and public sectors.
Project Sela also attempted to create a digital payment method that keeps the appealing qualities of currency while providing customers with a sufficient level of anonymity. It has no credit risk, is widely accessible, has a secure way to store values and make payments, can finish settlements quickly, and has cheap operating costs.
The CBDC Unveils Intermediary Type
An innovative sort of intermediary called the Access Enabler is one of the fundamental components of Project Sela. Without "holding" end users' retail CBDC, this intermediary manages all customer-facing retail CBDC services. This reduces the requirement to keep money in order to preserve liquidity or lower settlement risk.
The BIS remarked that Project Sela demonstrated substantial promise in developing a retail CBDC platform with access, security, and innovation features in the 60-page report. The central bank is envisioned as the platform's operator in Project Sela, with the primary duty of assuring quick settlement for all transactions.
Access enablers (AEs), private intermediate service providers, will be in charge of all "customer-facing" services. The technical information in the paper indicates that AEs will not have access to consumer rCBDCs because users manage their money using "self-generated private cryptographic keys."
The architecture of Project Sela prevents AEs from taking on credit risks by doing away with the requirement that they maintain liquidity on their balance sheet prior to providing rCBDC services. According to BIS, eliminating the credit risk will allow AEs to flourish, fostering healthy competition and fostering innovation in the market.
The BIS claims that this will lower the entrance barrier because AEs won't be required to perform account creation and record management duties. However, AEs are expected to provide a variety of services, such as routing, endorsements, and other needs for compliance that may be listed in the rule book.
Comparing the provision of rCBDC services to the current payments market, the report stated that "lower entry barriers can enable wider participation, to include, for example, SMEs, civil society and charitable organizations, e-commerce providers, community centers, and technology companies, among others."
The potential for security breaches is one specific concern associated with AEs having more access to the CBDC system. Project Sela employs "preventative software design" to lessen cyber security risks while preserving the "desirable attributes of cash."
The Access Enabler also has the benefit of not needing to keep money on its balance sheet. The Access Enabler eliminates two significant cost sources: complexity and risk, when compared to current payment service providers.
Head of the BIS Innovation Hub Hong Kong Centre Bénédicte Nolens said:
“Project Sela explored the feasibility of a CBDC system where the central bank operates the retail ledger and a new type of intermediary, called an Access Enabler, provides broader access to the CBDC, promoting competition and innovation. It showed that this can be achieved without compromising cyber security or the privacy of end users from the central bank.”
Israel Andrew Bir, the deputy governor of the bank said;
“Competition and innovation require a flourishing and open ecosystem with many different types of service providers. This was our initial goal in Project Sela as a proof of concept, and the project proved the feasibility of the model we had in mind. If central bank money is to go digital, cybersecurity is key, and the project provided an opportunity to discuss and study cybersecurity elements of CBDC with our partners. The Bank of Israel is honored to collaborate with institutions that stand at the frontier of CBDC explorations.”
Project Sela, according to HKMA Deputy Chief Executive Howard Lee, rekindles the city's interest in considering an electronic HKD. He stated:
“Project Sela provided valuable practical insights into the cyber security, technological, legal, and policy aspects of a retail CBDC implementation. While the HKMA has not yet made a decision on whether and when to introduce a retail CBDC in Hong Kong, Project Sela’s outcomes will inform our ongoing exploration of a possible e-HKD. We hope Project Sela will also benefit other central banks in their own evaluations of different retail CBDC architectures.”
CBDC-Experienced Players In The Field
The three participants have a wealth of knowledge regarding CBDCs, and the BIS has completed a number of studies into the cross-border payment capabilities of central bank money. For its highly successful mCBDC pilot, the BIS previously collaborated with the central banks of China, Singapore, Hong Kong, and the United Arab Emirates.
Project Icebreaker, a partnership with Israel, Sweden, and Norway, produced significant outcomes for the future of international CBDCs. Israel's research into the digital shekel has advanced significantly, whilst Hong Kong's pilot program seems to be taking cues from China's digital yuan.
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