Project Icebreaker completes cross-border retail CBDC architecture experiment
A new architecture for cross-border retail CBDCs are tested at the end of Project Icebreaker.
The Bank for International Settlements (BIS) and the central banks of Israel, Norway, and Sweden have finished Project Icebreaker. This project looked at the pros and cons of using central bank digital currencies (CBDC) for international payments.
The project was a collaboration between the BIS Innovation Hub Nordic Centre, the Bank of Israel, the Norges Bank, and the Sveriges Riksbank. It tested the technical feasibility of making cross-border and cross-currency transactions between different experimental retail CBDC systems.
As the report says, the goal of Project Icebreaker is to find a specific way to connect domestic systems (a so-called hub-and-spoke solution). A foreign exchange provider who operates in both countries makes it possible for a cross-border transaction to consist of two domestic payments. So, CBDCs that are sold in stores never have to leave their own systems.
Most of the cross-border payment systems that are already in place don't let the payer choose the exchange rate because it doesn't have any say over who does the conversion. In the Icebreaker project's model, many providers of foreign exchange can send quotes to the system's hub, which then chooses the one that is cheapest for the end user.
This competitive setup reduces the risk that the desired currency pair won't have enough liquidity, which can cause fees to go up and even cause the transaction to take longer. The Icebreaker system uses bridge currencies when transactions between two specific end currencies aren't possible or aren't good. This makes foreign exchange providers compete with each other, which is good for everyone.
The project also showed that the hub-and-spoke model could speed up cross-border transactions and reduce settlement and counterparty risk by using coordinated payments in central bank money. The project gives countries that are thinking about starting their own CBDCs a model for how to use them and new services in cross-border transactions.
The results of Project Icebreaker help central banks that are thinking about putting retail CBDCs in place learn more about the technologies that can be used and the technical and policy options that are available. The project only needs very basic technical requirements in order to be able to connect domestic systems that use different technologies, like the proofs-of-concept that the three central banks used. This makes the project scalable, easy to use, and interoperable.