Bank for International Settlements, et al. report on CBDC cross-border settlement experiment

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Report on CBDC Multi-Currency Transactions

The Bank for International Settlements (BIS) reported on the 6th the results of an experiment conducted jointly with several central banks on central bank digital currency (CBDC) cross-border transactions. He explained the advantages, necessary requirements for each CBDC system, and future considerations.

This was carried out by the BIS Innovation Hub in collaboration with the Bank of Israel, the Bank of Norway and the National Bank of Sweden. The aim was to gain a better understanding of the technology used for international payments for CBDCs, and explore the technical and policy options central banks need to consider when designing how to implement CBDCs.

BIS Innovation Hub Nordic Center Director Beju Shah explains:

This project has demonstrated how cross-border and cross-currency settlements between CBDCs in different countries can be achieved with minimal requirements, enabling integration and interoperability between them.

It also demonstrated benefits to everyday users, such as increased transparency, reduced costs, and increased competition. A retail CBDC needs more work, but the lessons learned from this project will be of great value to central banks.

There are two types of CBDC: the wholesale type, which is used for interbank payments, and the retail type, which is mainly used by retail users such as consumers. For this project, the retail version was tested.

In addition, in this model, the transaction is divided into two, and each transaction is conducted domestically by foreign exchange (FX) brokers in both countries. This gives central banks almost complete control over their CBDCs. It also has a mechanism to offer the best rate to the end user.

What are CBDCs

A digital currency issued by the central bank of a country or region. It stands for “Central Bank Digital Currency”. The big difference from virtual currency is that CBDC is a legal tender. While it is expected to reduce costs and improve efficiency in currency management and settlement, there are many issues to be considered, such as protection of personal information and privacy, security measures, and impact on the financial system.

▶Cryptocurrency Glossary

Benefits and requirements of CBDC international payments

According to the report, the main benefits of cross-border payments via CBDC are:

  • Enable cross-border interoperability.Systems with different technologies can communicate with each other in a standardized way
  • Reduce settlement and counterparty risk
  • Scalable and easily connectable to systems in many countries
  • Transaction costs are low and transactions can be completed in seconds

He continues that the requirements that a CBDC should have in order to realize such a function are as follows.

  • Ability to perform HTLC-based conditional settlement
  • Operate in real-time or near-real time, 24/7 to maximize transaction speed and minimize payment failures due to timeouts

HTLC stands for Hashed Timelock Contract. A type of smart contract used in blockchain. It has a mechanism to reduce counterparty risk. The report added that alternative models to HTLC could also be considered.

The report also lists issues that should be considered in the future, such as in terms of policy. Policy aspects include governance arrangements, liquidity provision, user privacy, anti-money laundering and terrorism financing measures, and international payment-related standards.

On the legal side, he raised issues such as the legal basis for central operators processing CBDCs and the potential for inconsistencies in laws and regulations between different CBDC systems. On the technical side, it states that resilience requirements for participants in the CBDC system should be considered.

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