Central banks around the world are exploring the possibility of issuing central bank digital currency, or CBDC, as a digital version of their national currency.
The study on CBDC is aimed at understanding the potential benefits and risks of this new form of digital currency.
The central bank study includes research into the technological and operational aspects of digital currencies, such as their design, implementation and distribution.
According to a press release, the Bank for International Settlements (BIS) has completed a project called Project Icebreaker, piloting CBDC for retail use.
The project aimed to see if cross-border and cross-currency transactions between experimental retail CBDC systems were technically possible and how well they could work in the future, the Edition said.
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The way CBDCs work
CBDCs work like real money in that they can be used to pay for things, but they only exist in digital form and are often based on a distributed ledger such as a blockchain.
CBDCs are created and managed by a central bank and are usually held in digital wallets that can be accessed through mobile devices or other digital platforms.
When a user wants to make a purchase using a CBDC, the person simply transfers the digital currency from their wallet to the recipient’s wallet, just as they would with traditional currency.
Also, CBDCs can help people become less dependent on cash, which can be expensive to make and distribute.
The goal of Project Icebreaker
Project Icebreaker’s goal was to find out how well a CBDC works for cross-border payments.
According to the report, the project was a collaboration between the BIS Innovation Hub Nordic Center, the Bank of Israel, the Norges Bank and the Sveriges Riksbank.
It gave these organizations a better understanding of the technologies and policies behind the project, making it easier to scale, work with, and better understand.
To do this, the central bank project teams tried different ways to connect domestic systems. For example, cross-border transactions can be split into two domestic payments and handled by a foreign exchange provider that operates in both countries.
This way, retail CBDCs don’t have to leave their own systems.
The Icebreaker system uses bridge currencies when transactions between two specific terminal currencies are not possible or not good. As a result, providers of foreign exchange compete with each other, which is beneficial to everyone.
“Project Icebreaker is unique in its proposal,” said Cecilia Skinsley, Head of the BIS Innovation Hub, explained.
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Using the tools that Project Icebreaker makes available, national central banks can create their own retail CBDCs with essentially no restrictions.
The paper then provides a template for implementing CBDC for cross-border money transactions, Sksley added.
Also, “bridge currencies” became part of the project. These currencies are used when transactions between two terminal currencies are not possible or feasible.
Policymakers have not commented further on the bridge currencies or how they work. It is not clear whether these will be created by central banks themselves or whether the system will allow private bridging currencies to be used.
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