Retail CBDC
Since 2016, Norges Bank has been engaged in a project focused on developing a central bank digital currency (CBDC). Currently, the project is advancing into its fourth phase. This phase will involve an examination of legislative modifications that are necessary to implement the CBDC.
In 2018, a dedicated Norges Bank working group put forth a comprehensive overview outlining key aspects to consider when evaluating the potential issuance of a CBDC. This document, titled “Central bank digital currencies (Norges Bank Papers 1/2018),” emphasized essential points for assessment.
The subsequent year, the same working group delved deeper into identifying potential objectives that could be achieved through a CBDC, along with exploring different design possibilities aligned with these objectives. Their findings were documented in “Central bank digital currencies (Norges Bank Papers 2/2019).”
In 2020, the CBDC project published a report that provided updates on the ongoing work, shared insights, and encouraged constructive discussions. This report, titled “Status report — Norges Bank’s central bank digital currency project (Norges Bank Papers 2/2020),” aimed to foster a broader understanding of the initiative.
Continuing their efforts in 2021, the working group scrutinized the fundamental attributes required for a successful CBDC, investigated how technical solutions could facilitate these attributes, and examined potential ramifications for financial institutions in the event of CBDC implementation. Additionally, the group charted the path forward for the CBDC project. These findings were presented in “Central bank digital currencies (Norges Bank Papers 1/2021).”
As part of a two-year timeline, Norges Bank has chosen to progress into the fourth phase of the CBDC project. This phase will introduce experimental testing of technical solutions while also conducting a thorough analysis of the necessity and potential outcomes associated with the introduction of a CBDC.
The ultimate objective of this endeavor is to establish a robust foundation for determining whether Norges Bank should proceed with trials of a preferred technical solution for the CBDC project.
Source:
Cross border Retail CBDC : Project Icebreaker
Focus Area:
Retail Cross border CBDC
Overview:
The Bank for International Settlements (BIS) and the central banks of Israel, Norway and Sweden collaborated on Project Icebreaker, which studied the potential benefits and challenges of using retail central bank digital currencies (CBDC) in international payments.
Project Icebreaker investigates the possible advantages and obstacles associated with implementing retail Central Bank Digital Currency (CBDC) for cross-border payments. It examines the technical viability of executing cross-border and cross-currency transactions using various Distributed Ledger Technology (DLT)-based CBDC proofs of concept.
Motivations:
The primary objective was to acquire a more profound comprehension of the utilized technologies and to recognize crucial technical and policy decisions and trade-offs that central banks must contemplate while designing CBDC implementations to enable seamless cross-border payments.
Financial institutions involved:
- Bank of Israel
- Norges Bank
- Sveriges Riksbank
- BIS Innovation Hub
Technology & Design partners:
- Ethereum Quorum
- Hyperledger Besu
- Corda DLT
Technical Solution:
The Icebreaker model streamlines cross-border payments by establishing connections between various rCBDC systems. FX providers, who hold memberships in multiple rCBDC systems, can exchange one currency’s rCBDC for another. Essentially, they would purchase a currency using rCBDC from one system and pay with another currency’s rCBDC from a different system. For example, if Alice in Sweden wanted to pay Bob in Israel, the FX provider would buy Swedish krona and sell Israeli shekels. An FX provider could be any entity, such as a financial institution holding wallets in two or more rCBDC systems, willing to assume FX risk to facilitate the transactions. The cost of holding and managing liquidity, along with the FX risk, would be reflected in the spread between the buy and sell rates for each specific currency.
The figure below illustrates different domestic rCBDC systems with diverse distribution models, exemplifying the potential variations in design and technology choices within the Icebreaker model. This representation draws inspiration from the three PoCs in the experiment. Additionally, it assumes that the FX provider utilizes a wallet provider for its FX wallet, though this might not always be the case, as an FX provider could act as its own wallet provider.
Conclusion:
Project Icebreaker demonstrates that central banks can maintain nearly complete autonomy in designing their domestic rCBDC systems while simultaneously participating in a structured interlinking arrangement that facilitates cross-border payments.
Source:
https://www.boi.org.il/media/31vbknly/icebreaker-full-report.pdf