Retail CBDC
The Bank of Israel has been working on plans for CBDC since 2017.
In November 2018, the Bank of Israel first published a report which examined the issue of central bank digital currencies (CBDC).
In May 2021, the Bank of Israel published another report as it set itself to prepare an action plan, so that if conditions develop in the future that would lead to a Bank of Israel assessment that the benefits of issuing a digital shekel outweigh the costs and potential risks, the Bank of Israel will be prepared to put such a plan into action.
In March 2022, the Bank of Israel published another report which analyzed the potential impact of issuing a central bank digital currency on the stability of the banking system and its ability to continue fulfilling its financial intermediation function.
In May 2022, the Bank of Israel published another report summarising the public responses it obtained.
In June 2022, the Bank of Israel published another report of examining technological alternatives, and the opportunities and risks that may be inherent in the various technologies for implementing a digital shekel system. To conduct the experiment, a Distributed Ledger Technology (DLT) infrastructure was set up on the Microsoft Azure cloud using Azure Blockchain Services. This allowed the implementation of an Ethereum-based Quorum blockchain. The technology provided the means to explore the utilization of smart contracts and establish an infrastructure for Delivery vs. Payment (DvP) transactions. In this setup, a nonfungible token was used to represent ownership of an asset, which would be exchanged for money along with the token representing the monetary value.
In April 2023, the Bank of Israel published another report discussing the conditions that would enable or support a decision to issue a Bank of Israel digital currency at some point.
In June 2023, the Bank of Israel published another report that examines the factors that should make it easier to adopt a digital shekel in the present and help it serve as widespread means of payment in the future. It initiates a discussion on a number of issues related directly or indirectly pertaining to the topic of adoption and acceptance of a digital shekel.
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