CBDC collaboration ‘Project Icebreaker’ publishes learnings on cross-currency payments

A collaboration between the Bank for International Settlements (BIS) and the central banks of Israel, Norway and Sweden, exploring the potential benefits and challenges of retail central bank digital currencies (CBDCs) in international payments, has concluded.

Project Icebreaker, which involved the BIS Innovation Hub Nordic Centre, Bank of Israel, Norges Bank, and Sveriges Riksbank, had been established to test the “technical feasibility” of conducting cross-border and cross-currency transactions between different experimental retail CBDC systems.

The project was based on “very minimum” technical requirements to be able to integrate domestic systems running on different technologies.

The subsequent report produced by Project Icebreaker has revealed that in most existing cross-border payment systems, the payer has no choice regarding the exchange rate, because they have no control over the provider of the foreign exchange conversion.

However, the project developed a model whereby several foreign exchange providers can submit quotes to the system’s hub, which automatically selects the cheapest one for the end user.

The project found that this approach mitigates the risk of “insufficient liquidity in the desired currency pair, which can drive fees up and even delay the transaction”.

If transactions between two specific end currencies was either unavailable or unfavourable, the Icebreaker system was able to implement the use of bridge currencies to promote competition among foreign exchange providers.

The project also concluded that the “hub-and-spoke model” can reduce settlement and counterparty risk through the use of coordinated payments in central bank money, and also complete cross-border transactions “within seconds”.

Cecilia Skingsley, head of the BIS Innovation Hub, called Project Icebreaker unique in its proposition.

“It first allows central banks to have almost full autonomy in designing a domestic retail CBDC. Then it provides a model for that same CBDC to be used for international payments,” she said.

Andrew Abir, deputy governor at the Bank of Israel, added: “If Israel is to issue a digital shekel, it would be very important that we do it according to the evolving global standards, so that Israelis could use it also for efficient and accessible cross-border payments.

“While there is still much work ahead of us for the Icebreaker model to become a global standard, the learnings from this successful project have been very important for us and for the central banking community.”

The deputy governor of Sveriges Riksbank, Aino Bunge, said that while domestic payments have become less expensive, safer and more efficient, payments across currencies are still associated with high costs, slow speed and risk.

She said: “Project Icebreaker shows how different CBDC solutions in different countries could enable instant cross-currency transactions in a way that would greatly benefit the end users. The project has also been a great example of collaboration and sharing of knowledge between the participating central banks and BIS.”

Bunge added: “Although there are a lot of questions that need to be investigated further, Project Icebreaker is a valuable initiative and contribution to the discussion on how we can improve cross-currency payments.”

On a recent episode of Open Banking Expo Unplugged, Xiaochen Zhang, global head of innovation and go-to-market at AWS, and Erica Salinas, principal technical leader – Web3 at Amazon, explained why central banks are exploring CBDCs.