Central banks around the world are exploring the possibility of issuing central bank digital currencies, or CBDC, as a digital version of their national currencies.
The study on CBDC is centered on understanding the potential benefits and risks associated with this new form of digital currency.
The central banks’ study includes research on 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 finished a project called Project Icebreaker, which was a pilot for CBDC for retail use.
The project was meant to see if cross-border and cross-currency transactions between experimental retail CBDC systems were technically possible and how well they might work in the future, the release 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 like a blockchain.
CBDCs are made and managed by a central bank, and they are usually kept 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 his/her wallet to the recipient’s wallet, just like he/she would with traditional currency.
Also, CBDCs could help people depend less on cash, which can be expensive to make and spread.
Project Icebreaker’s Goal
The goal of Project Icebreaker was to find out how well a CBDC works for making payments across borders.
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 understand.
In order to do this, the central banks’ project teams were trying out different ways to connect domestic systems. For example, cross-border transactions could be split into two domestic payments and handled by a foreign exchange provider who works in both countries.
This way, retail CBDCs wouldn’t have to leave their own systems.
The Icebreaker system uses bridge currencies when transactions between two specific end currencies aren’t possible or aren’t good. This makes foreign exchange providers compete with each other, which is beneficial for everyone.
“Project Icebreaker is unique in its proposition,” Cecilia Skingsley, Head of the BIS Innovation Hub, explained.
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Using the tools made available by Project Icebreaker, national central banks can create their own retail CBDCs with essentially no restrictions.
The paper then offers a template for implementing CBDC for cross-border monetary transactions, Skingsley added.
Also, “bridge currencies” were made a part of the project. These currencies are used when transactions between two end currencies are not possible or are not workable.
The policymakers did not say anything else about the bridge currencies or how they work. It is not clear if these will be made by central banks themselves or if the system will let private bridge currencies be used.