BIS Completes Groundbreaking Icebreaker Experiment on CBDCs
The Bank for International Settlements (BIS) is wrapping up its experimental project, Icebreaker, which explores the use of central bank digital currencies (CBDCs) in cross-border payments.
In recent years, central banks have made strides in upgrading their domestic payment systems, while also delving into the possibility of developing retail central bank digital currencies (rCBDC) based on distributed ledger technology (DLT). Various projects in different stages of development have already been implemented. Nevertheless, cross-border payments continue to present a major hurdle. These transactions are notoriously sluggish, exorbitantly expensive, and shrouded in opaqueness. To enable the use of rCBDC for international payments, requisite standards, and protocols must be instituted at the outset.
Hence, apart from the BIS, the Icebreaker project also engaged the central banks of Israel, Norway, and Sweden to examine the technical capacity of facilitating transnational payments among different experimental retail CBDC systems. The rCBDC system, an all-encompassing ecosystem of many components and features associated with rCBDC, served as the foundation of the enterprise.
We are delighted to have been part of one of the first experimental tests of cross-border retail CBDC payments, together with our partners the BIS Innovation Hub, Sveriges Riksbank and Bank of Israel. This project contributes to the important global effort to improve cross-border payments. In addition, it has added significant value to Norges Bank's experimental test of a domestic system for retail CBDC payments,
says Torbjørn Hægeland, Executive director for Financial Stability at Norges Bank.
Icebreaker Model
The Icebreaker project consists of internal rCBDC systems, FX providers (currency providers), and the Icebreaker Hub.
1. Internal rCBDC systems
The systems of rCBDC represent developing ecosystems, comprised of various levels and participants, with the central bank at their core. It provides the primary technical infrastructure for issuing and redeeming rCBDCs, supplemented by a set of rules that define rights, obligations, legal requirements, and so forth.
Individuals and legal entities can receive, store, and transfer rCBDC using wallet services provided by licensed banks and financial institutions.
2. FX providers
The Icebreaker model involves FX providers that hold wallets in multiple rCBDC systems to facilitate cross-border rCBDC payments. They purchase one rCBDC using their wallet in one system and sell another in the second, assuming all the perils. The spread, which is the difference between buying and selling each currency pair, reflects the cost of holding and managing liquidity as well as currency risk.
3. Icebreaker Hub
The Icebreaker Hub serves two primary functions: routing cross-border payment messages between systems and providing a marketplace where senders can receive quotes from FX providers.
4. Hub-and-Spoke (HaS)
The Icebreaker project incorporates the HaS solution to consolidate rCBDC systems, which are required to integrate solely with the Icebreaker Hub rather than with one another. A notable advantage of this approach over alternative solutions is that the model can be scaled up without amplifying complexity, in contrast to decentralized inter-system interactions for rCBDC systems.
5. FX marketplace
Each FX provider sends currency rates to the Icebreaker Hub, which maintains a real-time database of the aforementioned. Upon the request of the sender, the Icebreaker Hub displays the best available rate along with the name of the FX provider.
Payment Process
As previously mentioned, a cross-border transfer is divided into two internal payments by the FX provider, without any rCBDC leaving its jurisdiction. The connection through the Icebreaker Hub is facilitated by APIs and, depending on the specific rCBDC, the entire task can be performed by the wallet itself or its provider on behalf of the owner.
The payment process consists of four stages.
1. Getting quote
Sender enters the recipient's country and payment amount, defining it in any currency used by the parties involved. The wallet then sends a request to the Icebreaker Hub, which finds the best available currency rate offer.
The user is not bound to a specific FX provider, and the Icebreaker Hub acts as a neutral broker, enhancing transparency and competition. To avoid monopoly, an intermediary pair can be used for transactions.
2. Payment discovery
Upon accepting the quote, the sender enters the recipient's address and relevant payment information.
The request goes to the recipient's wallet, which creates a secret phrase and locks the request with a hash value using the SHA-256 hash function. This is a unique feature of the Icebreaker model, as all calculations occur through the PvP scheme. It utilizes locked payments supported by HTLC (hash time-locked contracts, a type of smart contract with time-based payment locking used in DLT applications for risk mitigation). If the payment details match, the hash value is sent through the Icebreaker Hub to the sender's wallet.
While HTLC provides a secure method of payment in most cases, there may still be instances where disputes arise, such as when one party fails to fulfill their obligation. In such cases, a dispute resolution mechanism would be needed to resolve the issue fairly and efficiently.
3. Payment setup
Upon receiving the hash value, the sender initiates an internal payment to the wallet of the FX provider. The FX provider then sends details about the payment and the hash value to the recipient's wallet via the Icebreaker Hub and then proceeds with its internal payment to the recipient's wallet.
Both payments are locked by the same hash value, which is generated by the recipient's wallet in the second step.
4. Payment completion
To unlock the funds, the recipient's wallet examines the incoming payment and, if it matches the hash value, releases the secret phrase to the HTLC mechanism. This results in the funds being transferred to the recipient's wallet in a successful transaction. The FX provider is then informed of the secret phrase through the Icebreaker Hub, and the incoming payment from the sender is unlocked. It's an intricate process that involves cutting-edge technology and sophisticated security measures.
Although the system may seem cumbersome and involves a lot of messages being exchanged, during testing, the entire process was successfully completed in just a few seconds.
Meeting the standards: requirements for rCBDC systems.
The technical requirements for the connected rCBDC systems in the Icebreaker model are kept to a minimum.
1. Without exception, all rCBDC systems must provide real-time operation, ideally on a 24/7/365 basis.
2. HTLC support along with the capability for implementation are essential features.
3. All systems should ensure their participants have adequate liquidity to act as FX providers.
The minimalistic approach to technical requirements allows for enhanced scalability, compatibility, and simplicity. The project demonstrates that central banks can enjoy almost complete autonomy in developing rCBDCs while participating in a formal inter-network agreement to facilitate cross-border payments.
Indeed, the implementation of the Icebreaker model in the real world will require addressing a range of technological, political, and legal challenges. However, with careful planning and collaboration, such challenges can be overcome to pave the way for a more efficient and secure cross-border payment system.
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