The Bank for International Settlements (BIS) is exploring wholesale cross-border payments through various CBDC projects, the Bank of Israel is working through the technical aspects of the digital shekel, and Qatar Central Bank (QCB) is considering options for issuing its digital currency.
The central bank digital currency (CBDC) continues to be studied and experimented with by various financial institutions around the world.
BIS to Explore Interaction of Various CBDC Projects
The Bank for International Settlements (BIS) has conducted a comparative analysis of several central bank digital currency (CBDC) projects. According to the BIS report, wholesale cross-border transfers within the projects studied are technically feasible, but numerous regulatory uncertainties remain.
The BIS study examined four CBDC projects:
- Jura. A partnership project between the Swiss and French central banks.
- Inthanon-LionRock2 (ILR2). A project of the Bank of Thailand and the Hong Kong Monetary Authority (HKMA).
- Multiple CBDC Bridge (m-CBDC Bridge). The Asia-Middle East Banks joint project.
- Dunbar. A collaborative project of the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore, and the South African Reserve Bank.
BIS analysts considered two technical scenarios for implementing wholesale cross-border payments within the CBDCs being studied:
- Making payments between two residents from different jurisdictions when the payment is made in the payer’s digital currency.
- The possibility of making offshore payments when the payer and the payment recipient are not residents of the jurisdiction in whose currency the transaction is made.
Both of these scenarios were possible with all of the CBDCs studied. BIS experts noted that the absence of intermediaries and process automation when using smart contracts reduced transfer costs. Transactions were automatically recorded in a single registry, and changes in financial balances were displayed in real-time.
BIS researchers stressed that the study failed to answer several important questions about cross-border payments using different CBDCs. Among them are:
- ambiguity in the technical compatibility of distributed ledger technology (DLT) and traditional financial systems of other countries;
- problems of CBDC project scalability;
- security guarantees for digital payments;
- uncertainty of regulatory and legal aspects of cross-border use of CBDCs;
- vagueness of the economic impact of using CBDCs for cross-border payments.
According to a recent BIS survey, 90% of all central banks are exploring CBDCs.
Israel Experiments with CBDCs
While studying the technical aspects of the digital shekel, analysts at Israel’s Central Bank conducted an experiment simulating a car sale. The researchers were interested in user anonymity and the technicalities of using smart contracts in CBDCs.
The experiment was carried out in controlled conditions and included the creation of infrastructure based on distributed ledger technology (DLT) and the application of the Quorum blockchain based on Ethereum.
The following CBDC functions were tested within the experiment:
- the issuance and transfer of digital currency from one wallet to another;
- the ability to impose quantitative restrictions on payment transactions;
- the use of smart contracts in payment transactions;
- studying the issuance of digital shekels;
- the possibility of preserving the partial privacy of CBDC users.
The Bank of Israel analysts concluded that two points need to be worked out when issuing the digital shekel:
- Limiting the amount of digital money. Analysts suggested that the introduction of a daily limit on the transfer of fiat shekels into digital shekels could be spelled out in a smart contract, which would control the amount of digital money.
- The possibility of deliberate distortion of smart contracts. To rule it out, only service providers would be allowed to make changes to smart contracts, and the regulator would control the process.
Recall that the Central Bank of Israel analysts recently found that the digital shekel should become an alternative rather than a complete replacement of traditional money.
Qatar Central Bank Considers Options for Issuing CBDC
Speaking at the session on The Inflation Test at the Qatar Economic Forum, Qatar Central Bank (QCB) Governor Sheikh Bandar bin Mohammed bin Saoud Al Thani said the bank is looking for suitable technology and platform to issue Qatar’s CBDC. This was reported by the local media.
The QCB is currently in the initial stages of developing technical aspects for issuing CBDC, which will be considered a digital form of the country’s fiat currency.
The QCB Governor stressed that for making a final decision on issuing CBDC, bank analysts must evaluate the pros and cons of such innovation. It is also necessary to develop a suitable technological base and find the right platform that meets Qatar’s regulatory standards.
QCB representatives announced their plans to study various aspects of the CBDC issue in March this year, promising to define a clear direction within a few months.
