Simplifying X-Border flows is key to global CBDC
In an announcement last month, the European Central Bank (ECB) revealed the five companies that have been selected to take part in a “prototyping exercise” as part of the two-year investigation phase of the digital euro project. .
Amazon, Caixabank, the European Payments Initiative (EPI), Nexi and Worldline are each tasked with developing front-end prototypes to explore how the ECB’s digital euro back-end technology will fit into existing payment infrastructure. retail, commercial and banking. The exercise is expected to be completed in the first quarter of 2023, when the ECB will publish its findings.
Read more: Amazon, Nexi, Worldline, CaixaBank and EPI join the Digital Euro project
Each company will explore a specific use case for the digital euro, with Amazon developing e-commerce payment prototypes, while Caixabank is investigating peer-to-peer (P2P) online payments.
EPI, meanwhile, will focus on payer-initiated point-of-sale payments while Nexi will test payee-initiated ones, and Worldline will explore how the digital euro could work with offline P2P payment.
Related: How the digital euro can help address disintermediation and sovereignty issues
Commenting on the inclusion of an American firm — Amazon — in this important phase of the digital euro project, Jürgen Schaaf underlined that “our desire to strengthen our monetary autonomy with a digital euro does not mean that Europe would close all its doors to overseas retailers.”
See also: ECB adviser defends Amazon’s role in the Digital Euro project
Towards cross-border CBDC transactions
While the ECB’s prototyping exercise will look at how the digital euro will interface with private sector stakeholders, the work of the Bank for International Settlements (BIS) Innovation Hub is more international in scope and are more focused on mechanisms for cross-border central bank digital currency (CBDC) interoperability.
The BIS Innovation Center recently announced a partnership with the central banks of Israel, Norway and Sweden to launch “Project Ice-breaker” to test the use of CBDCs for international retail payments and fund transfer.
Learn more: Central banks of Sweden, Norway and Israel test cross-border CBDC payments
The initiative will see central banks connect their national proof-of-concept CBDC systems to explore the technical feasibility of interconnecting different national CBDCs.
The program is the latest cross-border CBDC experience to be coordinated by the BIS Innovation Hub. The Hub has also been involved in the “Dunbar Project”, a collaboration between the Reserve Bank of Australia, the Central Bank of Malaysia, the Monetary Authority of Singapore and the Reserve Bank of South Africa.
See also: The ECB, the Fed and the BoE are working on an interoperable CBDC
In September, the BIS also disclosed that it had successfully completed a CBDC pilot involving the Hong Kong Monetary Authority (HKMA), the Bank of Thailand, the People’s Bank of China’s Digital Currency Institute and the Bank central United Arab Emirates (UAE).
Related: China, Thailand, UAE and BRI test cross-border CBDC payments
From the Dunbar project, the concept of a “multi-CBDC” platform emerged, in which a single blockchain-based transaction protocol governs the intermediation between technically diverse digital currencies.
As Andrew McCormack, Head of the BIS Innovation Hub, explained, “A common platform is the most efficient model for payments connectivity, but it’s also the hardest to achieve.
The Dunbar Project further identified three key questions: which entities should be allowed to hold and transact with CBDCs issued on a multi-CBDC platform, how the flow of cross-border payments can be simplified while respecting the differences between jurisdictions, and what governance arrangements can give countries comfort enough to share such critical national infrastructure as their payment system.
Having proven that the concept of “multi-CBDC” was technically viable in the Dunbar project, these questions will likely inform the latest three-country collaboration, which will examine the specific challenges of interconnecting the digital shekel, e-krona and of the e-krone, in a controlled test environment.
Finally, as the emerging field of digital currencies enters its next phase, greater cooperation between central banks will be needed. And one of the main concerns to be addressed is how the governance mechanisms that create trust and shared control can be incorporated into the new technology without threatening the monetary sovereignty that central banks are charged with defending.
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