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The hub-and-spoke cross-border payment model for central bank digital currency (CBDC) developed by the Bank for International Settlements (BIS) would offer potential benefits for both the banks and retail users, the organization said in a new report. The model represents a part of the BIS’s “Project Icebreaker,” which aims to give central banks almost complete control over CBDC while providing the best foreign exchange rates.
The BIS, the international financial institution owned by global central banks, said the cross-border payment system for CBDC is beneficial for both the banks and retail consumers, it said in a report on Monday.
The BIS’ remarks come as a part of its findings in “Project Icebreaker,” which utilizes the so-called hub-and-spoke method to link different national CBDC systems worldwide. The project was carried out in collaboration with the central banks of Norway, Sweden, and Israel.
“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.”– Aino Bunge, Deputy Governor, Sveriges Riksbank
The hub-and-spoke method divides a cross-border transaction into two domestic payments conducted by a foreign exchange provider that operates in both countries. As opposed to most existing cross-border payment systems, the model developed by the BIS gives central banks almost complete control over their CBDC while allowing foreign exchange providers to submit quotes to the hub, which automatically picks the cheaper one for the benefit of an end user.
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The new BIS report comes just a few months after the group finalized the Project mBridge report, with the help of the central banks of the UAE, China, Thailand, and Hong Kong. The mBridge report outlined the advances in deploying cross-border CBDC.
Several global central banks have joined the race to develop a CBDC in recent months, including Japan, Russia, Australia, and India. According to the report, the G20 intergovernmental forum members have prioritized exploring cross-border payment solutions, with this project representing a response to the forum’s request.
Meanwhile, Russia and Iran opened talks earlier this year to develop a joint gold-pegged stablecoin that would be used as a payment method for settling foreign trade. The new coin would enable cross-border transactions and replace traditional currencies like the US dollar and the Russian ruble.
Do you think the hub-and-spoke model offers clear advantages compared to other systems? Let us know in the comments below.