BIS partners with Israel, Hong Kong for retail CBDC experiment

The Bank for International Settlements (BIS) has announced the completion of the Proof-of-Concept (PoC) for a new retail central bank digital currency (CBDC) model with inclusivity and privacy at the core.

Called Project Sela, the BIS teamed up with the Bank of Israel (BoI) and the Hong Kong Monetary Authority (HKMA) for the experiment, leveraging each central bank’s experience with CBDCs.

According to the 60-page report, the BIS noted that Project Sela showed significant promise in achieving a retail CBDC platform with access, security, and innovation functionalities. In its design, Project Sela envisions the central bank as the operator of the rCBDC platform, saddled with the primary responsibility of ensuring instant settlement for all transactions.

All “customer-facing” services will be within the purview of private intermediary service providers called access enablers (AEs). Per the technical details provided in the report, AEs will not have access to the rCBDCs of customers as users exercise control of their funds via “self-generated private cryptographic keys.”

Under Project Sela’s architecture, AEs do not incur any credit risks as the system eliminates the need to hold liquidity on their balance sheet before offering rCBDC services. BIS submits that removing the credit risk is expected to open the floodgates for AEs, promoting healthy competition and encouraging innovation in the space.

AEs will also not be burdened with creating accounts and record management tasks, which the BIS says will lower the entry barrier. However, AEs are expected to offer a range of services, including endorsements, routing, and other compliance requirements as may be stipulated in the rule book.

“Lower entry barriers can enable wider participation in the provision of rCBDC services, compared with the existing payments market, to include, for example, SMEs, civil society and charitable organizations, e-commerce providers, community centers, and technology companies, among others,” read the report.

Increased access to the CBDC system by AEs comes with peculiar challenges, including the risk of security breaches. Project Sela uses “preventative software design” to mitigate cyber security threats while still maintaining the “desirable attributes of cash.”

Experienced players in the space

The participating trio have extensive experience in CBDCs, with the BIS completing a series of experiments into the cross-border payment functionalities of central bank money. The BIS previously teamed up with the central banks of Hong Kong, the United Arab Emirates, China, and Singapore for its widely successful mCBDC pilot.

A collaboration with Israel, Sweden, and Norway dubbed Project Icebreaker led to impressive results for the future of cross-border CBDCs. Israel has made considerable progress with its digital shekel studies, while Hong Kong appears to be modeling its pilot after China’s digital yuan.