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BIS and Israel and HK central banks examine security, privacy and accessibility in CBDC design

BIS and Israel and HK central banks examine security, privacy and accessibility in CBDC design

The Bank for International Settlements says a joint experiment conducted with the central banks of Israel and Hong Kong proved the feasibility of a retail central bank digital currency (rCBDC) ecosystem that combines accessibility, competition and preventative cyber security, while retaining key advantages of physical cash.

Project Sela leaned on the Bank of Israel's cyber security expertise and ongoing work on the digital shekel and the Hong Kong Monetary Authority's (HKMA) learnings from Project Aurum and e-Hong Kong Dollar.

In Sela, the rCBDC ledger is operated by the central bank without compromising end user privacy as personal identifiers are obfuscated. Retail payments are therefore settled directly on the central bank's balance sheet in a privacy-preserving manner, meaning instant finality for transactions.

A novel type of intermediary, the Access Enabler, is a core part of the system. It handles all customer-facing rCBDC services without ever 'holding' end users' rCBDC at any point in the process, thus eliminating the need to hold funds to ensure liquidity or to reduce settlement risk. Moreover, the Access Enabler does not need to hold funds on its own balance sheet. This removes two significant sources of costs, complexity and risk when compared with current payment service providers, says the BIS.

Bénédicte Nolens, head of the BIS Innovation Hub Hong Kong Centre, says: "Project Sela explored the feasibility of a CBDC system where the central bank operates the retail ledger and a new type of intermediary, called an Access Enabler, provides broader access to the CBDC, promoting competition and innovation. It showed that this can be achieved without compromising cyber security or the privacy of end users from the central bank."

Comments: (1)

Jeremy Light
Jeremy Light - pingNpay - London 14 September, 2023, 13:54Be the first to give this comment the thumbs up 0 likes

'eliminating the need to hold funds' could be a big issue for payment providers. With this model how can they make CBDCs commercially viable unless they charge high fees to compensate for the inability to collect interest?

Separating the operational provision of CBDC services from liquidity provision may reduce settlement risk (although there are other ways to mitigate it), but at scale it looks a non-starter commercially.

Also, privacy and surveillance are only one aspect of CBDC risk. Loss of control over funds is another big risk - an Access Enabler is a gateway to funds and could easily be used as an Access Disabler or blanket blocker i.e. the risk of financial exclusion in contrast to the goal of financial inclusion so often used to justify CBDCs.

There needs to be a focus on commercially viable business models using CBDCs that have cast iron solutions to their risks - this is best driven by the private sector.