Israel and Hong Kong Finish Retail CBDC Test

Project Sela leveraged the diverse experience of the central banks of Israel and Hong Kong to create a retail central bank digital currency (CBDC)

Israel and Hong Kong Finish Retail CBDC Test

The Bank for International Settlements and the central banks of Hong Kong and Israel released the results of the completed retail CBDC Project Sela on Sept. 12.

The project, which involved both public and private financial institutions, “proposes a new financial infrastructure, the Access Enabler, which facilitates customer-facing activities without ever holding users’ rCBDC,” states BIS in its Twitter announcement. It combines the desirable features of cash with the advantages of digitalization.

Project Sela was conducted jointly with the Bank of Israel and the Hong Kong Monetary Authority. As for the participants out of the private sector, these included fintechs FIS and M10 Networks, responsible for core products, Clifford Chance, conducting legal analysis, and Check Point Software Technologies, bringing cyber security expertise.

The result of the experimental project revealed that in case preventative features are included in the design, access to rCBDC does not compromise cyber security.

The Sela ecosystem includes a new intermediary, the Access Enabler, that handles all customer-facing services, including Know Your Customer compliance, endorsements and routing, reducing both liquidity and settlement risks, along with diminishing operating costs.

Here is how the proposed ecosystem works. The central bank that issues an rCBDC keeps the ledger for the transactions with pseudo-anonymous end-user accounts. It also provides instantaneous settlement via a real-time gross settlement (RTGS) system. Meanwhile, funding institutions manage actual users’ accounts. They convert the rCBDC into and out of bank deposits and cash. Finally, end users maintain control over their electronic wallets with cryptographic keys.

Access enablers, in their turn, do not create accounts, manage records or control money, which paves the way for numerous private financial institutions to participate without excessive regulatory requirements. The project managers believe SMEs, civil society and charitable organisations, e-commerce providers, community centres and technology companies, can all seamlessly become part of the Sela ecosystem.

As for the weak points of the system, the report notes that RTGS systems, used for settlement, are usually not available around the clock and are not designed for frequent small transactions. The project team is working on potential technical solutions.

Earlier, the central bank of Israel participated in another joint project with BIS and the central banking institutions of Norway and Sweden to find out how CBDCs can be used for international retail and remittance payments. This project called Icebreaker finished in March 2023, concluding that a “hub-and-spoke” model between domestic systems could “reduce settlement and counterparty risk by using coordinated payments in central bank money and complete cross-border transactions within seconds.”

Nina Bobro

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Nina is passionate about financial technologies and environmental issues, reporting on the industry news and the most exciting projects that build their offerings around the intersection of fintech and sustainability.