Israel and Hong Kong forge new path in CBDC development

• The joint project drew upon the diverse expertise of central banks and trusted private entities.
• This approach does not disrupt traditional financial institutions, as it pertains to banks, credit unions, and similar entities.

Israel and Hong Kong have successfully completed a comprehensive test of a retail Central Bank Digital Currency [CBDC] that prioritizes privacy and inclusivity. This was the result of a collaboration between the Hong Kong Monetary Authority, Bank of Israel, and the Bank for International Settlements.

Titled Project Sela, the project established a public-private partnership and enlisted private intermediaries to craft a CBDC that blends the advantages of traditional cash with digitalization benefits. It was unveiled

What Project Sela entails

Within the Sela ecosystem, the central bank responsible for issuing the rCBDC maintains a ledger featuring pseudo-anonymous end-user accounts. This system ensures instantaneous settlement through a real-time gross settlement (RTGS) infrastructure.

Financial institutions are responsible for managing users’ accounts and facilitating conversions between the rCBDC and traditional bank deposits or cash. An essential intermediary, known as an access enabler, takes charge of customer-facing services, including Know Your Customer (KYC) compliance, endorsements, and routing.

Moreover, end users retain control over their electronic wallets through cryptographic keys.

A benchmark for retail CBDC?

The project’s approach was multidimensional, drawing upon the diverse expertise of central banks and trusted private entities. Two FinTech companies, FIS and M10 Networks, played pivotal roles by providing core products.

Clifford Chance conducted legal analysis, and Check Point Software Technologies concentrated on cybersecurity elements as part of Project Sela’s design as a proof-of-concept to assess the viability of the proposed rCBDC.

One of the standout advantages of this ecosystem is its accessibility for private financial institutions offering unbundled financial services. This inclusive approach aims to boost competition and broaden user access.

Importantly, access enablers, despite their pivotal role, do not create accounts, manage records, or control funds, thus reducing the regulatory burden on these entities. This paves the way for a more extensive range of participants in the provision of rCBDC services.

These include small- and medium-sized enterprises (SMEs), civil society organizations, charitable entities, e-commerce providers, community centers, and technology firms.

Furthermore, this innovative approach does not disrupt traditional financial institutions, as it pertains to banks, credit unions, and similar entities. It does not advocate for disintermediation.

Interestingly, it streamlines the process for users to convert rCBDC to or from cash through these institutions. Crucially, the settlement of payments remains the responsibility of central banks, ensuring transparency and security.

In this model, users have complete control over their financial assets, instilling confidence in the system.

The report also highlights potential weaknesses in real-time gross settlement (RTGS) systems. Typically, these systems are not available 24/7 and are not optimized for frequent small transactions. Nevertheless, the report discusses potential technical solutions to address these limitations.