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Israel, Hong Kong to test two-tier CBDC feasibility

Updated: Jun 22, 2022

Efficient payment system that will increase competition is one of the primary motivations for a possible issuance of digital shekel

New Israeli Shekel banknotes. REUTERS/Nir Elias/Illustration
New Israeli Shekel banknotes. REUTERS/Nir Elias/Illustration

The BIS Innovation Hub, the Bank of Israel and the Hong Kong Monetary Authority will join forces to test the feasibility of a cyber secure two-tier retail CBDC (Central Bank Digital Currency).

In the proposed model the intermediaries will have no financial exposure resulting from their customers' on-boarding, holding or transferring CBDC, therefore reducing the risk and costs associated with financial intermediation.

Led by the Innovation Hub's Hong Kong Centre, the project is planned to kick off in the third quarter of 2022 and publish its findings by the end of the year.

The Bank of Israel explains that traditionally, central bank money is provided to the public indirectly – by the commercial banks. Even in digital payment systems, transferring funds from one end to another usually entails, even if for a short time, a financial exposure of the intermediaries that are involved in the transaction.

This project will explore the feasibility of an architecture in which intermediaries in the two-tier system are "exposure-less" - they provide technological access to the CBDC system, conduct the "Know Your Customer" processes, and provide consumer services, but are not financially exposed, at any point of the processes of obtaining, transferring, or redeeming CBDC.

This architecture is assumed to have several benefits: Less financial risk for the customer, more liquidity, lower costs, increased competition, and wider access.

Cyber security issues regarding two-tier retail CBDC will also be addressed. The project will test if intermediaries’ financial exposure-less nature can lend itself to a more cyber secure solution to end users. In particular, if through distributing the intermediaries and the services they provide along with layered data obfuscations, it might be possible to provide a service that is more resilient to sophisticated cyberattacks.

"Providing an efficient payment system that will increase competition in the payment market is one of the primary motivations we've identified for a possible issuance of a digital shekel - an Israeli CBDC,” said Andrew Abir, Deputy Governor of the Bank of Israel.

“We are delighted for the opportunity to test this model together with excellent and experienced partners such as the BIS Innovation Hub and the Hong Kong Monetary Authority. Accessing Israel's well-known experience in cyber security is a great opportunity to support the global research of CBDCs".

Howard Lee, Deputy Chief Executive of the HKMA, expressed his pleasure from this new project. “Not only is the tripartite project a significant milestone in the HKMA’s CBDC journey, it also marks the first collaboration between Hong Kong and Israel on the fintech front,” he said.

“We trust that with the expertise offered by Israel, a global leader in cybersecurity, the findings of the joint project would add to the wealth of knowledge on CBDC and contribute to the common good of the international central banking community.”

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