Collaborative Initiative to Develop a Central Bank Digital Currency
A collaborative initiative dubbed Project Sela sought to test and develop a central bank digital currency (CBDC) suitable for mass retail use.
The Bank for International Settlements (BIS), the Hong Kong Monetary Authority (HKMA), and the Bank of Israel have demonstrated the feasibility of a secure retail central bank digital currency (rCBDC), according to an update shared on September 12.
A joint experiment coordinated by the Bank for International Settlements called “Project Sila” has reportedly shown that rCBDC is able to provide the benefits of fiat currency without compromising cybersecurity, user privacy, and accessibility.
The Sila project benefited from the Central Bank of Israel’s ongoing work on the digital shekel and a case study conducted by the Hong Kong Monetary Authority on the potential for creating an electronic Hong Kong dollar.
Benedikt Nolenz, head of the BIS Innovation Center in Hong Kong, noted that the joint venture introduced a new intermediary system for central bank digital currencies called “Access Enabler.”
According to Nolens, Access Enabler mitigates liquidity and settlement concerns by not holding users’ rCBDC tokens on its balance sheet. Nolens also said that the feature should lower the operating costs of blockchain-based payment services.
Howard Lee, executive vice president of the Monetary Authority, said the Sila project could help advance Hong Kong’s progress on government-issued digital currency.
Apex banks from other countries will benefit from Sila’s results in building their own CDBD infrastructure and ecosystem, Li added.
The project proved the feasibility of the model we had in mind. If central bank money is to become digital, cybersecurity is key, and the project has provided an opportunity to discuss and study the cybersecurity elements of central bank digital currencies with our partners.
Andrew Abir, Deputy Governor of the Bank of Israel
Central bank digital currencies around the world
Central bank digital currencies are digital representations of fiat currencies issued by sovereign governments or central banks. This concept dates back to approximately 1985 and was mentioned in a financial paper written by James Tobin.
US policymakers, such as Republican Representative French Hill, remain strongly opposed to retail central bank digital currencies, citing broad risks to the US financial system.
Federal Reserve Governor Michelle W. Bowman echoed similar statements in April 2023 and said that potential concerns about central bank digital currencies outweigh the benefits.
Countries such as China, Jamaica and Nigeria have launched their own central bank digital currencies despite arguments that government-controlled virtual currencies go against the purpose of cryptocurrencies and decentralized finance (defi), which is to provide near-instant value exchange without the need for central oversight.