CBDC Part 1: An Introduction to Central Bank Digital Currencies

By Matthew Lam   Apr 19, 2019 2 Min Read

This analysis is provided by our columnist, Standard Kepler .

Thoughts of The Week

Standard Kepler has previously identified Central Bank Digital Currencies (CBDC) as one of the more promising potential applications of distributed ledger technology (DLT). As is made evident in the chart of the week, a number of CBDC projects have been launched for purposes of evaluating the suitability of blockchain in future wholesale and retail payment systems. The following is part 1 of a series of short articles that will examine different aspects of CBDCs.

Financial market infrastructures (FMIs) are critically important institutions responsible for providing clearing, settlement and the recording of financial transactions. FMIs are trusted third parties between financial institutions, using centralized ledgers to record and track transactions. FMI operators display significant interest in technology that may increase the efficiency of FMIs, and three waves of exploratory CBDC DLT projects have been launched to date.

A number of benefits are typically hypothesised for such future payment systems. It is speculated that financial sector back-office costs can be reduced via increased settlement automation. Further advantages are expected with regards to reliability and traceability of information, as well as shorter settlement times. CBDC DLT projects to date indicate that the technology is currently lacking the maturity to achieve these improvements, and part 3 and 4 of this series will more closely evaluate the actual benefits of using DLT in wholesale and retail payment systems.

Due to their critical importance to financial stability, FMIs balance a number of significant risks. These include governance and legal risks, credit and liquidity risks, settlement risk, and operational risk. Appropriate transparency and privacy for system participants must also be achieved while maintaining the benefits of DLT technology. This results in a series of trade-offs, significantly so between system privacy, resilience, and scalability. Existing CBDC projects indicate that Corda achieves privacy and scalability at the cost of resilience. Hyperledger Fabric achieves privacy at the cost of resilience and privacy, and Quorum’s zero-knowledge proofs achieve privacy at the cost of scalability.  Part 2 of this series will more closely compare Corda, Hyperledger Fabric, and Quorum.

CBDC DLT projects should be studied closely, as they bring us closer to identifying the core value proposition of DLT.

Chart of The Week

Chart of the week Part 1 CBDC.JPG

Click here for the full PDF version! 

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Disclaimer

The views and opinions expressed in this article are those of Standard Kepler and do not necessarily reflect the view of Blockchain.News 





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