CBDC: From philosophical to practical in global adoption
Central bank digital currency (CBDC) exploration is entering a new phase, as multiple pilot programs explore different use cases within and across markets.
As a digital form of central bank money, CBDC creates a new form of economic value by expanding a central bank’s ledger, while accelerating important structural changes and innovation without disrupting existing payment rails. A central-bank issued CBDC can deliver significant benefits across the financial ecosystem, including risk management, stability, growth and inclusion, and privacy and protections. When created and deployed using a multi-party technology framework and practical operating structure, CBDC enhances the ability of central banks, commercial banks, and technology innovators to work together using timely, accurate, and auditable information from a central bank-governed system of record of CBDC positions.
While initial CBDC use cases mostly focused on domestic uses, broader use in cross-border transactions is now being explored. Cross-border payments are seen by central banks as one of the main reasons to introduce CBDC, as the current international rails are too slow, expensive, and opaque. This is especially true for remittances, where an international payment rail backed by central bank money could provide faster, cheaper payments for some of the world's poorest people.
Cross-border transactions bring questions of interoperability into sharp focus, as the ability of each country or market to operate its own digital currency with its own features, market rules, and regulations is a necessary condition that must be preserved. At the same time, that currency must be able to transact across a technology-enabled global economic network that safeguards privacy, provides security and scalability, and enables interconnectivity across different organizations and legacy technologies.
Pillars of CBDC
For central banks to fully realize the benefits of CBDCs in cross-border and remittance use cases, the underlying technology must be able to support a regulatory environment with various standards. CBDC must:
Be grounded in privacy with the roles, rights, and permissions of different actors clearly defined and with full auditability and traceability.
Provide the central bank with the ability to develop CBDC and define initial use cases, with the flexibility and interconnectivity to support future applications that may not yet be known or in scope.
Assure transaction finality and certainty of settlement.
Be scalable and resilient to support high transaction volumes that are likely to increase significantly over time.
Digital Asset has identified five core requirements for the underlying technology.
Data privacy: A CBDC solution should feature privacy across, as well as within, ledgers. While every central bank will set their own standard, the technology should support stringent privacy protocols that are built into the sub-transactional level of a smart contract.
Digital identities: Digital identities are crucial for linking legal entities to their digital representations, yet cross-border remittances preclude a centralized solution to digital identities, since transactions cross jurisdictions. Participants in the payments network must be able to identify who their counterparties are, as well as their roles.
Cross-ledger atomicity: With atomicity, every leg of a transaction must succeed for the transaction to complete. By ensuring atomicity, systems can achieve payment versus payment and delivery versus payment without the risk of handing over goods when the payment leg fails or the need for an intermediary to act as an escrow.
Composable extensibility: Composable extensibility allows new applications to be added dynamically and networks easily connected for future CBDC use cases.
Multi-ledger, interoperable technology: This enables digital currency systems to be deployed and connected across disparate networks, regardless of the underlying IT infrastructure. It is the key to enabling compatibility with other CBDCs, since there will be no single master ledger.
When these requirements are met through a technology framework purpose-built for financial services, the benefits of CBDC-driven cross-border payments and remittances become attainable. Digital Asset is actively engaged with central and commercial banks and technology providers around the world on these initiatives. To drive CBDC thinking forward, we partnered with Dr. Giovanni Bandi, Fellow and Incoming Director of the Regulatory Genome Project at Cambridge University, on a report detailing current CBDC standards and the technology and regulatory frameworks critical to facilitating the growth and adoption of CBDC for cross-border payments and remittance flows. This blog is an introduction to the full report, which you can request and download below.
Download the report here ->