By Peter Clifford
Further readingDistributed ledgers need more than traditional application design patterns The Evolution of Legacy Market Infrastructure Revolutionize Global Custodian Services with Distributed Ledgers and Daml HKEX is teaming up with Digital Asset Discussing the State of Distributed Ledger Technology
LiquidShare and Digital Asset Help Shape the Future of CBDCs: Three Lessons Learned
By Peter Clifford. Oct 19, 2021 12:00:00 AM
Interest in Central Bank Digital Currencies (CBDCs) is surging based on a confluence of global trends. As Central Banks have noted in the Central Banks’ Executive Summary, “Many jurisdictions are seeing falling transactional use of cash, and new forms of digital money issued by the non-bank private sector (such as stablecoins) emerge. These developments have accelerated since the onset of the Covid-19 pandemic”.
Seeing the potential to increase transparency and efficiency, many central banks have begun to explore the transformative potential of CBDCs. Central Banks’ Executive Summary recognizes the potential benefits of using digital currency; “Yet a theme that cuts through almost every consideration is interoperability. Domestic interoperability would be key to ensuring a CBDC system coexists with other national payment systems and contributes to broader accessibility, resilience and diversity.”
The capital markets provide an excellent venue to test and demonstrate the benefits of CBDC interoperability. In June 2021, LiquidShare was involved in a milestone experiment conducted by Banque de France that simulated the issuance and settlement of securities on a private, permissioned blockchain. This demonstrated what is possible in post-trade settlements.
First, a little background: In 2017, a group of major European financial institutions (including BNP Paribas, Euronext, Caisse des Dépôts and Société Générale) launched LiquidShare to establish post-trading blockchain infrastructure for the European financial industry.
Built on the open-source distributed ledger Hyperledger Besu and Digital Asset’s Daml multi-party application platform and smart contract language, the LiquidShare platform secures and streamlines back-office processes and enhances the transparency and trustworthiness of post-trading operations.
The issuance of digital securities on a blockchain is increasingly commonplace and popular both with CEOs of unlisted companies who benefit from having a digital registry of shareholders for future corporate events, as well as for investors in illiquid assets, or objects, that may benefit from greater transparency and liquidity in a digital format. But in this case, the smart contracts handled the issuance and controlled the circulation of CBDC tokens, ensuring that transfers took place simultaneously with the delivery of the securities.
A Banque de France communique explains the Central Bank’s interest here: “This experiment made it possible to test the integration of issuance and settlement activities, including exchanges on the secondary market. It serves the discussions that the Banque de France is conducting on the tokenization of financial assets; in particular, the new settlement processes tested should contribute to a greater integration of financial markets.”
Yuval Rooz, co-founder and CEO at Digital Asset, added, “Post-trade processes can significantly benefit from the efficiency and trust provided by distributed ledgers and Daml.”
Such efficiency and trust are critical to the adoption of distributed ledger technology in capital markets, and to the development and growth of CBDCs.
The LiquidShare test were part of a much larger initiative by Banque de France, but already there seem to be some key take-aways:
- Smart contracts are foundational to CBDC success.
CBDCs allow central banks to extend their ledgers to more participants, including underbanked consumers, while retaining control over the money supply and permissions for transacting on the digital ledger. A smart contract application platform embeds rules and permissions directly within the CBDC and facilitates connections with technology providers, existing institutions and different infrastructures.
Ledgers that get it right reduce depository counterparty risks for consumers, improve business-to-business settlement mechanisms and expand options for faster and cheaper payment processing. The Daml smart contract platform for multi-party applications used in the experiment delivers against all of these objectives.
Those capabilities are why LiquidShare chose to work with Daml. “We chose Daml for its strong potential to embed business logic, and because it enables us to build multi-party business processes easily and rapidly,” said Jean-Marc Eyssautier, CEO of LiquidShare. With Daml, innovators like LiquidShare can focus on the applications and run underlying business logic on multiple infrastructures and across ledgers.
- Interoperability connects systems and engages more stakeholders.
Because CBDCs will need to work seamlessly across multiple institutions, access platforms and borders, interoperability is crucial. The Central Banks Executive Summary noted “that adoption of digital currency may be more successful if it fulfilled unmet user needs, achieved network effects, and were implemented with the use of existing, accessible technology and infrastructure.”
To transform cross-border and domestic payments in both wholesale and retail markets, CBDC must also tie into a wide range of workflows – including future workflows that have not yet been designed. Otherwise, the substantial risk of CBDCs being deployed on different, incompatible platforms will become reality, severely limiting their potential.
Daml is designed for such interoperability. Digital Asset has also developed an interoperability protocol that is available for public consumption. The goal is to broaden the conversations about CBDCs and get more market participants involved.
Daml’s interoperability protocol can synchronize applications across multiple networks. Daml applications that run on one database, ledger, or blockchain can be extended or ported to a different infrastructure, with no need to rewrite the code. This supports greater connectivity with the ability for solutions to scale as business needs evolve. It also streamlines and enhances the testing and pilot programs necessary for CBDCs to move forward.
- A flexible and incremental approach can accelerate CBDC development.
Central banks worry about limiting their future options in designing CBDCs. They need solutions to model and test digital currencies and explore potential use cases across multiple ledgers, blockchains or existing hardware. “CBDC adoption would likely be driven by its future usefulness to users and acceptance by merchants. Central bank money is the safest form of money available. Yet beyond security, other valuable features of CBDC could include lower cost to consumers and merchants, offline payments, a higher level of privacy in comparison to commercial options, and multiple accessibility features.”
In other words, Central Banks need to build on what works as it continues solving the considerable technology challenges involved in developing its CBDC. Because CBDC development is likely to be a multi-year process, such a thoughtful “test-and-learn” approach is essential. Starting small, proving the efficacy of controls and maintaining flexibility are critical to facilitating widespread CBDC adoption in the future.
Daml is designed to support this incremental approach. New ideas can be validated quickly without significant technology investment or the risk of locking into long-term contracts. Along with our interoperability protocol, this flexibility is why Daml has emerged as a standard for post-trade solutions. Beyond the Banque de France and LiquidShare, the Hong Kong Exchange, Deutsche Boerse Group, and the Australian Stock Exchange are using Daml. Nasdaq has also announced plans to integrate Daml into the Nasdaq Marketplace Services platform.
We believe in the transformative potential of CBDCs and are excited to help address the technical challenges in their development.
To learn more about the relationship between LiquidShare and Digital Asset, see the press release.
To learn more about our views on the future of CBDCs, see the white paper.
References: Central Bank Digital Currencies: Executive Summary September 2021: Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, Board of Governors Federal Reserve System, Bank for International Settlements