Central Bank Digital Currency Report Summary

Central bank digital currency (CBDC) exploration is entering a new phase, as multiple pilot programs explore different use cases within and across markets. 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 trade and remittance flows.

Below is an abridged version of the full report, which you can request and download here.

About central bank digital currency (CBDC)

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.

An evolving regulatory framework

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 processes 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, with the ﬂexibility to accommodate future, currently undeﬁned use cases.

The ability to use interlinking systems points to an emerging cross-border framework that is a series of domestic CBDC systems connected to a foreign one. This model appears to be preferred by central banks, as each would retain control over the use and regulation of their own CBDC, while still allowing it to transact with other CBDCs, as long as rights and permissions of the actors are clearly deﬁned. From a regulatory point of view, this is probably the best solution, as it isolates the national operations and requirements from those of other countries while implying some standardization at the international level of the communications between different CBDCs. However, this demands a CBDC framework that is interoperable, so that a country’s CBDC can function at both national and international levels.

Pillars of CBDC

The technology underlying CBDC must be able to support a regulatory environment with various standards for different types of transactions and assets, and for different jurisdictions and priorities. 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 ﬂexibility and interconnectivity necessary for central banks to develop CBDC, deﬁne initial use cases, and support future applications that may not yet be known.
Assure transaction ﬁnality and certainty of settlement.
Be scalable and resilient to support high transaction volumes that are likely to increase signiﬁcantly over time.

For maximum adoption and usability, CBDC should be designed to support the broadest possible set of uses and the greatest ﬂexibility to expand as opportunities arise.

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 smart contract and enforced on a sub-transactional level. Conﬁdential information resides with its owner (regardless of whether blockchain or traditional databases are used), and rights and permissions are set at a granular level to protect the ‘need to know’ principle. This limits the scope of data used or shared while still allowing authorities to monitor the legality of transactions.

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. Knowing the identity of the counterparty is a crucial requirement that must be captured within the solution.

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. Certainty of transfer and settlement is essential for cross-border remittance workﬂows. Enabling direct transfers without requiring third-party intermediation would eliminate fails, ensure transparency throughout the transfer process, and reduce cost.

Composable extensibility

Composable extensibility allows new applications to be added dynamically and networks to be easily connected for future CBDC use cases. Without it, institutions are forced to reinvent the wheel when new technologies arise or when there is a need to deploy future use cases to the same infrastructure.

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, and because some CBDCs may not use DLT. With Digital Asset’s smart contract Daml application framework running on Canton, an integrated, privacy-enabled distributed ledger, multi-ledger interoperability becomes attainable. Canton enables any Daml-based ledger to be distributed via participant notes, with advanced synchronization protocols that ensure the participant’s ledger remains in a valid state at all time. Applications built with Daml are fully portable and can be kept as a standalone solution or expanded, extended, or connected when and how the owner chooses.

Conclusion

The development of CBDC represents a generational opportunity to expand the central bank ledger to additional users, enabling important structural changes and accelerating innovation without disrupting existing payment rails. Digital Asset remains at the forefront of CBDC dialogue. We expect greater value to be created as individual CBDC initiatives plug into a network of interconnected distributed ledgers to create a decentralized, golden source of truth that is widely shared and boundlessly scalable.

This emerging ecosystem of interconnected networks is already being created. Digital Asset calls this the Global Economic Network, where information and value are shared efﬁciently, and transactions occur seamlessly. Adding CBDC to this ecosystem will expand the value exponentially: Just as organizations are free to transact, unconstrained by organizational boundaries, so too will currency be more readily transferable across borders. Daml-based CBDC works across traditional boundaries and regulatory frameworks, creating interconnected networks between information silos and cross-border institutions. CBDC powered by Daml is one of the many ways Digital Asset is building economic value across the Global Economic Network.

Central Bank Digital Currency Report Summary

From the Philosophical to Practical for Global Adoption

Overview of Digital Asset report