The Bank for International Settlements (BIS) and four central banks have completed trials of two blockchain-based platforms that a multinational central bank digital currency (CBDC) technical standard could be based on.
Nationally issued CBDCs like the digital yuan and proposed digital dollar could make both retail and interbank payments far faster, easier and cheaper. They also offer the same potential benefits for cross-border payments, but would need to be able to talk to each other to make that happen efficiently.
The goal of Project Dunbar, involving the central banks of Australia, Malaysia, Singapore and South Africa, as well as a number of commercial banks, was to delve into the governance, processes and technology needed to make that happen.
Among other things, it made a tacit conclusion that the digital ledger technology (DLT) upon which blockchain is based was the way to go but did not specify a blockchain platform. Testing by the Boston Fed and MIT’s Digital Currency Initiative recently cast doubt upon blockchain’s superiority as a CBDC platform.
See also: Boston Fed, MIT Digital Dollar Test Casts Doubt on Blockchain as Processing Platform
The BIS project tested two permissioned protocols. One was built on R3’s Corda, a DLT platform that Corda has helpfully described as “both a blockchain and not a blockchain.”
The other is Quorum, the J.P. Morgan-designed permissioned blockchain platform based on Ethereum that was recently sold to ConsenSys, an Ethereum development firm.
National Necessity
It led to some important findings about the establishment and governance of regional and international CBDC groups, as well as ways to provide the security and confidence needed to convince central banks to record liabilities on a shared platform they do not fully control.
“A common platform is the most efficient model for payments connectivity but is also the most challenging to achieve,” Andrew McCormack, head of the BIS Innovation Hub in Singapore, said in a statement. “Key concerns of trust and shared control can be addressed through governance mechanisms enforced by robust technological means, laying the foundation for the development of future global and regional platforms.”
The BIS has been pushing CBDCs for the last couple of years, both to ensure they are compatible with each other in order to ease cross-border payments and to fight off the threat it believes stablecoins pose to the trust that its general manager, Agustín Carstens, calls “the soul of money.”
While stablecoins might be convenient, Carstens warned against allowing either Big Tech or private blockchains to control money in a speech earlier this year.
“Handing the keys to our monetary system over to private entities driven primarily by profit,” he said, “could erode trust.”
First-Mover Advantage
The report, “International settlements using multi-CBDCs,” investigated three governance models: Enhanced compatibility, interlinking and integration.
It also assumed a four-tier structure in which central banks issue CBDCs though selected large commercial banks that on- and off-ramp CBDCs; other commercial banks initiate CBDC transactions as well as performing anti-money-laundering (AML) checks; and other non-resident banks can just initiate the transfer and exchange of CBDCs.
The report discussed the security factors necessary to provide central banks the level of trust and confidence they need to enter an alliance using a shared technology platform, as well as the need for it to be flexible enough to account for locally-set rules applying to specific currencies.
But as McCormack mentioned, one interesting thing was that in addition to the possibility of creating a single shared platform for all central banks, Project Dunbar envisioned groups of central banks forming regional alliances.
Admitting new members, the report suggests “would be undertaken by a governance body, based on a variety of factors,” although those “criteria should be common and applied universally across the platform.”
Still, that would mean that new members would have to conform to the rules established by existing members — much like the EU admission process.
From the U.S. perspective, that could make the Federal Reserve’s current thinking on CBDCs problematic.
“We don’t feel an urge or need to be first,” U.S. Federal Reserve Chair Jerome Powell said recently. “Effectively, we already have a first-mover advantage because [the U.S. dollar is] the reserve currency.”
See also: Fed’s Powell: CBDC Will Be Years, Not Months, Away
On the other hand, the other global economic powerhouse may be just as far away from its own CBDC.
European Central Bank (ECB) President Christine Lagarde said much the same thing this month.
“We need to make sure that we do it right — we owe it to the Europeans,” she said. “The whole process — let’s be realistic about it — will in my view take another four years, maybe a little more.”
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