Exploring Blockchain-based Central Bank Digital Currency

The Bank for International Settlements estimates that approximately 80% of central banks around the world have embarked on exploratory projects to study the potential for issuing central bank digital currency (CBDC), an inevitable shift towards a new monetary era that is today being realized.

Utilizing our over 32 years of experience with central banks, government regulators and versatile financial institutions, and over 6 years of proficiency in building a blockchain-based CBDC, we have developed a complete understanding of the limitless considerations this intricate technology presents, and what it means for central banks in their exploratory projects.

Our business, operational and technological expertise, and massive access to economic, legislative, regulatory and compliance requirements, has enabled us to overcome the obscurities of what this technology presents to central banks, with our teams today ready to assist central banks in the journey to explore the potentials of issuing CBDC: from assessing its effects on financial stability and security to evaluating its implications on bank funding and liquidity, all on top of the integral blockchain-based technology.

PS-CBDC

Our software development capabilities, technology infrastructure expertise and extensive manpower dedicated to this disruptive technology are reflected in our bespoke blockchain-based CBDC, PS-CBDC: a solution that offers a country an advanced, secure form of its own regulated national digital currency built on advanced blockchain technology and authorized by their central bank.

As CBDC is also a relatively new and disruptive technology, we believe it is vital for central banks to partner with well-informed and highly capable providers to guarantee success. As such, our renowned digital currency specialists and international consultants in different domains are available to assist with and assess PS-CBDC to ensure that it contains the advantageous capabilities of conventional currencies, while maintaining adaptability to strategies adopted by central banks—and also ensuring that central banks are involved in all phases of development.

From the technology perspective, PS-CBDC encompasses intricate components to furnish a secure, tailored and advanced solution for central banks, including, but not limited to:

Permissioned Blockchain Network that stores and shares immutable ledgers of all transactions in the network.

One-to-One Exchange Rate with fiat money which allows for the gradual migration towards central bank digital currency.

Open Integrators and Built-in Smart Contracts in addition to its auto-scalability and modular components that satisfy multifold payment ecosystems.

Dynamic Use Cases which facilitate resilient wholesale and general-purpose CBDC implementation designs.

Identity Management and modules that accommodate issuance, valuation, consensus and peer-to-peer domestic and/ or cross-border payments.

Mobile Wallet Software Development Kit (SDK) that connects with any mobile payment application and facilitates a smoother nationwide transition to CBDC.

OBJECTIVES AND BENEFITS

PS-CBDC was created to enable central banks to serve the following main objectives:

1. Resolve cash fraud and robbery
2. Eliminate cash costs
3. Support new market needs
4. Enhance financial inclusion
5. Reduce operational risk
6. Prevent monopolies

These objectives are achieved through multiple benefits that are inherently provided by PS-CBDC, including:

Financial Inclusion

PS-CBDC serves as a costless medium of exchange, secure store of value and stable unit of account for banks, central banks, governments, financial institutions, and banked and unbanked individuals. It also supports all types of payments for retail CBDC, including but not limited to person-to-person, person-to-business, and person-to-government.

Financial Integrity

PS-CBDC is compliant with Anti-Money Laundering/ Combating the Financing of Terrorism (AML/CFT) and Know Your Customer (KYC) requirements through participant registration and periodical records updates, thereby ensuring financial integrity of transactions. It also delivers no single point of failure and multi-phases of validations and consensus protocols.

Transactions Privacy

Depending on the preference of the central bank, PS-CBDC may offer transaction anonymity between transacting parties. For jurisdictions and claim of ownership, the central bank is authorized for accounts and transactions tracing.

Financial Market Monitoring

PS-CBDC provides statistical data analytics and monitoring of market spending behavior. It presents money distribution between industries and the financial sector, enhances monetary policy tools and ultimately prevents tax evasion.

Economic Gains

PS-CBDC eliminates transaction ‘friction’ with minimal infrastructure cost and reduces risks involved from deferred settlement. It also improves confidence in privately controlled money systems and increases trust in the national payment system.

Cross-Border Payments

PS-CBDC can also be expanded to enhance the efficiency of cross-border payments and has the capability of forming multi-CBDC arrangements by central banks, resulting in convenient and inexpensive access to other currencies for remittances, travel and trade, especially in emerging economies.

EXPERIMENTAL EXPLORATION

When a newly emerging phenomenon is addressed, the recommended approach is an experimental exploration through Proof of Concept (PoC) and pilot projects, which is the approach being taken by most central banks exploring CBDC in the absence of globally recognized best practice standards.

Accordingly, we have been advising our clients to explore the technology’s potentials and feasibility via PoC and pilot projects across different business use case scenarios, which if executed successfully, may lead to more confident steps towards establishing a formal CBDC.

PoC and pilot projects by central banks should be able to cover technology, economic and regulatory aspects before they commence with their CBDC journeys. Accordingly, we provide country-specific consultations by our partner consultants covering two major aspects:

1. Business Process Re-engineering
   Our business process engineers assess monetary situations in the country, while our engineers scrutinize the ‘as-is’ situation for every business use case scenario, as well as build and provide several recommendations for the ‘to-be’ situations.
   
   
2. Blockchain, DLT and CBDC Analysis
   For the technological scope, our highly experienced team of experts which have been working with monetary technologies for over 20 to 30 years, as well as specializing in blockchain and CBDC technologies for the past 6 years academically and experientially, are responsible for providing an expert opinion on what technologies to use/ not use and why.

All-Purpose Technology

PS-CBDC was developed with different approaches in mind which led to a portable application of use cases irrespective of the blockchain engine being used. Issuance, Pledging and Redemption Direct or indirect/ hybrid distribution of PS-CBDC units for general use through pledging and redemption operations.

Interbank Settlement

Commercial banks can use PS-CBDC to transfer balances between their accounts for settlement purposes using CBDC wallets.

Cash-In/ Cash-Out

PS-CBDC offers both a cash-in facility to exchange banknotes for CBDC and a cash-out facility to exchange CBDC for banknotes.

Wallet-to-Wallet Transfers

PS-CBDC offers real-time value transfer between different supported wallet types with well-defined payment purposes and configurable payment limits. Wallets can be assigned to individuals, businesses, government entities, or any community organization with a well-established identity.

Reports and Enquiries

PS-CBDC offers reporting facilities to the central bank and any other participating organization to inspect and trace sent or received transactions.

Offline Transactions

PS-CBDC allows limited use of offline transactions in situations with limited or no network connectivity. To minimize the risk of offline transactions, certain measures are provided to the central bank to retain control.

Intraday Liquidity Management and Sweep Accounts

Business entities work in an extended timeframe that goes beyond commercial banks and central banks, so introducing hierarchically deterministic PS-CBDC wallets makes it easier for business entities to manage liquidity needs after the central bank’s working hours. This requires interoperability between CBDC wallets and e-money bank accounts managed by business entities where they need to be able to sweep money from and into their bank accounts frequently during the day, especially when subsidiaries are involved.

IMPLEMENTATION APPROACH

The recommended approach for implementing CBDC use case scenarios should be the gradual approach in which CBDC is tested in limited use cases either geographically and/or according to other dimensions such as industries or vendor types. With this limited exploration phase, it is important to have a ‘success’ criteria or benchmark that can be tested in addition to incentives such as the red envelope giveaways in the case of China or lottery entries in the case of Uruguay.

Once a use case is applied to a limited partial group of the business scenario domain, it can be expanded to additional segments of the same domain for the same use case. And only when a business use case is fully implemented or at least expanded to over 80% of the domain population, the platform may be extended to incorporate another use case and so on. However, throughout the transition from testing and experimental phases to full launch, central banks must ensure that the approach remains user-centric and agile.

Read the full Central Bank Payments News special supplement here.