2019 was the year of Central Bank Digital Currencies (CBDC) as we saw multiple nations getting in on the race to develop their own state-backed cryptocurrencies. The regulators have been trying to keep private cryptocurrency use at bay while promoting the use of distributed ledger technologies (DLT).
Several major central banks across the globe have already started working on CBDCs. DLT is expected to bring several benefits to central banks in the areas of cross-border payments and settlements, among others.
The European Central Banks’s EUROchain concept has identified DLT as an option that helps strike a balance between a certain level of privacy in electronic payments and ensuring compliance with regulations aimed at tackling money laundering and the financing of terrorism (AML/CFT regulations).
However, not all central bank officials are inclined towards the implementation of DLTs. In a panel held at the Massachusetts Institute of Technology (MIT) Bitcoin Expo 2020 on March 7, a group of monetary and cryptocurrency experts discussed the various challenges and prospects of central bank-issued digital currencies.
Don’t Rush into DLT
The panelists agreed that DLT could improve the global monetary system, but argued that there are various challenges involving privacy, interoperability, and scalability of blockchains. However, one of the panelists, Sonja Davidovic, an economist with the International Monetary Fund (IMF), warned that the central banks should not rush to implement blockchain tech without research. She said:
“What we’ve seen a lot is that there’s a hype out there and people are quickly jumping to choosing that technology just because it’s popular. That certainly happened with blockchain. The result of that is that we’ve seen central banks that are directly engaging with it without going through the proper process of testing the technology in a proof of concept, selecting vendors through an open bidding process, and having a request for proposals.”
Furthermore, Davidovic noted that there already are a lot of DLT based options available to the central bankers, but so far, none of them have demonstrated robust privacy and interoperability. The IMF official added that central banks would be at risk since they often outsource work to commercial vendors and third parties and often fail to evaluate the technology or the vendors.
“It’s about the weakest link,” she said. “You can have a secure system, but if the people who’re operating the system click on a phishing email or allow a security breach, your most robust system is not going to help with security.”
“[CBDC] is not going to be a straight copy of cryptocurrency for sure,” the official added.
The future is Hybrid
The second panelist, a former Bank of England official Robleh Ali, believes that central banks would also be interested in adding some elements of blockchain technology into DLTs and create some sort of “hybrid DLT-and-centralized system. “ He said:
“You’ll likely end up with a hybrid in the end. I don’t think every central bank would choose the same system. How they interact with each other will be key, so you can sort them into a single system.”
Bob Bench, the director of applied fintech research for the Federal Reserve Bank of Boston, urged central banks to consider the risks of “putting their full faith and trust of their government’s currency” into DLT. He added:
“BTC is very interesting because it’s mostly just transactional values. But if you’re trying to build a retail central bank currency – like China, for example, there’s 40 trillion in volume last year generated through WeChat alone – you need something that over and over and over again, can move value and do it quickly without breaking.”