The market for Central Bank Digital Currencies (CBDCs) is heated up at the moment with most of the banks around the world either piloting a CBDC project or researching its use cases. Ever since China made the news with its state-backed cryptocurrency, many others have followed.
2019 saw the world embrace CBDCs as a tool against curbing the use of private cryptocurrencies. With the likes of Facebook’s Libra raising various concerns regarding privacy among the regulators, CBDCs has been considered the only viable solution.
According to a survey conducted by London-based journal Central Banking, a specialized publication backed by big names like the Bank of International Settlements (BIS) and the European Central Bank (ECB), central banks across 48 nations are now considering the development of a state-backed cryptocurrency.
These participants include 19 central banks based in Europe and 27 central banks from the other parts of the world. 57% of the banks looking into CBDCs are still in the initial stages of the research, while 25% have already developed a working proof of concept and another 13% has moved on to the pilot stage of the project.
CBDCs but not on blockchain?
As per the survey released last week, 65% had researched CBDCs and its potential applications and use cases. However, the survey showed that only a “small African central bank” preferred the use of blockchain as the underlying technology, that too only “if found to be the best available platform.”
While the report did not explain why the central banks aren’t keen on using blockchain, one of the participating central banks, a North African bank, noted that it had concerns regarding the security and scalability issues that still largely persist in the industry. It is, however, not clear whether other participants had similar views.
Instead of a blockchain, 71% respondents expressed their interest in using Distributed Ledger Technology (DLT), a broader category of network architectures that includes blockchain, as the platform upon which they’d develop their CBDC if they plan on issuing one.
DLT includes private and permissioned networks, shared amongst a handful of known and trusted nodes. In the survey, participants indicated there was a trade-off with decentralization. While distributed frameworks have created an operational resilience against a single point of failure, there were also privacy issues, with more parties likely having ready access to confidential transaction data.
Furthermore, the survey cited the Bank of England’s CBDC research paper, which notes that while distributed networks have several benefits, they also represent a major shakeup of the existing monetary system, for which many financial institutions might not be prepared.
Resemblance with cash
Another interesting result of the survey was that 58% of the participants preferred a token-based model over an account-based design. A token-based model was preferred because most participants would rather want the design to resemble cash.
Amongst the participants, some central banks want to address the issue of reduced cash usage while also broadening payment options, while some wanted to reduce the dependency on cash due to the various limiting factors physical currencies possess.
The above factors were the motivations to use a tokenized design for 17% of the participants, with financial inclusion, driving innovation and payments efficiency taking the second place with equal scores.