[ad_1]
The coronavirus (COVID-19) continues to spread across the planet, reaching more than 3,344,000 people worldwide. Health restrictions to contain the virus force the world to migrate entirely to digital. For this reason, central banks explore the opportunities offered by digital currencies and blockchain-based systems, anticipating a rapid phase of transformation of the traditional financial system.
In Latin America, Argentina is at the forefront, since the Central Bank of the Argentine Republic (BCRA) is adopting new technologies and has launched the proof of concept of the interbank platform based on smart contracts, on RSK, which is operating with six nodes, one for each participating institution, including Banco Santander, BBVA, Bancor, ICBC, Interbanking and Bolsas y Mercados Argentinos (BYMA). The system for handling claims for unauthorized debits and returned checks is the first step in involving distributed ledger technology (DLT) or blockchain in the local financial system.
Also, the Central Bank of France wants to experiment with the integration of digital currencies, recently published a request to receive proposals for experimental applications with this type of currency. These projects will help the financial institution understand the risks and mechanisms of CBDCs. They will also contribute to the conversation about digital money in the European area.
The announcement by the Central Bank of France puts the country at the forefront of this debate, since it is the member of the European zone most outstanding in launching an experiment with CBDC to date, together with Sweden, whose Riksbank is also experimenting with digitizing the coin and preparing to launch Krona.
Already since last year, as reported by CryptoNews, the European Union was in favor of Central Banks issuing digital currenciesHe even proposed creating a regulatory framework that targets not only the issuance of this type of asset, but also for private initiatives.
China has also been working on its national digital currency (DCEP), which It will be issued this May to local government employees in Suzhou City. The digital currency will be issued by four state banks, including the Agricultural Bank of China, the Industrial and Commercial Bank of China, the Bank of China and the China Construction Bank.
In addition to these cases, world-renowned banking giants like Spain’s Santander have settled bonds using the Ethereum network, in a process that involved fiat money that was contributed by one of the group’s subsidiaries.
The innovative step of central banks
A document published by R3 entitled “Central Bank Digital Currency: An Innovation in Payments” examines the growing interest around blockchain-based central bank digital currencies (CBDCs) around the world, focusing on the progress to date and shows the models under which the system will operate, as well as a variety of implementations.
The report provides elements that help to understand the substantial benefits offered by blockchain-backed digital currencies for general use and adds that the motivation of central banks to promote their development is specifically based on the fact that CBDCs represent an alternative to cash and represent the modernization of payment systems in the structure of a digital economy.
As part of the structure of a digital economy, a blockchain is decisive for enable the conversion of payment asset tokens, allowing peer-to-peer transactions and distributed custody. The system is also intended to be used to increase efficiency in cross-border payments. Also to perform atomic transactions, which means that any scenario of delivery against payment can occur in real time, without the risk of one part of the transaction being executed before the other, as detailed in the report.
The document adds that by using a blockchain and digital currencies, liquidity-saving mechanisms can be more effective in reducing bottlenecks, which currently cause delays. Whereas, the system may allow banks to increase their effectiveness and liquidity from what they currently have. “Each bank could have greater control and visibility in real time of how their payments will be compensated throughout the network, reducing the dependence on the central operator for that compensation calculation. Greater control and flexibility with liquidity would benefit all market participants, “he points out.
The report separates digital currency projects into two categories: wholesalers, which are those issued by commercial banks and institutions; while retailers are linked to small businesses. Of the former, he exposes a series of pilot projects, while, of the latter, he clarifies that none currently exist. However, it adds that an investigation and a PoC proof of concept produced by the European System of Central Banks (ESCB), is showing that it is possible to build a simplified CBDC payment system that will allow users a certain degree of privacy for lower value transactions.
Even that PoC has several novel features such as a user identity procedure and a transaction history that they cannot be seen by the central bank or intermediaries other than those chosen by the user. The app allows anonymous electronic transactions to be automated, with additional verifications delegated to an AML (Anti Money Laundering) authority. This is accomplished using “anonymity vouchers,” which allow users to anonymously transfer a limited amount of CBDC for a defined period of time.
How will the system work?
To demonstrate how the system will work, the report describes a CBCD implementation method that has three different types of participants: central banks, financial institutions with access to central bank balance sheets, and retail institutions without access to the central bank. This model can be used to understand the wholesale and retail use cases described above.
The model shows a two-tier system with API accounts, where each participant has access to the distributed ledger. It has three types of participants. Since not all participants will have access to or want to be custodians of their own CBDC, the system incorporates API accounts. API accounts are a mechanism for a node to act on behalf of users who can communicate with the node through an API. In practice, any node (a network participant) manages an account for each user it represents. This is, similar to the bank accounts that we use today.
The report clarifies that all the examples still have governance questions to answer and whose answers will depend on each central bank. The questions that remain open are: What are the privacy controls around payments? Will CBDC be anonymous as cash, or would there be some level of information for large transactions? What are the network limits for CBDC?
