According to a January 2019 report by the Bank for International Settlements (BIS), at least 40 central banks around the world are currently, or soon will be, researching and experimenting with central bank digital currency (CBDC). CBDC, a commonly proposed application of blockchain and distributed ledger technology (DLT), has attracted much interest within the central banking community for its potential to address long-standing challenges such as financial inclusion, payments efficiency, and payment system operational and cyber resilience.
Including but not limited to CBDC, central banks are researching and experimenting with at least 10 specific use cases for blockchain and DLT, exploring where they can potentially unlock new possibilities and improve inefficient processes. While central banks across continents are conducting several research projects and pilots with blockchain technology, the degree of depth, progress and interest across efforts varies greatly.
In rare cases, such as with the Bank of France, the central bank has already fully deployed blockchain technology with project MADRE, which has fully replaced the centralized process for the provisioning and sharing of SEPA (single euro payments area) Credit Identifiers with a decentralized, blockchain-based solution. The project began as a proof-of-concept in June 2016 to learn more about DLT with a simple use case.
Central bank activities with blockchain and DLT are not always well known or communicated. As a result, there is much speculation and misunderstanding about objectives and the state of research. The purpose of World Economic Forum’s paper is to introduce and highlight the key issues and areas of research, experimentation and implementation for central banks with respect to DLT.
Importantly, DLT is an active area of research and exploration, and many central banks have not yet reached definitive conclusions regarding the opportunities it provides when considering risks. The leading cases for wholesale CBDC consist of increasing efficiency in cross-border interbank payments and in interbank securities trading and settlement.
Dozens of central banks from across the world are actively investigating whether blockchain and DLT can help solve long-standing interests such as banking and payments system efficiency, payments security and resilience, financial inclusion and more. Research began in 2014 with the Bank of England and now includes more than 60 research papers and multiple large-scale technology pilots exploring CBDC and other applications.
In sum, central banks are investigating DLT for at least 10 distinct use cases: retail CBDC; wholesale CBDC; interbank securities settlement; payment system contingency and resiliency; bond issuance and lifecycle management; KYC and AML; information exchange and data sharing; trade finance; cash money supply chain; customer SEPA creditor identifier provision.
Research and experience vary across countries, and many central bank researchers have yet to conclude whether DLT can provide value to their processes given salient risks and limitations. In some cases, central banks have concluded that blockchain technology does not provide valuable opportunities for their economies when considering the risks and downsides.
In the least, many monitor developments by peer institutions and within the private cryptocurrency markets. Emerging country central banks may experience the greatest gains from DLT implementations where existing financial processes and technology systems are not yet highly efficient or deeply rooted. They may also achieve greater financial inclusion from implementing CBDC or other blockchain-based applications.
For central banks around the world, DLT applications such as CBDC can increase efficiency and reduce frictions in cross-border payments, on both the consumer (retail) and the interbank (wholesale) levels. Over the next four years, we should expect to see many central banks decide whether they will use blockchain and distributed ledger technologies to improve their processes and economic welfare. Given the systemic importance of central bank processes, and the relative immaturity of blockchain technology, the banks must carefully consider all known and unknown risks to implementation.