A report published by Global Digital Finance notes that during the past 18 months, the developments related to central bank digital currencies (CBDC) have “accelerated dramatically.”
CBDC projects have gone from the research stage to formulating key policy requirements. Countries like China have even introduced their own digital currency (currently in its testing stage in several major Chinese cities).
The Global Digital Finance team claims:
“Unquestionably, this has been driven by developments in Facebook’s Libra where the spectre of the private sector playing more of a role in medium of exchange and store of value was entirely possible.”
As previously reported, the People’s Bank of China (PBoC), the nation’s reserve bank, has introduced its Digital Currency Electronic Payment (DCEP) platform. The PBoC is now planning to further improve and streamline the new virtual currency payment network by working cooperatively with local banks.
As noted in the report by Global Digital Finance, the Bank of International Settlements recently revealed that at least 48 reserve banks have an “active” research or proof of concept in development for a CBDC.
The report added:
“Since the rise of the COVID-19 pandemic, cash circulation has dropped significantly in many economies, digital payment types have increased, and the focus on efficient, fair and transparent payments has become [a priority] in all areas of the economy.”
New initiatives like Hyperledger’s eThaler4 (developed on Ethereum) and the Digital Dollar Project “continue to advance the digital US dollar case rapidly,” the report states. It explains that there are several different use cases that require reduced volatility to eventually have “real consumer adoption.”
The report specifically mentions the following use cases that would work well if there were lower levels of volatility in digital currency prices:
- Remittance – requires reduced volatility when payments are being made
- Digital commerce and payments – for any business to be able to accept day-to-day payments, and process worker salaries
- Financial inclusion – unbanked and underbanked
- Lending markets – long-term issuances
- Store of value for long-term hedging – trading markets – long-term issuances
- Alternative banking
The report’s authors recommend:
“A digital dollar will need to be designed with security in mind from the outset, beginning with a formal specification of the protocol that enables it. This specification should be subjected to careful public review and testing. A well-designed system of roles and permissions will be critical to protect the system from malicious administrators and hacking.”
The report further states that when an expert review has “determined the specification to be valid,” then the developers can proceed to the implementation stage. During this phase, they should use a modern systems programming language to create the digital currency payment system, the report notes.
“Multiple implementations may be beneficial for enabling a resilient network. The implementation(s) should then be formally verified against the specification….In order to maintain the levels of consumer privacy we enjoy with cash, neither the central bank nor its government should have direct access to universal unshielding capability (aka no backdoors).”
Transactions must only be “unshielded” by government agencies when the digital assets are used for carrying out illicit transactions, the report states.
It also mentions:
“Privacy concerns are heightened with digital currencies because they could expose the user’s entire transaction history and net worth. Essentially, the privacy mechanism should protect wallet balances by default and only reveal balances required to settle the transaction at hand.”
(Note: You may check out the full report here.)