CBDC and Stable coin- Inter-operability (convertibility from CBDC to other coins -
Bitcoin)
When we look at the interoperability of CBDC with other coins, Financial service company
Visa has suggested that CBDC and other stable-coins should be interoperable. The company
considers ‘Universal Payment Channel’ as the most adequate interoperability platform for the
digital currencies and stable-coins(Sarkar, 2021).
It is also understood that the primary goal of UPC is to overcome the issues of scalability that
are currently faced by the existing networks. The financial service company has also proposed
a ‘hub and spoke payment route’ which is likely to function in similarity to the existing
interoperability solutions. The UPC platform works by opening a payment channel for the
sender which are then managed by various spokes to complete the transaction. The
transaction is then sent via a series of intermediate nodes before reaching the destination.
According to various researches, this process result in better availability of
network(Nambiampurath, 2021).
The financial service company, Visa, also outlines the multiple uses of UPC which includes
cross border payments for CBDCs and also a marketplace for digital currencies. The ledgers
of the CBDCs will be connected with the UPC hub. The UPC hub will also act as a bridge to
regulated stable coins. The introduction of blockchain based CBDC gives the opportunity to
overhaul the entire payment system(Nambiampurath, 2021).
Privacy and CBDC (Decentralized Identity)
A decentralised identity allows the Central Banks to create a modernised infrastructure for the
CBDC around the key design goals based on the next-gen blockchain technology.
Decentralisation also provides more resilience against the single point of failure problem. A
blockchain CBDC carries the abilities to serve a broader set of users and use cases to promote
innovation directly through its ecosystem and future-proofing. The decentralised system
which will be based on next gen blockchain technology will give the confidence of ensuring
global scalability as well.
It is important for decentralised CBDC to work with blockchain that provides global scale
performance of the currency at par with the centralised solutions with delivering safety,
security and resilience to the customers. Privacy is another key factor that will play a major
role in the decentralised identity of the CBDC for global adoption of the technology.
Digital Currency Governance
The digital currency governance can look for new opportunities in the digital currency sector
by welcoming innovation and competition. The opportunities could be such as attracting
talent as well as capital that would be beneficial in the economic growth as well. The
blockchain technologists also have potential to create employment opportunities which will in
turn reduce unemployment and eradicate poverty from the world as well.
The governance should also work on protecting the users from unfair, deceptive and
fraudulent practices involving digital currency. Similarly, businesses and other such parties
shall be protected from the users who do not have enough knowledge about the usage and are
not aware of the consequences to their actions. Also, fair marketplace and consumer
protection are of utmost important concerning to CBDC thus Big Tech Companies who have
the authority to access the digital currency market should be restricted from obtaining the
users’ personal data as this would compromise the purpose of setting up a blockchain. Data
protection should be ensured to the users to encourage the population from shifting to the
currency notes. Once the users are ensured of data protection, only then will they be willing to
shift to CBDC.
It is understood that the digital currency mining has the potential to harm the environment,
thus, the members of the blockchain community have been working to find a solution to the
problem by developing a lifelong solution which can also be considered environment friendly.
As a good number of blockchain networks are committed to solving this problem by driving
innovation with a negative carbon footprint, making blockchain transactions carbon neutral is
a genuine possibility in the near future. Technologists also anticipate to deliver a solution that
reduces the carbon emissions by 80-85% in the next 12 to 18 months. Pioneers in the
blockchain industry have also stated that they are ready with a system that can enable carbon
offsetting with quantifiable and long term benefits.
CBDC and Global Crypto Standards for Financial Stability
The International Monetary Fund has released a set of guidelines for the emerging markets
and the developing economies to ensure that there is financial stability and global crypto
adoption. The International Monetary Fund (IMF) sees crypto assets as a vehicle for quicker
and cheaper cross-border payments, noting the crypto markets' remarkable rise in value. It is
also suggested by the IMF that the policymakers should look for implementing global
standards for crypto assets and enhance the ability in monitoring the crypto ecosystem by
addressing data gaps. The emerging markets that face the risk of cryptoization should look at
ways to strengthen macroeconomic policies and consider the benefits of issuing CBDC.
Besides the issuance of CBDC, the IMF also recommends proportionate regulation to the risk
and in line with those of the global stable coins.. In addition to CBDC implementation, the de-
dollarisation policies will also help the governments tackle macro-financial risks.
Financial Sovereignty
The central banks will find it difficult to let go their roles as the guardians of monetary
sovereignty and they do not seem determined to surrender to their role of this. Also, the
increase of highly volatile cryptocurrencies has raised the concerns of financial stability due
to which all the countries are working at ways to launch their own digital currencies.
A CBDC issued by the central bank has all of the features and benefits of standard fiat legal
money, but it resides outside of existing digital payment networks because commercial banks
are not involved in the transaction chain. Payment transactions under CBDC are processed
instantly through a single digital ledger, eliminating the current necessity to transit through
various banks, which results in processing delays of several days in many circumstances,
especially for cross-border transactions.
Furthermore, CBDC users would not be required to have a commercial bank account, which
would have a good impact on financial inclusion. There would also be no risk of a bank
failure because CBDC is backed by the government.
Barriers in the Issuance of CBDC
The technological infrastructure around the globe will be a barrier to the issuance of CBDC.
The technological structure be such that it has the ability to handle high bandwidths and
traffic at a single point of time. The technological structure should be such that there is no
cross linking happening between the consumers(Wallis, 2021).
The ledger system that will be used in CBDC is not built for payments and is not capable of
handling the volume of transactions that a successful CBDC would require. For this, a
separate private ledger will have to be created that will be capable of handling the transactions
at the required scale for a successful CBDC(Wallis, 2021)
.
Reference:
Bharathan, V. (2020, December 9). What Made Central Banks Rethink Their CBDC Strategy:
Evidence From Bank Of Korea, Bank Of Japan And Reserve Bank Of Australia. Forbes.
https://www-forbes-com.cdn.ampproject.org/c/s/www.forbes.com/sites/vipinbharathan/
2020/11/30/what-made-central-banks-rethink-their-cbdc-strategy-evidence-from-bank-of-
korea-bank-of-japan-and-reserve-bank-of-australia/amp/
Carpenter, P. (2022, March 22). CBDC: Central Banks Mobilize to Retain Control Over Monetary
Sovereignty. Intuition. https://www.intuition.com/cbdc-central-banks-mobilize-to-retain-
control-over-monetary-sovereignty/
Key Design Principles for a Successful CBDC Deployment. (2021, February 9). Algorand.
https://www.algorand.com/resources/algorand-announcements/key-design-principles-for-a-
successful-cbdc-deployment/
Nambiampurath, R. (2021, October 1). Visa Publishes Whitepaper for CBDC and Stablecoin
Interoperability. BeInCrypto. https://beincrypto.com/visa-publishes-whitepaper-cbdc-
stablecoin-interoperability/
Sarkar, A. (2021, October 3). IMF recommends CBDC and global crypto standards for financial
stability. Cointelegraph. https://cointelegraph.com/news/imf-recommends-cbdc-and-global-
crypto-standards-for-financial-stability
Wallis, J. (2021, May 18). Ripple Pilots a Private Ledger for Central Banks Launching CBDCs.
Ripple. https://ripple.com/insights/ripple-pilots-a-private-ledger-for-central-banks-launching-
cbdcs/?utm_campaign=twitter&utm_source=twitter&utm_medium=organic
%20social&utm_content=1615225402
