There has been a widespread assumption that central bank digital currencies (CBDCs) would be built on blockchain — or at least the distributed-ledger technology (DLT) it’s based on.
However, a growing number of central bankers and CBDC designers are casting doubt on the need for the technology built for Bitcoin, noting that existing technologies may serve just as well and that blockchain does bring some weaknesses to the table.
That is a conclusion reached most recently in a paper by the Bank for International Settlement (BIS) and the World Bank that focused primarily on CBDCs as a tool of financial inclusion — but it is also one that the growing number of central banks collaborating with the Massachusetts Institute of Technology’s (MIT’s) Digital Currency Initiative on CBDC design research are coming to.
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It’s still too early to say that blockchain provides any definitive benefits, Dinesh Shah, the Bank of Canada’s director of FinTech research, told crypto industry news outlet The Block last week.
Blockchain “is not a given but it’s still on our list of potentials,” when it comes to designing a CBDC, said Shah, who has expressed skepticism about the technology crypto is built on in the past.
Related: Canada Has a Contingency Plan for a CBDC, but May Not Use It Yet
That is roughly where MIT’s researchers came down in a February test of technologies performed with the Federal Reserve Bank of Boston, which found that in a head-to-head test of a barebones CBDC design, a blockchain-based platform was far inferior.
The blockchain-based platform was capable of only 10% of the scalability of a non-DLT system because of bottlenecks created by the need for a single and complete record of transactions in the order in which they were processed.
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Shah said that’s especially noteworthy because the Bank of Canada is collaborating with the Boston Fed and the Bank of England — also an MIT partner — on this research.
In addition, the BIS is coordinating a a group of six banks that are pooling research. Other members are the Bank of Japan, the European Central Bank, Sweden’s Sveriges Riksbank and the Swiss National Bank.
That puts research casting doubt on the benefits of a cryptocurrency-based CBDC at the core of many financially powerful nations.
Inefficient at Scale?
That question about blockchain’s efficiency is also a conclusion reached by the Swiss National Bank last summer, its chief economist, Carlos Lenz, told a local newspaper.
“But blockchain is very inefficient,” he said. “I don’t think a decentralized solution is ideal.”
In the paper by the BIS’ Financial Stability Institute released this week, “Central bank digital currencies: a new tool in the financial inclusion toolkit?,” researchers came to much the same conclusion based on interviews with nine central banks engaged in CBDC design.
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They said that because DLT-based systems require the ledger to be “managed collaboratively and decentralized by several organizations … each ledger’s change must be synchronized between all entities’ nodes, which takes time. As a result, transaction throughput in DLTs is lower than in traditional designs.”
Beyond that, the report at least raised the question of whether CBDCs actually bring any concrete benefits beyond financial inclusion and an extra layer of security.
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While cryptocurrency-style “token-based CBDCs can enable payments in newer contexts like the ‘Internet of Things,’ and programmability could allow payment services to be embedded into commercial and social interactions,” it said many of the features that CBDC boosters say currencies like a digital dollar or digital euro would bring “can, in isolation, be offered by other payment innovations, and many gaps could be addressed through regulation and sound oversight arrangements.”
That’s also a conclusion reached 2 1/2 years ago by at least one influential member of the Swiss National Bank’s governing board members, Thomas Moser, crypto news source Cointelegraph reported.
Moser said that blockchain’s primary use cases are all focused on providing trust without a trusted third party at the center of the transaction.
“Like for instance, Bitcoin. I think it is a very good use case for blockchain,” he said, adding that a central bank’s involvement with a CBDC provides that trust. “But if you have a central bank, then this is the central party. And if you trust that central party, I think then it’s not really straightforward to reason that you need a blockchain.”
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