In this article we aim to educate readers about CBDC, the challenges for blockchain to become the accepted infrastructure of choice, and how the Dusk Network is built upon the exact core-principles that may underpin future Central Bank Digital Currencies.
The Dusk Network is a public and permissionless network purposefully designed to become the backbone infrastructure of financial applications. As such, Dusk Network is capable of providing both transaction privacy and auditability, smart contract functionality, transactions that finalize in seconds, and operates an energy conscious consensus mechanism. In other words, Dusk Network is built upon the exact core-principles that may underpin future Central Bank Digital Currencies.
Rabobank is a Dutch multinational banking and financial services company, and the second-largest bank in the Netherlands in terms of assets. Yesterday, Rabobank released an in-depth article to shine their light on CBDC (NL / ENG), in which they research the best possible technology solutions. Rabobank findings are amongst others based on the requirements posted by the ECB, in their report on a digital Euro.
In this article we aim to educate readers about CBDC, the challenges for blockchain to become the accepted infrastructure of choice, and how the Dusk Network is built upon the exact core-principles that may underpin future Central Bank Digital Currencies.
💡 What is CBDC?
Central Bank Digital Currency, or CBDC, has been used to refer to all kinds of proposals involving digital currency issued by a central bank. The European Central Bank (ECB) describes CBDC as “an electronic form of central bank money accessible to all citizens and firms.” According to the European Central Bank (ECB), one of the potential benefits of a CBDC is that it can serve to reduce the increasing dependency on 'traditional' private payment solutions in the Euro area.
The ECB reports in the ‘Report on a digital Euro’ that: “The architecture of the system underlying the digital euro [CBDC] should be flexible and easy to expand, with standardised open interfaces between system components, so as to support possible future payment needs and easy integration of new types of device over time.” Public blockchains are particularly well-suited for this.
Benefits of DLT in CBDC
Aside from the above, the primary use cases of CBDC, as reported by Rabobank in their article, revolve around enabling peer-to-peer transfers (like cash), and a more efficient international payment infrastructure.
⚡️ In the current banking system, international payments often need to be routed via intermediary banks (middlemen). Think of Billy with a bank account in Germany who purchases goods with an online electronics company in Japan. If the two banks don’t have an established financial relationship, intermediary banks are required. This is like taking a series of connecting flights to arrive at your destination. This is exactly why international transfers can take days to process, and are generally expensive. A blockchain-based CBDC solves this.
In addition, DLT offers possibilities to make the CBDC programmable via smart contracts. In addition, you could 'pre-program' a CBDC so that it is earmarked and can only be spent on specific items, for example study costs or care.
Ongoing real world projects
Discussions around the globe revolve around two types of CBDC: Retail CBDC and Wholesale CBDC.
Retail CBDC: a system in which the citizen himself participates in the CBDC.
Wholesale CBDC: intended for financial institutions that hold reserve deposits with a central bank.
- 💡 China is currently the world leader in rolling out its CBDC. An extensive pilot is underway , and it is expected that the Chinese CBDC will already be widely implemented in the short term. China has opted not to use DLT for mass payments, but to use traditional payment technology.
- 💡 Saudi Arabia and the United Arab Emirates recently piloted a wholesale CBDC with 'Project Aber' using blockchain technology. They aim to create a CBDC that commercial banks can use to settle international payments between them. The idea was to test whether DLT can remove ‘single points of failure’, where failure of nodes does not have an impact on the payment infrastructure. Rabobank noted that for them: “Another advantage is that onboarding new players, such as fintechs, should become easier and cheaper.”
General requirements of retail CBDC
For a retail CBDC to be issued on a blockchain, it needs to satisfy a couple of important criteria:
- Speed & efficiency: This is largely expressed in transactions per seconds. At Dusk Network we have plans to create layer-2 scaling to achieve thousands of transactions per second, with the zero-knowledge technology that is natively included expected to play a major role there. However, at this point in time it is unclear whether any blockchain network, albeit a permissionless, or permissioned configuration can satisfy the required retail CBDC transaction volume the Eurozone faces during peak traffic.
- Privacy: “Cash has distinct intrinsic features – its physical nature, the capacity to ensure privacy in payment transactions… [..]. Ideally, a digital euro should allow citizens to continue to make their payments much as they do today with cash.” - ECB, Report on digital euro (Oct, 2020).
- Auditability: CBDCs should have support for an audit-role and regulatory oversight, such that it cannot be exploited by criminals. So while transactional privacy is a major design aspect, at Dusk Network we know the importance of baking in optional audit-roles for regulatory oversight. It is one of the main design principles underpinning the XSC-token standard.
- Security: CBDCs require a secure network without ‘single points of failure’, that guarantees that settlement in central bank money should be available at all times. Widely distributed networks, such as permissionless blockchains, provide a robust network of nodes where failure of nodes does not have an impact on the availability of the payment structure. In addition, the ECB reports that “Privacy and security of the information stored in the device should be ensured by means of the most advanced technical tools available”.
- Finality: The underlying infrastructure should guarantee the certainty of settlement. Rabobank provides: “A disadvantage of the PoW consensus mechanism is that it approximates 'finality', but never quite reaches it. There could always be a reorganization of the chain that would reverse transactions.” Dusk Network uses the SBA consensus. SBA cannot be forked, and transactions are final and irreversible immediately after they are settled.
Naturally, energy consumption is also an important consideration. The Eurosystem decides to proactively support improvements in the overall costs and ecological footprint of the monetary and payment systems. The ECB adds that: “this would be achieved by highlighting the cost and energy efficiency of the digital euro, compared with other payment solutions, when promoting its use.”
Comparison sheet of potential CBDC infrastructures
Concluding Remarks
The plans to create a retail CBDC are highly ambitious, and it is too early to tell whether any DLT will be able to satisfy the Eurozone’s transaction volume requirements. However, layer-2 scaling solutions provide a promising future outlook. On the wholesale CBDC side similar requirements are imposed on DLTs (privacy, finalty, audit-role, energy consumption etc.), with a more humble need for high-speed transaction throughput. If anything, the extensive CBDC documentation validates the core-principles underpinning the Dusk Network.
We have invented the Dusk Network to satisfy the requirements of enterprise solutions, such as financial service applications, and by extension the financial industry, and we see a promising future for public and permissionless blockchains.