There is a reason why decentralized currencies are not just buzzwords. With the transition to a fully interoperable global digital economy, financial institutions will have the opportunity to become more competitive and better serve their customers in today’s modern situation. One of the exciting examples is the Central Bank Digital Currency (CBDC). Central banks can create their own fiat digital alternatives by partnering with crypto service providers. The CBDC can drive more efficient and low-cost payments, stimulate economic growth and provide financial services to historically underserved demographics.
As with any new technology, there are uncertainties associated with digital assets. Many of these uncertainties can be mitigated with the help of regulatory guidance from policy makers and collaboration with fintech and crypto service providers at the international level. This not only paves the way for full interoperability of global digital currencies, but also supports the digitization of the global economy, streamlines cross-border payments and improves financial inclusion.
Research from global universities has helped inspire CBDC solutions for the world’s largest financial institutions seeking to integrate digital assets into their business models. Funded by Ripple’s University Blockchain Research Initiative (UBRI), major campuses and academics have been able to spend the past few years researching CBDC engineering, policies, and business solutions based on blockchain technology.
Geopolitical implications of the CBDC
In October 2021, we hosted the third annual UBRI Connect conference. The conference will bring together world-leading researchers and scholars from across the UBRI network to focus on discoveries in the blockchain space.
Digital currencies such as CBDC and Stablecoin were important topics at the conference. Darrell Duffie of Stanford Business School talked with James Wallis, Ripple’s Vice President of Central Bank Engagement, to further discuss this topic, including current and future sentiment about digital currency alternatives.
As of 2021, 87 countries, which account for more than 90% of global GDP, are reported to have begun investigating CBDC solutions. Recently, the Republic of Palau and the Royal Monetary Authority of Bhutan have partnered with Ripple to use the XRP Ledger (XRPL) to develop the country’s digital currency.
Regarding the central bank that chose not to adopt the CBDC, Duffy said: [the] Local currency. “This statement jumps over many steps needed to optimize the potential of the CBDC, but the sentiment remains true. By offering consumers digital currency options, this statement remains true. There is an opportunity to interoperate within the modern digital economy.
From a technology innovation perspective, Duffie explained how technology and economic advances, as well as how payment privacy and security can be balanced. Duffie believes that taking an international approach to CBDC solutions to facilitate progress will bring the solution through the involvement of the central bank in the private sector. This includes interactions and interoperability opportunities between commercial and central banks in the global economy.
Duffie emphasizes the importance and potential of future digital asset interoperability only if policymakers work with crypto space giants to provide a clear regulatory structure. Will be.
Customizable policy approach
In a letter to the Bank of Thailand in June 2021, our team emphasized the belief that interoperability focused on international standard protocols ensures the success of the CBDC. As with Duffie, I agree that a two-tier public-private payment approach is an effective model. More specifically, the letter suggests that private companies create and distribute CBDCs so that central banks can issue digital currencies to better serve their consumers.
Later this year, Ripple announced that it would join the Digital Pound Foundation to step up efforts to work with space players to develop and implement the Digital Pound in the United Kingdom. As the number of central banks implementing CBDC grows, privacy, interoperability, and full sovereignty will be key factors for the UK to remain competitive in financial innovation.
Ripple’s CBDC solution provides central banks with the opportunity to customize their own policies and privacy requirements. This is especially important for the government in times of crisis, for example when issuing COVID-19 stimulus payments. Ripple’s CBDC solution is based on the same technology that powers XRP ledgers, so it consumes essentially less energy, is more efficient, and is cheaper than alternative ledgers.
Decentralized private design framework
Three researchers at University College London (UCL) (Geoffrey Goodell, Hazem Danny Al-Nakib, Paolo Tasca), all supported through UBRI, propose a design framework for central banks issuing digital currencies. Did.
The proposed solution is a “value container”, which is much broader than the simple digital currencies issued by central banks. They compare it to a connected rail system that programs a diverse set of assets in new ways, supporting the deployment of digital currencies and users without changing existing market structures such as the competitive FinTech landscape. Ensures your privacy.
The “value container” has two important functions that can support the CBDC. First, they recommend a distributed ledger technology (DLT) payment system that is entirely privately operated but supervised by the state government. Second, it optimizes privacy by design to enhance the welfare and safety of users. Privacy by design emphasizes the need to develop a secure infrastructure model from the beginning, along with the evolving regulatory security measures of the organization.
Within this “value container,” they argue that the DLT system offers a variety of operational and economic benefits, promotes transparency in the design itself, and at the same time works closely with private companies. .. Using the DLT infrastructure, researchers also emphasize that this approach supports collaboration between central banks and the private sector, enabling interoperable systems between central banks, digital assets, and government regulation. doing.
The ongoing global inequality crisis caused by the COVID-19 pandemic has raised concerns about economic holes caused by the current financial system, such as months of delays in essential stimulus checks. rice field. UCL researchers argue that their proposal can enhance economic stimulus measures, such as issuing social aid checks using digital currencies in the same way as direct payments made to individuals and non-financial companies. I am.
The future of the CBDC is bright
The Global Network of University Blockchain Research Initiatives is currently researching CBDC solutions, and some of the highlights of academic contributions made between 2020 and 2021 will be released by university researchers supported by the initiative. It has been.
The proliferation of innovative CBDC solutions promises exciting potential and widespread benefits. It will give financial institutions, central banks, governments, as well as countless global citizens access to safe, reliable and affordable financial resources.
