Perspectives


An in–depth exploration of Central Bank Digital Currencies


Analyzing the core design choices of CBDCs, along with the infrastructure and development needed to support them.

An in–depth exploration of Central Bank Digital Currencies

By Bison Trails · May 19 2021

  • Central Bank Digital Currencies, commonly known as CBDCs, are digital currencies issued by a central bank, representing a new digital medium of exchange, settlement, and payment verification with the potential to restructure the global financial system and the way trades are settled.
  • Intense focus on the base architecture and design of private digital currencies underscores the fact that decisions in these areas are critical to the success of CBDC execution.
  • The most successful national and international CBDC infrastructure will likely be built with public input and private sector know-how, calling on established industry experts and leading organizations to build the components of a larger system.
  • Our full report, Infrastructure and Design of Central Bank Digital Currencies, takes a deep dive into the different use cases and design and technical considerations that will determine the successful rollout of CBDCs. Read the report here.

What is a CBDC?

Central Bank Digital Currencies, commonly known as CBDCs, are digital currencies issued by a central bank. However, CBDCs represent not only currencies in digital formats, but also a new digital medium of exchange, settlement, and payment verification—one with the potential to restructure the global financial system and the way trade is settled.

  • Around 80% of central banks across the globe have begun to explore CBDCs, with 40% already testing proofs–of–concept.
  • Along with protecting monetary sovereignty, CBDCs are seen as a new means of spurring technological innovation and promoting economic inclusion within a nation and globally.
  • Almost 2 billion people worldwide remain unbanked and outside the financial system; almost 25% of the United States is considered to be at least underbanked. Optimistically, CBDCs represent an opportunity to broaden this population’s access to financial services while radically updating public monetary infrastructure.

"CBDCs can improve on existing currency models by using permissionless systems to enhance trust between constituents and their governing bodies,” explains Bison Trails’ Co-Founder and CEO Joe Lallouz.

“While constituents maintain access, and utility of their money, the governing body retains management of the monetary supply—likely with highly updated and powerful new levers for asserting monetary policy. This combines defining elements of public cryptocurrencies and central banks into a very beneficial, happy medium.”

You can learn more about what CBDCs are, why they’re important, and explore their infrastructure and design in our full report on CBDCs.


Motivating CBDC development

The creation of digital assets by private entities, most notably Diem (formerly known as Libra), has motivated many central banks to develop CBDCs. Diem offers a whole new paradigm in economics: a diverse association of enterprise and social impact stakeholders developing digital currencies on a permissioned, open–source chain built with the most cutting edge tech—with a built–in global market and limited barriers for growth once live.

Although famously reticent to develop a US digital dollar, Federal Reserve Chairman Jerome Powell acknowledged the inevitability of a CBDC given the highly technical private option Diem will provide, stating that “[Diem] was a bit of a wakeup call that this is coming fast, and could come in a way that is widespread and systemically important fairly quickly—if you use one of these big tech networks like [Diem] did.”

Similarly, the development of Diem is considered a catalyst for the Chinese government to accelerate its plans for its Digital Currency Electronic Payment (DCEP), also abbreviated as the digital RMB or e–CNY, the country’s forthcoming national digital currency issued by the state bank People’s Bank of China (PBoC). The accelerated rollout of the DCEP has, in turn, driven other nations to redouble efforts around their own research and development on CBDCs.

“Diem has done a good job in the way that they built their technology stack, for example how permissioning works and the way that the chain is architected from its base layer to include auditing and smart contracting for consensus,” explains Bison Trails’ co–founder and CTO Aaron Henshaw.

“It ensures that all transactions run through checks that are audited and controlled, that you don't create opportunities for smart contract bugs to introduce certain types of risk to the system. It's built into how the consensus works, how it creates state, and how things come in and out of the state machine.”

The intense focus on the base architecture and design of Diem underscores the fact that decisions in these areas are critical to successful CBDC execution. It is clear that countries currently testing CBDC options are not only driven by time-based pressure, but more importantly by the desire to implement the strongest and most secure technological product possible.


How will CBDCs be built?

The design space surrounding CBDC development is enormous. Though intimidating in scope and complexity, the opportunities for making leaps in technological innovation are endless.

Central banks and their development partners will need to be intentional with their design, infrastructure, and implementation. The most successful national and international CBDC infrastructure will likely be built with public input and private sector know–how, calling on established industry experts and leading organizations to build the components of a larger system. Blockchain, digital asset, and distributed systems technologists who are furthest along will be the best situated to play a part in building this blockchain–as–a–public service.

Broadly speaking, partnerships with enterprises, particularly infrastructure service providers, have the potential to massively increase the speed of implementation and quality of the creation, maintenance, rollout, adoption, and, ultimately, success of these CBDC efforts.

While natural resources like oil and gas were the dominant market forces of the 20th century, technology is now the greatest driver of capital and innovation. Leadership in our global economy will be achieved through technology more than manufacturing or resources. FinTech, blockchain, and cryptocurrency are beginning to build a new global financial infrastructure with the potential to dominate the 21st century. To do so will require partnership between national governments, central banks, financial technology enterprises, and the novel factor of the upstart blockchain industry.


The infrastructure and design of CBDCs

According to the International Monetary Fund’s 2020 Working Paper report on the central bank and monetary law considerations of CBDCs, there are four critical axes of consideration for the design features of all CBDCs:

  • whether the network will be account-based or token-based;
  • whether the CBDC will be issued for wholesale, retail, or general use;
  • whether the currency will have direct, indirect, or hybrid issuance;
  • and whether the network will operate in a centralized or decentralized manner.

Our full report, Infrastructure and Design of Central Bank Digital Currencies , analyzes each of these four axes, and the implications each choice has on the infrastructure needed to support them, in–depth. Read the report here.


bison cool

Bison Trails and its parent company Coinbase Global, Inc. are members of the Diem Association and, as such, have a financial interest in the Diem Network.

THIS DOCUMENT IS FOR INFORMATIONAL PURPOSES ONLY. PLEASE DO NOT CONSTRUE ANY SUCH INFORMATION OR OTHER MATERIAL CONTAINED IN THIS DOCUMENT AS LEGAL, TAX, INVESTMENT, FINANCIAL, OR OTHER ADVICE. THIS DOCUMENT AND THE INFORMATION CONTAINED HEREIN IS NOT A RECOMMENDATION OR ENDORSEMENT OF ANY DIGITAL ASSET, PROTOCOL, NETWORK OR PROJECT. HOWEVER, BISON TRAILS (INCLUDING ITS AFFILIATES AND/OR EMPLOYEES) MAY HAVE, OR MAY IN THE FUTURE HAVE, A SIGNIFICANT FINANCIAL INTEREST IN, AND MAY RECEIVE COMPENSATION FOR SERVICES RELATED TO, ONE OR MORE OF THE DIGITAL ASSETS, PROTOCOLS, NETWORKS, ENTITIES, PROJECTS AND/OR VENTURES DISCUSSED HEREIN.

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About Bison Trails


Pioneering Blockchain Infrastructure®

Bison Trails is a blockchain infrastructure platform-as-a-service (PaaS) company based in New York City. We built a platform for anyone who wants to participate in 25 new chains effortlessly.

We also make it easy for anyone building Web 3.0 applications to connect to blockchain data from 33 protocols with Query & Transact (QT). Our goal is for the entire blockchain ecosystem to flourish by providing robust infrastructure for the pioneers of tomorrow.

In January, 2021, we announced Bison Trails joined Coinbase to accelerate our mission to provide easy-to-use blockchain infrastructure, now as a standalone product line. The Bison Trails platform will continue to support our customers. With Coinbase’s backing, we will enhance our infrastructure platform and make it even easier to participate in decentralized networks and build applications that connect to blockchain data.

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