Central bank digital currency (CBDC) represents a potential digital sea change in the daily function of finance. The key innovation is the adoption of a value-based, or token-based, approach to money. CBDC tokens can exhibit features akin to those of a bearer instrument—such as a bank note—encapsulating all of the properties needed to assign value, ownership and transfer of ownership.
The technology best suited to offer the required functionality is distributed ledger technology (DLT), of which the best known example is blockchain. In addition to its capabilities for facilitating token issuance, assignments, and swaps or exchanges, blockchain enables central bank money to become “smart” while enhancing needed prudential controls and security.
CBDC rests on tokens. This money format not only delivers innovation, it also adds many advantages that existing money formats cannot meet.
Key advantages of blockchain technology
#1: Native Functionality
Tokens offer “out of the box” functionalities that strongly support the transaction of digital values. They enable instant and atomic exchanges, creating new possibilities to conduct delivery versus payment (DvP) and payment versus payment (PvP) transactions. Tokens are expected to be the standard for payments in the internet of things (IoT) and other machine-based applications.
Tokens represent the end-state of the digitalisation of value. The possibility of endowing tokens with embedded business logic or smart contracts allows them to assume the functionalities they need to interact independently with the network and to enable conditional, complex, layered and triangulated transactions. Programmability offers a new set of possibilities to equip money with new utility.
#3: Multi-tier Distribution
The portability of tokens enables distribution through a multi-tier structure. This bolsters the preservation of the existing two-tier banking system, in which the central bank distributes money to the commercial banks, which in turn distribute it to end-users. CBDC supports bank intermediation by allowing the central bank to interact only with intermediaries.
The tokens will transact on new payment rails, offering greater diversification of the payments system and affording greater autonomy for the central bank by making it less dependent existing payments networks. Tokens can serve new token-based financial market infrastructures as a settlement medium and advance a more varied payments infrastructure, while supporting financial deepening and inclusion.
#5: Financial Innovation
Tokens are both a new medium and a new financial market infrastructure. They should give rise to and serve as a catalyst for financial innovation. Tokenised central bank money lends confidence to financial ecosystems by enabling high-quality settlement, which in turn supports the emergence and proliferation of new financial applications.
#6: Off-line Capabilities
Payments need to be impervious to power outages and interruptions in telecommunication coverage. Tokens enable peer-to-peer exchanges in the proximity of payers and payees through their wallet functionalities.