Although the analysis and experimentation of blockchain technology across sectors have been undertaken for several years, few organizations have deployed it. While central banks are among the most cautious and stringent institutions worldwide, a recent white paper distributed by the World Economic Forum shows that these institutions, perhaps surprisingly, are among the key players in implementing blockchain technology.
Central bank actions with blockchain and distributed ledger technology (DLT) are not perpetually well-known or described. As a result, there is a lot of speculation and misunderstanding. Dozens of central banks around the world—from Singapore to Sweden to South Africa—are actively examining whether blockchain can help address long-standing concerns in banking services, such as payment system performance, payment security and flexibility, as well as financial composition.
These groups, tasked with overseeing a nation’s monetary policy and financial and economic security, are extremely cautious about implementing any technology or solution that may have contradictory consequences. Many central banks are actively studying a variety of use cases to explore the potential of the technology in controlled and protected settings.
Blockchain in Central Banks
- Retail Central Bank Digital Currency (CBDC) – An original digital currency issued by the bank that is moved and settled in a peer-to-peer and decentralized practice (without intermediaries) and is universally available for consumer use. Central banks in many countries are experimenting with this, including those in Sweden, the Eastern Caribbean, Uruguay, the Bahamas, and Cambodia.
- Interbank securities settlement – A targeted juxtaposition of blockchain-based digital money, including CBDC, facilitating rapid interbank clearing and settlement of securities for bills. The aim is to develop interbank “delivery versus payment” operations where two parties exchange an asset, like redemption for cash, can transfer payment and delivery of the asset simultaneously. Central banks investigating this option include the Bank of Japan, the Bank of England, the Monetary Authority of Singapore, and the Bank of Canada.
- Lifecycle management and bond issuance – The application of DLT in auctions, issuance, or other lifecycle processes to reduce costs and enhance efficiency. This theory could be applied to bonds issued and managed by sovereign states, international institutions, or public corporations. Central banks or government controls could act as “observer nodes” to monitor activity as needed. The World Bank launched a blockchain-based origination bond, referred to as “Bond-I,” in August 2018.
- Resilience and stress-testing of payment practices – The application of DLT in interbank fees and primary or backup interbank settlement to ensure security and continuity of threats, including technical or network malfunctions, natural disasters, cybercrime, and other perils. Often, this use case is tied to others in the collection of benefits that a DLT implementation could offer. Central banks examining this use case include the Central Bank of Brazil and the Central Bank of the Eastern Caribbean.
- Anti-Money Laundering (AML) and Know Your Customer (KYC) – Digital KYC/AML methods leveraging DLT to track and obtain relevant data from customer payment and identity to streamline operations. This solution could connect to a digital national identity program or link with existing KYC or AML regulations. It could also interact with the CBDC in the context of payments and tracking financial movements. Central banks considering it include the Hong Kong Monetary Authority.
- Information transfer and data sharing – The use of distributed or decentralized databases to create alternative systems for sharing information and data within or between government or private sector institutions. Among others, the Central Bank of Brazil is exploring this use case.
- Cash supply chain – The application of DLT for issuing, ending, and managing the delivery and cash flow from production facilities to commercial branches and the central bank. This could relate to the ordering, depositing, or withdrawal of funds and could clarify regulatory reporting. Central banks reviewing this include the Central Bank of the Eastern Caribbean.
If we consider the rare case of the Banque de France, a central bank that has favorably deployed a DLT-based application. In different circumstances, central banks have determined that blockchain technology does not present valuable opportunities for their economies when contemplating risks and downsides. At the very least, many are monitoring improvements among peer institutions and within private cryptocurrency markets.
