How Central Banks are Experimenting with Blockchain

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While analysis and experimentation with blockchain technology transversely across sectors have been undertaken for several years, few organizations have deployed it. Although central banks are amongst the most circumspect and strict institutions across the globe, a recent white paper distributed by the World Economic Forum shows that these institutions, possibly surprisingly, are among the fundamental to implement blockchain technology.

Central bank actions with blockchain and distributed ledger technology (DLT) are not perpetually well known or described. As an effect, there is a lot of thinking and misunderstanding. Dozens of central banks throughout the world – from Singapore to Sweden to South Africa – are actively examining whether blockchain can help solve long-standing concerns in banking, such as payment-system performance, payment security, and flexibility, as well as financial composition.

These groups, tasked with superintending a nation’s monetary policy and financial and economic security, are extremely cautious about executing any technology or solution that can have conflicting consequences. Many central banks are actively investigating a variety of use cases to traverse the technology’s potential in controlled, protected settings.

Blockchain in Central banks

  1. Retail central bank digital currency (CBDC) – An original bank-issued digital currency that is moved and settled in a peer-to-peer and decentralized practice (with no intermediary) and is universally available for consumer usage. Central banks from numerous countries are experimenting with this, including those from Sweden, Eastern Caribbean, Uruguay, the Bahamas, and Cambodia.
  2. Interbank securities adjustment – A focused juxtaposition of blockchain-based digital money, including CBDC, facilitating the rapid interbank clearance and settlement of securities for bills. The purpose is to develop “delivery versus payment” interbank operations where two parties are trading an asset, such as redemption for cash, can transfer the payment for and delivery of the asset concurrently. Central banks investigating this option involve the Bank of Japan, Bank of England, Monetary Authority of Singapore, and Bank of Canada.
  3. Lifecycle management and Bond issuance – The application of DLT in the bond auction, issuance or another lifecycle processes to decrease costs and enhance efficiency. This theory could be applied to bonds published and managed by sovereign states, international institutions or government businesses. Central banks or government controls could be “observer nodes” to watch activity where applicable. The World Bank launched the original blockchain-based bond, described the “bond-i,” in August 2018.
  4. Payment practice resiliency and predicament – The application of DLT in a primary or backup domestic interbank fee and settlement arrangement to provide security and continuity from intimidations, including technical or network malfunction, natural disaster, cybercrime, and other perils. Often, this use case is joined with others as part of the collection of benefits that a DLT implementation could offer. The central banks examining this use case comprise the Central Bank of Brazil and the Eastern Caribbean Central Bank.
  5. Anti-money-laundering (AML) and Know your customer (KYC)– Digital KYC/AML methods that leverage DLT to track and receive relevant customer payment and identity data to streamline operations. This resolution could connect to a digital national identity program or plug into pre-existing e-KYC or AML regularities. It also could conceivably interact with CBDC as part of payments and financial movement tracking. Central banks examining it include the Hong Kong Monetary Authority.
  6. Information transfer and data-sharing – The utilization of distributed or decentralized databases to create alternative systems for information and data sharing within or inside related government or private sector establishments. Among others, the Central Bank of Brazil is investigating this use case.
  7. Cash Supply-chain – The application of DLT for issuing, trailing and managing the delivery and flow of cash from production facilities to the commercial and central bank branches. This could accommodate the ordering, depositing or withdrawal of funds, and could clarify regulatory reporting. Central banks examining include the Eastern Caribbean Central Bank.

If we consider the rare case of the Bank of France, a central bank that has favorably deployed a DLT-based application. In different circumstances, central banks have inferred that blockchain technology does not present valuable opportunities for their economies when contemplating the risks and downsides. At the quite least, many are monitoring improvements among peer institutions and inside the private cryptocurrency markets.