The Merkle

Is There a Future for Central Bank Digital Currencies?

Various countries around the world are exploring the option of creating national digital currencies. A digital version of the US dollar or euro, for example, would be rather interesting to see. However, a central bank-issued digital currency is not all that easy to create. There are specific technical requirements to take into account. In fact, such currencies may not even warrant the use of a blockchain or distributed ledger technology (DLT).

Central Bank-Issued Digital Currency Requirements

A central bank-issued national digital currency is nothing like cryptocurrencies we know today. Unlike Bitcoin and altcoins, a national digital currency comes with a high degree of centralization. The way coins are generated and distributed would be fully controlled by a specialized entity. It would be no different from how central banks issue regular money, but they would do so in a very different manner where these currencies are concerned.

Indeed, central bank digital currency – also known as CBDC – entails a lot of requirements which must be adhered to. Firstly, such currencies need to be resilient, which has proven to be problematic already. Resiliency is closely connected to scalability and transaction processing in this regard. As Bank Underground mentioned, CBDC infrastructure needs to be capable of processing thousands of transactions every single second. That will be a major challenge.

To do so, the correct infrastructure will need to be built. While most people assume CBDC will be issued using a blockchain or distributed ledger technology, that may not necessarily be the case. In fact, neither of these technological concepts lend themselves for use by central bank digital currencies. Any brief outage or delayed upgrade would have catastrophic effects and potentially cripple this new digital economy for some time to come.

Keeping scalability in mind, ensuring CBDC can be used commonly across an entire nation will be a tough ordeal. This is especially true in countries such as the US, simply due to their sheer size and number of residents. In the Eurozone, a digital euro would make very little sense, considering it would be used across many countries simultaneously. Such an infrastructure may not necessarily be feasible to roll out with current technology, although it remains to be seen how such ventures will be tackled moving forward.

The bigger concern is interoperability. Using a blockchain or DLT makes little sense in this regard, as all parties are working on their own private solutions. If different blockchains for different currencies cannot communicate with one another, there is not all that much point in using CBDC in the first place. While these digital currencies coexist with regular money, cross-border solutions will need to be facilitated somehow. Once again, that’s not all that easy to achieve.

CBDCs are still in their infancy right now, and for all we know they may never come to fruition. It is certainly an idea worth exploring, for all intents and purposes. However, there are so many different requirements to take into account, coming up with proper technical solutions will be challenging. Even if these currencies come to market, they will never rival cryptocurrencies any more than they already do.