Central bank digital currencies (CBDCs) are a hot topic right now. However, many people are still unconvinced about their value, and some do not understand what benefits they will bring to the economy. Certainly, the adoption of CBDCs will herald a new way of working with and using money online for everyone. But how will it work?
A CBDC is a digital currency issued by a country’s central bank. The central bank can manage the back-end infrastructure for the CBDC, while financial institutions can offer wallets and other customer services to end users.
The central bank holds information about funds held by users of that currency, which can be accessed by commercial financial institutions.
There are many advantages to adopting CBDCs in a country, especially one that uses blockchain for distributed data storage. CBDCs will provide business and technology opportunities for applications and services that will be more efficient to use.
The BSV blockchain offers several benefits for CBDCs in countries that choose new digital currencies. Adopting a CBDC will benefit merchants, service providers, software houses, developers and others across the supply chain. Consumers will benefit, too: if a CBDC is implemented in a country, it can bring flexibility and choice to everyone who uses the currency and add the confidence of governance, security, trust and traceability.
The Bitcoin blockchain brings privacy, which is different from anonymity, to transactions while maintaining governance and auditability. Privacy is maintained in the user’s Bitcoin wallet, which sits at the edges of the network rather than being under centralised control. Developers can create CBDC solutions to enable efficiency, privacy and security for users.
Flexibility in wallet design means that the creator or developer of the wallet software could store privacy information at the provider in case the user’s wallet is compromised. In this case, the information initially given to satisfy the Know Your Customer (KYC) details could be used to validate the user who can regain access to their wallet. This could also reduce the chance of bad actors compromising the system and reducing trust in the wallets.
If a CBDC protocol has been created and set for both KYC and anti-money laundering (AML) regulatory compliance, thresholds could be built into wallets so that if a pre-configured amount is exceeded, the wallet could automatically flag the transaction for AML and further checking. If the wallet has built-in intelligent components, its software could detect if a user makes regular, smaller payments that are potentially suspicious and trigger AML notifications to the regulatory authorities.
To encourage fair markets and competition, it would be better to have many wallet providers who offer software wallets to consumers. Users can view their accounts through any vendor’s software wallet application. Using wallets as a commodity will eliminate the risk of customers losing money if the wallet software provider goes bankrupt or goes out of business for a different reason.
Using this model allows for competitive wallet development and product innovation, which ultimately leads to a better experience for consumers. With protocol standardization across wallets and interoperability features between different wallets, wallet providers can compete for customers’ business, which will lead to a better experience for all users.
Banks should allow their customers to access their bank accounts using any provider’s wallet they choose instead of restricting them to one bank-designed app, as is common across the current banking model. Making wallets open-source makes them available to all without compromising privacy.
Transferring limits could be managed centrally so that banks do not need to set their daily transfer limit at an amount, say, $15,000 per day. These limits could be set at the CBDC level or at the bank instead of at each wallet.
Setting limits centrally will ensure that wallets do not need additional complexity, and rules can be maintained equally for all. Privacy mechanisms such as certificates could be stored offline so payments could still happen, even without online access. Online payments could have built-in reference checks to guarantee their validity, and all privacy certificates for wallets will have immutable and traceable records stored in the blockchain.
With CBDCs, different wallets can be used to provide a view of funds at the bank and switching between wallets will be easy. This enables access to funds from backup wallets in case access to the primary wallet becomes unavailable. Of course, this requires standardization across all wallets to ensure interoperability and the ability to easily transfer funds to wallets created by different providers. If a provider’s wallet goes offline for any reason or otherwise becomes unavailable, users should easily be able to transfer their funds to a different wallet.
As money is central to our lives and digital payments are an increasingly common way of paying for goods and services through credit and debit cards, it makes sense to consider implementing a CBDC. A significant requirement is that the core technology at the heart of the CBDC confirms with the governance requirements and that transactions are traceable and immutable. The BSV blockchain already guarantees immutability and, with potentially unlimited scale, is primed to become the engine for CBDCs across the world.
Watch: CBDCs are more than just digital money
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