Blockchain and Central Bank Digital Currencies: Enhancing Global Payments for Public Good

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Fintech

Technology Behind Crypto Can Also Improve Payments, Providing a Public Good

A new kind of multilateral platform could improve cross-border payments, leveraging technological innovations for public policy objectives.

Tobias Adrian and Tommaso Mancini-Griffoli

February 23, 2023

The initial excitement surrounding crypto assets has largely been met with disappointment rather than revolution from many users. International bodies like the IMF and Financial Stability Board advocate for stringent regulation to address concerns related to stability and consumer protection.

Nonetheless, some of the rapidly evolving technology behind crypto shows potential for greater promise in the future. Private sectors continue innovating and customizing financial services using these tools.

Consequently, it is incumbent upon the public sector to harness this technology to upgrade its payment infrastructure and ensure interoperability, safety, and efficiency in digital finance. Our recent working paper titled A Multi-Currency Exchange and Contracting Platform outlines a vision for such an advancement. Additionally, others are also advocating similar perspectives.

Technology has made significant strides:

1. Tokenization: This involves representing property rights to an asset like money on an electronic ledger - essentially a database that all market participants access and update efficiently while being tamper-proof.

2. Encryption: It helps decouple compliance checks from transactions so only authorized parties can access sensitive information, promoting transparency and trust in digital interactions.

3. Programmability: This feature allows for financial contracts to be more easily created and automatically executed a trusted third party.

Private sector innovation

The private sector's use of these tools leads to innovative solutions that might surpass the initial impact of crypto assets:

1. Tokenization of financial assets can reduce trading costs, enhance market integration and increase access.

2. Tokenizing money itself could streamline transactions through an interoperable ledger system.

3. Automation is widespread, with third parties building functionality akin to smartphone apps.

The private sector's boundary-pushing efforts in innovation often fl to guarantee safety, efficiency, or interoperability of transactions even if well-regulated. It may lead to the creation of client-specific networks for trading assets and making payments. Open ledger systems might emerge as an attempt to bridge these networks but are likely to lack standardization and investment due to limited profit potential.

Central bank role

Central bank digital currencies CBDCs offer a unique bl as both monetary instruments for storing value and payment means, alongside critical infrastructure essential for transactions' finality. This bl is crucial in supporting payments and financial system stability.

The vision for leveraging CBDC technology:

1. Interoperability among national currencies ensures seamless global trade through enhanced cooperation between central banks.

2. Safety thanks to escrowed central bank reserves guarantees that settlements are final, thereby protecting users from fraudulent transactions or payment delays.

3. Efficiency in transactions is improved with reduced costs per transaction and the ability for open participation while mntning contract consistency across borders.

Much work remns to be explored, as this vision is still evolving. The initial impetus behind crypto assets was to bypass intermediaries and public oversight; ironically, its real value may lie in leveraging technology that the public sector can utilize to enhance payments and financial infrastructure for the public good.

By introducing interoperability, safety, and efficiency into private sector innovation through well-managed CBDCs, we could achieve substantial economic and social benefits while mitigating associated risks.

This blog is based on joint research work with Federico Grinberg, Robert M. Towns, and Nicolas Zhang.

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