BIS & Central Banks Examine CBDC System Design and Legal Challenges

Understanding Central Bank Digital Currency (CBDC): Recent Insights

In a groundbreaking collaboration, the Bank for International Settlements (BIS) and several leading central banks have released a comprehensive paper that delves into the intricate legal frameworks and design considerations for Central Bank Digital Currency (CBDC) systems. This initiative includes participation from prominent institutions such as the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve Board, Swedish Riksbank, and Swiss National Bank.

Debate Over Centralization vs. Decentralization

One of the core issues discussed in the paper revolves around the structural design of CBDC systems, particularly the debate between centralized and decentralized models. The authors present a two-tier system, primarily focusing on two models:

• Hub-and-Spoke Model: In this configuration, updates and control remain with the central bank while data ownership is shared across multiple entities.
• Peer-to-Peer Design: This approach allows for shared update permissions, fostering a more decentralized structure.

However, the paper expresses a cautionary stance towards total decentralization, stressing that centralized systems may exhibit vulnerabilities due to potential single points of failure, which can emerge as bottlenecks. The authors assert that while the core settlement authority should be centralized, other system components, such as identity management, could be organized in a decentralized manner.

Privacy Challenges in CBDC Systems

As CBDCs evolve, privacy remains a significant concern. While existing technologies have made strides toward implementing privacy features, emerging Privacy-Enhancing Technologies (PETs) including Secure Multi-Party Computation (SMPC) and Zero-Knowledge Proofs (ZKP) promise enhanced privacy capabilities. Despite this optimism, the paper highlights a degree of skepticism regarding the practicality of PETs for real-time execution. Experiences with two central banks and the BIS Innovation Hub raised questions about the complexity and reliability of these technologies.

Cybersecurity and Operational Compatibility

The paper extends its analysis to other vital concerns, including cybersecurity, offline functionality for CBDCs, and their compatibility with current point-of-sale systems. These discussions are critical as central banks globally assess the feasibility of CBDCs, aiming for a delicate balance between innovation and essential security and privacy measures.

Conclusion: The Future of CBDC Design

The collaboration among central banks and the BIS highlights a focused effort to lay down a robust foundation for future CBDC systems. As the exploration continues, stakeholders must engage in meaningful dialogues that reflect the evolving landscape of digital currencies while addressing the pressing considerations of security, privacy, and operational efficacy.