The current status and challenges of Central Bank Digital Currency (CBDC) development

Author: Cypherium

Compiled by: ChainCatcher

Central Bank Digital Currency (CBDC) is a complex multidisciplinary topic that raises numerous questions about the future of monetary policy, central banking, and payment systems, thus requiring active analysis and discussion. To assess the long-term potential and benefits of CBDC in the context of increasingly stringent crypto regulations, Cypherium has co-authored a research report with the Boston Consulting Group (BCG) on the current state of CBDC development, including potential benefits, advantages, challenges, and implementation methods.

As a founding partner of the OMFIF Digital Currency Institute in the UK and the U.S. Faster Payments Council, Cypherium has been advising policymakers, technology experts, banking officials, and other stakeholders on various issues related to CBDC. For example, Cypherium has collaborated with the Bank of England, the Hungarian National Bank, Algorand, Mastercard, and Facebook's Diem project to publish notable research findings. This joint study with BCG further serves as a concrete pathway to share Cypherium's innovative development framework, Digital Currency Interoperability Framework (DCIF), and industry insights to help expand and refine the technology supporting CBDC.

According to this research, the People's Bank of China, the Swedish Central Bank, and the European Central Bank are at the forefront of CBDC experimentation, each exploring variants of centralized or decentralized architectures based on single tokens or accounts to implement CBDC. The adoption of CBDC has its obvious benefits, such as easier design of monetary policy, improved access to financial services, accelerated financial transactions, and promotion of digitization, among others. However, it also brings challenges such as data privacy, cybersecurity, offline payments, energy consumption, and most notably, the issue of transactional interoperability between two or more different types of CBDC built on two fundamentally opposing systems.

To meet regulatory and security requirements, a closed and centralized system design for CBDC is the most likely scenario, which will pose barriers to interoperability, including with other CBDC payment platforms and traditional banking and enterprise systems. Having a universal communication data format that adheres to certain standards or conducting cross-border transactions through trusted third parties or public blockchains (such as Cypherium) could be viable solutions to this issue.

Cypherium has consistently focused on creating financial inclusion among civilians, banks, governments, and enterprises through its DCIF. As CBDC experimentation, development, and subsequent implementation become more concrete, DCIF will allow any asset, including CBDC, stablecoins, and digital assets, to be received and distributed on-chain and cross-chain—encompassing both centralized and decentralized systems.

The emergence of CBDC and cryptocurrencies has significant implications for the existing banking system, as it may undermine the role of banks as intermediaries and their function of converting economic assets into investments. Therefore, central banks need to make critical decisions regarding the design of CBDC, whether through new CBDC wallets or by establishing direct relationships with customers via intermediaries. Consequently, this study also identifies four potential models that could support CBDC architecture and further outlines some steps and methods that banks can follow to prepare for this new payment rail that could potentially reshape the payment services industry.

To learn more about the key findings of the joint research, please click the following link:

https://docsend.com/view/v8peadsf3mvgg7ny

Cypherium is a Layer 1 blockchain protocol designed to provide financial inclusion for users while offering operational efficiency for its enterprise and institutional partners. The Cypherium blockchain employs a hybrid consensus mechanism aimed at achieving commercial viability while retaining the characteristics of decentralization and DLT. Cypherium's approach to creating financial inclusion among civilians, banks, governments, and enterprises begins with our Digital Currency Interoperability Framework. DCIF is Cypherium's proprietary architecture that allows for the receipt or distribution of any asset on-chain or across ledgers, including CBDC, stablecoins, and digital assets.

Boston Consulting Group is a global consulting firm that collaborates with business and social leaders to tackle their most important challenges and seize their greatest opportunities. Founded in 1963, BCG is a pioneer in business strategy. Today, BCG helps clients undergo comprehensive transformations—igniting complex changes that enable organizations to grow, build competitive advantages, and enhance bottom-line impact. To succeed, organizations must integrate digital capabilities with human capabilities. BCG's diverse global team brings deep industry and functional expertise, along with a variety of perspectives that can inspire change. BCG provides solutions through leading management consulting as well as technology and design, corporate, and digital enterprises.