- The Ethereum incubator ConsenSys has presented a whitepaper at the World Economic Forum for the development of a central bank digital currency (CDBC) based on the Ethereum blockchain.
- An Ethereum-based CDBC could help central banks maintain complete control over the money supply, according to ConsenSys.
At the World Economic Forum in Davos, the ConsensSys team around Ethereum co-founder Joseph Lubin has published a whitepaper for an Ethereum-based central bank digital currency (CDBC). As ConsenSys writes, CDBCs have gained increasing importance at the World Economic Forum 2020. Large financial institutions around the world, including global banks, are experimenting with digital currencies and are looking for an ideal way to enter the market.
In Davos, ConsenSys therefore presented a whitepaper “Central Banks and the Future of Money”, which presents a practical approach to central bank digital currencies. The whitepaper provides guidance on how a CBDC could be designed and built on the Ethereum blockchain.
The document states that maintaining control over money is one of the main motives of central banks in various countries to introduce a CDBC. According to the whitepaper, the use of a “permissioned blockchain” based on Ethereum could help central banks to maintain this control, as ConsenSys describes:
Central Bank Digital Currencies are digital assets that are accounted for using a single ledger (distributed or not) that acts as a single source of truth. Central bank digital currencies represent a claim against the central bank, similar to how banknotes function today. Finally, the currency is central bank controlled––meaning the supply of CBDC is fully controlled and determined by the central bank. A CBDC differs from a traditional cryptocurrency stablecoin where issuance isn’t controlled by a bank, but rather a group of individuals.
This is why the Ethereum blockchain is ideal for CDBCs
Specifically, ConsenSys proposes a model in which the central bank establishes a private, permissioned Ethereum Network in which intermediaries act as nodes. This would allow the central banks to retain control without having to provide the necessary infrastructure:
We propose that central banks issue CBDC on a large-scale, private, permissioned, Ethereum-based network in which central-bank appointed intermediaries act as nodes. These intermediaries would work together on a single platform as providers of the currency, as well as compete to offer innovative services to citizens and businesses. […]
While public Ethereum is permissionless, meaning open to all, Ethereum has permissioned variants capable of offering enterprise grade security and performance. We believe that private, permissioned Ethereum would offer the best possible platform for the CBDC requirements specified above.
Furthermore, a private Ethereum blockchain using the consensus of the Proof of Authority (PoA) could offer real-time asset transfers at negligible cost. As ConsenSys describes, transaction times could be less than a tenth of a cent (< 0.1 EUR). A high transaction throughput would provide the corresponding scalability. According to the whitepaper, several thousand to several tens of thousands of transactions per second would be possible.
The system could also support the confidentiality of critical business data in the network. While the central bank would have an overview of all transactions, the individual network participants would not be able to see the volume or individual transactions. Thus, the system supports the implementation of KYC/AML and related regulations by providing traceability and monitoring capabilities to the competent authorities.
Furthermore, ConsenSys points out that the Ethereum Blockchain is best suited for the implementation of a CDBC.
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We believe that private, permissioned Ethereum would offer the best possible platform for the CBDC requirements specified above. Ethereum is by nature well suited to the creation of tokens. Central banks could easily design and implement tokens that can be widely circulated yet whose issuance and destruction remain firmly under their control.
While no blockchain has the technology to support the required transaction throughput levels today, Ethereum is well placed to be able to do so in the near future. The switch to proof-of-authority at the protocol level (Level 1) and the introduction of a number of Level 2 solutions, like state channels, plus ongoing R&D efforts in the Ethereum community, will make these performance levels possible. The large number of developers on Ethereum means these R&D efforts are not only robust, but also multifaceted.