1. Introduction
The bank for international settlements (BIS) has proposed a retail central bank digital currency (CBDC) architecture based on a hybrid approach where issuance and governance of the CBDC are handled by a country’s central bank while commercial banks provide consumer-facing services. According to the BIS, the proposed CBDC framework takes a modular approach to design and will focus on a token-based model to promote privacy. However, the CBDC architecture will also support account-based models where users have specific accounts tied to an entity. The authors of the proposal wrote:
“Privacy can be guaranteed by separating transaction from identity information, such that the latter remains with private intermediaries and users. This helps to reduce risks and ensure greater privacy protections than in other models.”
Despite promises of privacy, CBDCs are widely seen as the antithesis of permissionless finance, with lawmakers, individuals, and even central banks raising concerns about systemic risks, privacy, and viability.
2. Proposed CBDC Architecture Model
The BIS’s proposed architecture is designed to be both practical and privacy-focused. It consists of two main components: the issuance mechanism managed by a country’s central bank, which ensures that the CBDC operates within the framework of national laws and regulations, while also ensuring robust security standards. The second component involves commercial banks, who are tasked with providing consumer-facing services, such as accepting digital payments and facilitating cross-border transactions.
The modular design allows for flexibility in implementation, enabling countries to customize the CBDC architecture according to their specific needs. This approach is intended to address some of the key concerns surrounding CBDCs, including issues related to Privacy, financial stability, and regulatory compliance.
2.1 Token-Based Model
The token-based model is a central component of the proposed CBDC architecture. Tokens are digital units of value that represent ownership of a specific asset or security. In the context of CBDCs, tokens can be used to facilitate transactions between merchants and consumers, as well as between financial institutions. The key advantage of this model is its ability to ensure Privacy by separating transactional data from personal identity information.
For example, when a consumer makes a purchase using a CBDC token, the transaction details (such as the amount paid, the merchant’s location, and the date of the transaction) are stored in a secure system. However, the personal identity information associated with the consumer is kept on private intermediaries, such as banks or payment systems, rather than being transmitted to a central authority. This separation of concerns helps to mitigate risks related to Privacy breaches while maintaining the functionality of the CBDC.
2.2 Account-Based Models
In addition to the token-based model, the proposed CBDC architecture also supports account-based models, where users can have specific accounts tied to particular entities or financial institutions. These accounts are designed to provide greater control and transparency for consumers, allowing them to manage their own finances more effectively.
For instance, a user with an account associated with a particular merchant could have direct access to the funds received from transactions made through that merchant’s platform. This approach is intended to address concerns about systemic risks, as it allows for greater granular control over financial flows and reduces the likelihood of widespread disruptions caused by misuse or fraud.
3. Backlash Against CBDCs
Despite the promise of improved privacy and financial stability, CBDCs have faced significant backlash from various stakeholders. One of the primary concerns is Privacy, with critics arguing that the implementation of CBDCs could lead to the collection and sharing of personal identity information without adequate safeguards. This could result in unintended consequences, such as targeted advertising, data breaches, or unauthorized access to sensitive personal information.
In addition to Privacy issues, there are concerns about the potential impact of CBDCs on existing financial systems. Critics argue that the transition to a CBDC would disrupt current practices and create inefficiencies in the payment system. For example, merchants may face challenges in integrating CBDC tokens into their existing systems, and consumers may experience delays or inconvenience during the transition period.
3.1 Government Interventions
To address these concerns, many governments have proposed various regulations and measures to ensure a smooth transition to a CBDC. One notable example is the central bank’s role in overseeing the development and implementation of CBDCs, ensuring that they are designed with robust security frameworks and fail-safe mechanisms in place. Additionally, governments may impose restrictions on the use of CBDCs during transitional periods to minimize risks.
3.2 International Collaboration
Given the global nature of financial systems, there is a growing emphasis on international collaboration regarding the development and implementation of CBDCs. The BIS has played a key role in facilitating cross-border cooperation, sharing best practices, and addressing challenges related to Privacy, regulatory compliance, and interoperability.
4. Conclusion
The proposed CBDC architecture by the BIS represents a significant step forward in the evolution of digital currencies. Its modular design and focus on privacy-friendly mechanisms make it an attractive option for countries looking to modernize their financial systems while safeguarding against risks related to Privacy, financial stability, and regulatory compliance. However, the successful implementation of CBDCs will depend on a range of factors, including government regulations, stakeholder collaboration, and public acceptance.
In conclusion, while CBDCs have faced challenges and concerns, their potential benefits far outweigh these obstacles. By carefully balancing innovation with regulatory safeguards, countries can unlock the full potential of CBDCs to enhance financial systems and improve everyday lives.
