Blockchain for Central Banks

Use Case 1: Central Bank Digital Currency

Blockchain Retail central bank digital currency (CBDC) – Central bank-issued digital currency that is
operated and settled in a peer-to-peer and decentralized manner (no intermediary), widely available
for consumer use. Serves as a complement or substitute for physical cash and alternative to
traditional bank deposits.

Wholesale central bank digital currency (CBDC) – Central bank-issued digital currency that is
operated and settled in a peer-to-peer and decentralized manner (no intermediary), available only
for commercial banks and clearing houses for use in the wholesale interbank market.

Benefits:

-Reduced money laundering.

-Increased taxes due to immediate identification of non-tax payers.

-No fake currency.

-Lowered cost for currency issuance.

-Track all Dirhams flowing across the world.

Central bank currency: As-is scenario

Central bank digital currency: To-be scenario

Use Case 2: Payment systems

Interbank securities settlement – A focused application of blockchain-based digital currency, including CBDC, enabling the rapid interbank clearing and settlement of securities for cash. Can achieve “delivery versus payment” interbank systems where two parties trading an asset, such as a security for cash, can conduct the payment for and delivery of the asset simultaneously.
Payment system resiliency and contingency – The use of DLT in a primary or back-up domestic interbank payment and settlement system to provide safety and continuity from threats, including technical or network failure, natural disaster, cybercrime, and other threats. Often, this use case is coupled with others as part of the set of benefits that a DLT implementation could potentially offer.

Benefits:

-Low cost for settlement.

-No disputes.

-Instant realtime settlement.

-No cybercrimes.

Use Case 3: Bond Issuance

The use of DLT in the bond auction, issuance, or other lifecycle processes to reduce costs and increase efficiency.

May be applied to bonds issued and managed by sovereign states, international organizations or government agencies.

Central banks or government regulators could be “observer nodes” to monitor activity where relevant.

Use Case 4: For Audit and Regulation

Problem:
Audit and regulation are major bottlenecks to both small investors taking part in the securities market, as well as large trades that requires a lot of paperwork. Audit is a constant process that scans every investor for KYC/AML, checking for regulations violations, and the exchange of sensitive information among many parties – customs, banks, banks offering LC’s, invoices. It requires all these parties to coordinate on data exchange in real time while keeping the data secure.

Solution:
Enabling real time exchange of sensitive data with full traceability of who has made what change to the ledger is where Blockchain is useful.
A private, shared blockchain network that serves as a secure and digital platform on which only authorized parties — banks, traders, regular users, regulators, and the broader ecosystem of participants — can store data, exchange transactions, and send messages more efficiently and securely based on permissions.

Benefits:

-Greatly reduced time effort for audit

-Instant red-flagging on breaking regulations.

Use Case 5: Blockchain for Security Token Exchange

A Blockchain will bring to the security Token market what the stock exchange did to stocks – liquidity. Security Tokens are slated to be a multi-billion dollar market, and only certain regions are allowing trading and issuance of security Tokens.

With the upcoming regulations around cryptocurrencies being issued by the SCA, a Security Token exchange launched by the Central Bank in partnership with an exchange would be a first of it’s kind in the world, and could possibly bring liquidity to real estate assets around the world.

Benefits:

-First of its kind exchange in the world

-Brings all trading of any security token in the world to the UAE, hence potential for increased revenues as trading fees.

 

Use Case 6: Inter-department settlement

1. All departments register with the Blockchain platform. They can interact through a simple website.

2. Departments that invoice each other within the government can raise invoices, PO’s, Goods receivables documents on a smart contract.

3. Since there is a smart contract for every business contract, the Central Bank can clearly segregate payments and reconciliation.

4. Payments from all departments can be made to this smart contract, and all departments can pay the Central Bank through this contract.

The smart contract would take care of reconciliation, taxes, audit

Use Case 6: Inter-department settlement

Know-your-customer and anti-money-laundering – Digital KYC/AML processes that leverage DLT to track and share relevant customer payment and identity information to streamline processes. May connect to a digital national identity platform or plug into pre-existing e-KYC or AML systems. Could potentially interact with CBDC as part of payments and financial activity tracking. 

Information exchange and data sharing – The use of distributed or decentralized databases to create alternative systems for information and data sharing between or within related government or private sector institutions.

Examples of central bank blockchain use case

The Bank of Lithuania is planning to issue “Digital Collector Coin” to test blockchain in a small-scale and real environment. It will be linked to physical collector coins kept in the Bank of Lithuania’s vaults. The bank is also sponsoring a blockchain sandbox called LBChain.
The Bank of Thailand is exploring CBDC for interbank payments and liquidity management efficiency with Project Inthanon.

The Central Bank of Brazil is exploring DLT for an interbank payments contingency and resiliency system (Project SALT) as well as a decentralized information exchange platform (Project PIER).
The German central bank (Deutsche Bundesbank) is exploring DLT for multiple purposes including for improving efficiency and reducing risk in interbank securities settlement processes with the BLOCKBASTER prototype and other efforts.

The Hong Kong Monetary Authority conducts research and experiments on multiple use cases including trade finance, digital identity management and KYC/AML processes.

The Saudi Arabian Monetary Authority is conducting Project Aber with the United Arab Emirates to pilot DLT for interbank payments and settlements between Saudi Arabia and the UAE.
The South African Reserve Bank is exploring CBDC for domestic interbank payment and settlement efficiency with Project Khokha.

The Swedish central bank (Sveriges Riksbank) is investigating a blockchain-based “e-krona” to serve as an alternative form of central bank-issued money as cash usage in the country declines.
The Swedish central bank has not yet determined whether, if it implements an ekrona, it will employ DLT.

Components of the technology

Public Blockchains:

Mining: Hardware components include GPUs, servers, large cooling systems, and electricity costs. This is required to “mine” cryptocurrencies such as Bitcoin. Mining refers to generation of new cryptocurrencies through a mechanism called proof of work.

Software: “Nodes” of the blockchain can run on a laptop or a computer with at least 1tb of storage space, at least 8gb ram, and a good processor speed. This node basically connects to the blockchain miners and stores the history of all transactions of the blockchain.

Light clients: Light clients are desktop or mobile applications that don’t store the entire blockchain, but enable sending and receiving transaction data from the blockchain.

Private Blockchains:

Software: Private blockchain systems can run on a cloud server or on-site server with at least 1tb of storage space, 16gb ram to host one node. Since private blockchains won’t have as many transactions as public blockchains, they don’t need high electricity or maintenance costs. Also, there’s no concept of mining in private blockchains.

Step-wise process of the technology

Setting up the blockchain: Setting up number of nodes, block generation time, hosting on cloud or on-site.

User roles and permissions: Setting up user roles for different nodes and participants in the system

Smart contracts: Creating smart contracts on the blockchain for specific applications such as tracing a product from source to shelf on a supply chain.

Developing the front-end: Creating an easy to use web based front-end that users can use to interact with the blockchain at the backend.

Securing key management: Creating a safe place for storing private keys that are used to sign transactions on a blockchain.

Testing: Testing the entire blockchain system for transactions, smart contracts, and user roles and fixing any bugs.

Deployment: Deploying the blockchain across the departments that are going to be the users of the blockchain.

Potential risks to be assessed

Hardware:

-Risks with the hardware and software (the development platform) chosen to perform project development. e.g., can this hardware and software handle the workload required to complete the project?

-Maintenance of the hardware and 24/7 upkeep of the hardware.

-Chance that the workstation environment of the intended user will change after requirements are gathered.

Software:

-Usage of packages that can be delisted or not upgraded by the package creator.

-Failure of adequate testing of the developed software

-Risks associated with using off-the-shelf packages.

Blockchain:

-Upkeep of Blockchain nodes
-Ensure the data capture from existing systems into the blockchain
-Security of private keys
-Optimum smart contracts to consume less data storage and processing costs

Process:

-Risks associated with any conversions of existing data required before implementation of a new system.

-Integration

-Risk of data mismatch due to incorrect integration

-Risk of not getting real time data

Risk management

  • The project will have a project plan.
  • A process methodology will be applied throughout the project life cycle.
  • The Agile process of development will be followed throughout the lifecycle.
  • Scrum meetings will be held every alternate day.
  • A systematic method of project tracking and control and a change control process
  • will be used. Jira or trello will be used for tracking project progress.
  • An acceptably detailed Work Breakdown Structure will be produced.
  • A proper status reporting mechanism will be used to update all interested parties.
  • All roles and responsibilities are well defined. 
  • If the project is deficient in any of these areas, appropriate corrective measures will be taken before the prompt list is completed. 
  • Blockchain smart contract audits will be conducted.
  • Detailed software testing and user acceptance testing will be done.
  • All hardware and software will be stress tested before deployment.
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