When designing and implementing CBDC, various design and technology considerations need to be taken into account to ensure its effectiveness, security, and successful integration into the financial system. Privacy and anonymity are among the most often discussed design choices for CBDCs.

Design Considerations

1. User Accessibility and Inclusion: Ensure that CBDC is accessible to a broad range of users, including those without access to traditional banking services. Design user-friendly interfaces and consider accessibility features.

2. Privacy and Security:  Implement robust privacy features to protect users' transaction data and identities. Balance privacy concerns with the need for transparency and compliance with anti-money laundering (AML) and know your customer (KYC) regulations.

3. Smart Contracts and Programmability: Consider incorporating smart contract functionality to enable programmable features. This could facilitate more complex financial transactions and automate certain processes.

4. Resilience and Redundancy: Build a resilient and redundant infrastructure to ensure continuous operation even in the face of cyberattacks, technical failures, or other disruptions.

5. Scalability & Interoperability: Design the CBDC infrastructure to handle a large number of transactions efficiently, ensuring scalability to accommodate potential future increases in usage.

Design CBDC to be interoperable with existing payment systems and other digital currencies. This will facilitate seamless transactions and interoperability with both domestic and international financial systems.

Technology Considerations

Centralised settlement vs distributed permisionless model. : Decide on the underlying technology. Consider the use of blockchain or DLT for the issuance, distribution, and management of CBDC.

 

Digital Identity Verification : Incorporate robust digital identity verification mechanisms to ensure compliance with regulatory requirements and prevent fraudulent activities.

Tokenization Standards: Define tokenization standards to represent CBDC. This includes determining the technical specifications for CBDC tokens and ensuring compatibility with existing standards. Account-based vs token-based solution. This concerns whether validation is based on the identity of an individual (account-based) or on the veracity of the instrument (token-based). While the former has clear advantages in some cases,3 the CGIDE considers that a token-based approach could be desirable for peer-to-peer transactions. While programmability features can be achieved with both approaches, a token-based solution could offer a more extensive and flexible programmable infrastructure and facilitate the use of smart contracts. There may be solutions that allow for the benefits of digital tokens (and tokenisation) while preserving sound identification

Mobile and Offline Transactions : Support mobile transactions and explore options for offline transactions to cater to areas with limited internet connectivity.

Privacy and data protection : Privacy is a crucial consideration for all payment instruments, including CBDCs. In this light, the proposed CBDC design will guarantee adherence to privacy and data protection principles. This is essential to ensure user trust in the CBDC system. Central banks may wish to minimise the data to which they have access, including information on individuals’ identity, so as to avoid being the target of cyber attacks or political pressures. The design could consider different technological options to safeguard privacy and minimise personal data exposure.

Key technological aspects for the appropriate evolution of a CBDC platform. The proposed key technological aspects were scalability, technological independence, new releases and documentation distribution (semi- or even fully automatically generated) strategies.

“Cash-like” features for CBDC, such as very wide acceptance and convenience, instant settlement, continuous 24/7/365 availability and offline capabilities.

For CBDC  L2 tokens interoperability. What are the technology considerations?

The interoperability of CBDC with the relevant payment infrastructure, including mobile money, and its wide acceptance within the jurisdiction would increase both the convenience and the value that CBDC could provide to citizens. These factors could also increase the efficiency of domestic remittances. For cross-border remittances, interoperability with the relevant payment infrastructure of exchanged currencies may be valuable or necessary.

 

Token Standards: Establish common standards for CBDC tokens across Layer 2 solutions. This could involve defining specifications for token representation, transaction formats, and smart contract interfaces.

Interoperability Protocols: Implement cross-chain bridges or interoperability protocols that allow CBDC tokens to move seamlessly between different Layer 2 solutions. These protocols should ensure the secure and verifiable transfer of assets.

Interoperability is a complex challenge, and addressing these technology considerations can help pave the way for a seamless and secure exchange of CBDC tokens across different Layer 2 solutions. Continuous collaboration, research, and testing will be essential to refine and improve interoperability mechanisms over time.

 Hyperledger Fabric & Besu is right choice of technology to bring interoperability using Cacti & Weaver protocol.

We need some notes on Infrastructure for CBDCs like Hyperledger and Similar things done in China, where wallets work without the Internet.

This is not public data, but the need of infrastructure depend on the volume of data &  transaction.

Here is the infrastructure need as per the E-naira CBDC Project –

The eNaira infrastructure is based on the distributed ledger technology (DLT) and this will support the two-tiered model architecture which the CBN has adopted. However, considering the core requirements of financial systems which include:

·       Users to be identified based on underlying identity frameworks

·        Payment networks to be permissioned to prevent intrusion

·       High transaction throughput performance

·        Low latency of transaction confirmation

·        Privacy and confidentiality of transactions and data pertaining to business transactions

The Hyperledger Fabric variant of the DLT has been adopted for use as it inhabits the above requirements. The Hyperledger Fabric is an open-source enterprise-grade permissioned distributed ledger technology (DLT) platform, designed for use in enterprise contexts and accommodates the underlying requirements highlighted above. In addition, Hyperledger supports a modular architecture which is a key consideration for the eNaira system, and it has a robust security architecture, is configurable, versatile, optimisable, scalable, and open to innovation.

CBDC adoption & future in next 5 years.

As per  Atlantic council https://www.atlanticcouncil.org/cbdctracker/

130 countries, representing 98 percent of global GDP, are exploring a CBDC. In May 2020, only 35 countries were considering a CBDC. A new high of 64 countries are in an advanced phase of exploration (development, pilot, or launch).

We will see more adoption in Next 3-5  Years (2024-2030):

1.   Pilot Programs and Launches: More countries are likely to initiate pilot programs or fully launch their CBDCs. Countries that have already started testing or development phases may move towards implementation.

2.   Regulatory Clarity :Regulatory frameworks for CBDCs may become more defined and clarified, providing a more stable environment for development and adoption.

3.   Global Expansion: More countries, including major economies, may seriously consider or initiate the development of their CBDCs. This could lead to a more widespread global adoption of CBDCs.

4.   Interoperability Standards: Efforts to establish international standards for CBDCs and interoperability between different CBDC systems may gain traction, facilitating cross-border transactions.

Refrences

Here is the one from MIT open CBDC - https://github.com/mit-dci/opencbdc-tx

Interoperable CBDC sample (Hyperledger Cactus)- https://github.com/hyperledger/cacti/tree/main/examples/cactus-example-cbdc-bridging

https://github.com/hyperledger-labs/eThaler

Hyperledger CBDC - https://www.hyperledger.org/hyperledger-cbdcs

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