Hassan Maishera
One merely a theoretical concept, Central Bank Digital Currencies (CBDCs) are fast becoming a reality. As nations and national banks move past the pilot stage to real-world deployment, observers are watching keenly. The advantages of moving currencies on distributed ledgers offer promising advantages in terms of efficiency, inclusion, and fiscal management, but at what price?
Critics have taken aim from a number of angles, including security concerns given the value of the assets CBDC chains will be expected to transmit and the fallout that a major cyber breach could have on a nation’s economy. However, the most common attack vector concerns privacy. There are fears that placing every citizen’s financial dealings onchain, no matter how robust the safeguards, is inviting trouble.
While these concerns are warranted, they have been assuaged significantly by advances in blockchain technology. The tech stack developers have to play with has advanced since CBDCs were first floated, with a number of breakthroughs making it easier for privacy fears to be allayed.
Everyone’s Issuing a CBDC
Without recounting the history of CBDCs, it’s fair to say that national banks are now very much onboard with the concept. The maturation of blockchain, its increasing institutional adoption, and the proven security record of public networks such as Bitcoin and Ethereum has shown that trillions of dollars can be securely stored and transmitted onchain.
China’s digital yuan (e-CNY) has already been tested in pilot programs across major cities and is now being trialed in retail settings, public transport, and even for salaries in some regions. The European Central Bank is actively exploring the digital euro, aiming for a potential rollout by 2026, and is currently in the design and investigation phase as it tests various technical solutions.
Elsewhere, the U.S. Federal Reserve is considering a digital dollar, and while it remains to be seen if and when a prototype is created, it’s worth noting that the Federal Reserve Bank of New York launched a pilot called Project Cedar, focusing on using blockchain technology for cross-border payments. India has also been testing a retail version of the digital rupee in several cities since late 2022 and the Central Bank of Russia is conducting pilot programs for a digital ruble which could arrive as early as next year.
The final form these solutions take has yet to be revealed. However, the major sticking point for would-be users of CBDCs, both at enterprise and consumer levels, is the privacy protections they incorporate. It’s here that blockchain developers will be expected to deliver innovative solutions that can work at scale.
Building Financial Confidentiality Onchain
A number of blockchain projects are making great strides in developing onchain privacy tools, including Coti. Its flagship technology, known as Garbled Circuits, enables third-party data sharing, verification, and computation while keeping the underlying data confidential. Crucially, it’s able to do this at scale, ensuring rapid data delivery whether handling thousands or millions of transactions. Having recently been invited to participate in the Central Bank of Israel’s CBDC project, Coti will soon have a chance to prove that its tech is ideally suited to making digital currencies private by default.
There are other approaches to masking financial data onchain of course, with zero-knowledge proofs (ZKPs) touted as a viable solution. One challenge here, though, concerns scalability is given the increased computational burden that ZKPs carry compared to regular data transmitted onchain. The challenge for banks commissioning CBDCs is settling upon a system that makes data private by default while still allowing authorized entities, such as a customer or regional bank, to view this information.
CBDCs Have to Work
It’s not just the value of assets coursing through CBDC networks that makes them critical infrastructure; it’s the fact that the failure of one of the first digital currencies, be it through a cyber attack, data breach, or data bottleneck, risks torpedoing faith in the entire sector. When Bitcoin launched, BTC had zero value and operated for years with minimal value being moved onchain (during which several major bugs had to be patched) before growing into a billion-dollar monetary network.
CBDCs have to operate without major incidents from day one. As a result, their designers need to make smart choices about the tech they choose. The world will be watching, and critics will look for an excuse to weigh in. The stakes couldn’t be higher.
