Initially, when Bitcoin was launched, banks felt no threat until it began to gain mass adoption. Since then, central banks have strived towards issuing or adopting digital currencies. However, there are different views as to how to attain Central Banks Decentralised Currencies. One would wonder why the sudden interest in developing digital currencies as banks. Central banks are used to holding a monopoly when it comes to monetary issues for decades. So, it could likely be as a stunt to take back power. However, it will be a difficult feat to attain in the new decentralised digital space. Thus, different views are held as to how futile it is for Central Banks to compete with privately issued digital currencies or cryptocurrencies like Bitcoin.
Upholding a case for CBDCs
Central bankers are now encouraged to change their monetary systems to accommodate the changes brought on by privacy currency issuers. The Official Monetary and Financial Institutions Forum (OMFIF) has joined in encouraging its members to embrace changes. The OMFIF in its defence in a 2019 study claims that also it is in the best interest of central banks to keep abreast with developments in the digital currency space or risk being thrown out of the financial system equation. Unlike cryptocurrencies such as Bitcoin and Algorand who are flexible to changes and innovation, central banks have remained rigid for decades until recently. One event that may have spurred them into action was the proposed launch of the Libra stablecoin by Mark Zuckerberg. Now central banks realize they must respond to this by integrating or redesigning their respective platforms so that they become compatible with the present-day realities. More central banks are running trials on how to improve their decentralised currencies with a view of fully deploying them.
Integrate with Existing Digital Currencies or Create?
On the part of the Central Banks, they are quite late to the party. They spent a larger part of the decade trying to discredit and disbelieve blockchain technology. Now issuing the same digital currencies they have discredited and also last the expertise to deploy, they need a way out. There is a need to partner if central banks want to successfully issue digital currencies. In a report co-authored with IBM, the OMFIF acknowledges that the best bet deploying a successful CBDC by a central bank might be through partnering with a financial technology firm that is already working the blockchain space.
“Practically, the operation of a CBDC is likely to rely on some sort of public-private partnership. Central banks could outsource the distribution of the CBDC to private financial institutions, which could also be involved in the on-boarding of users.”
Most financial technology firms have created solutions focused on their ecosystems and their coins and tokens are designed to solve the issues revolving around their platforms. However, most blockchain-based companies make provisions for their protocols to accommodate external clients such as central banks.
Now, the ball is in the courts of central banks and governments to either create their coins and tokens or admit that they have no or resources to create their own and seek help from established blockchain institutions. So when it comes to launching CBDCs there is a need for both central banks and blockchain institutions to work together to create a deplorable CBDC. However, central banks have to seek for and admit the need for this expertise.
The Incredible Case of the Marshall Islands
One of the countries that opened its doors to decentralised currencies is the Republic of Marshall Islands (RMI). The government wanted a digital solution that was deplorable and searched for the best platforms available. RMI settled for Algorand, an open-source public blockchain based on a pure proof-of-stake consensus protocol that supports the scalability and transaction finality.
The island nation of RMI is one of the few sovereign nations to take the lead on creating CBDCs. According to Algorand’s Director of Business Solutions, David Markley, he announced that RMI chose Algorand as its partner for piloting its CBDC project and meet the island’s need for its blockchain projections.
Since their independence in 1979, RMI has used the US dollars as it’s currency. However, when it came to the time to switch currencies, RMI decided to take a different and unique route built on the blockchain. Thus, choosing Aglorand as its blockchain partner since it had readymade solutions for countries that may want to create their digital currencies. The aim is to utilise Algorand’s blockchain solution in creating an efficient and effective currency distribution system as well as reducing the cost of remittances.
Also, Algorand was selected since an expert in the blockchain field was needed despite having experience in the area of monetary policy management its central bankers still needed the extra hand that blockchain experts can provide.
When choosing to pivot to the digital currency, three key points were noted. First, the blockchain technology would house the currency. Second, there would be tamper-proof and predetermined growth of the money supply. And, thirdly, the currency will maintain privacy for individuals while still having a root of compliance in its currency protocol.
While RMI focused on three key points other nations may have different concerns that may not include blockchain scalability or transaction cost. However, many sentiments still current the use of CBDCs. As pointed out by François Villeroy de Galhau, the governor of the Banque de France, ‘currency cannot be private, money is a public good of sovereignty.’ Sentiments like this showcases the challenges faced by fintech companies and how many still believe that permissionless blockchain is a reckless move for a central bank as they must always comply with complex regulations and monitor access to data.
Aglorand’s Co-chain architecture for CBDC
To enable individual organisations to control isolated and sensitive data on the private blockchain while giving access to the public simultaneously, Algorand has been developing its co-chain architecture. The architecture enables the members of a permissioned chain to work most securely and efficiently not only with each other, but also, while retaining maximum autonomy, with the Algorand permissionless chain and members of other chains as well. All central banks have one objective and that is to adapt to the changing financial scenes by adopting the new technology in town. To adapt, the Algorand blockchain is a suitable platform tailor-made for central banks.