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CBDC and Interoperability: Your Questions Answered

August 13, 2021

Want to know more about how Central Bank Digital Currencies (CBDCs) work in practice and  real-world approaches to interoperability being explored by leading Central Banks today?  R3’s recent webinar “Connecting CBDCs: Enabling cross-border and cross-network transactions” addressed exactly this.

The 60-minute session discusses the technology, policy, and business rationale behind new CBDC interoperability solutions and cross-border transactions. In this blog, we focus in on the webinar’s central questions to provide key insights into how CBDCs will connect in the real world.

What is the technical bare minimum required for interoperability between two independent CBDC networks?

It’s possible to move assets from one party on one network to another on a completely different network with very little commonality needed between the two. The two parties don’t even need to know that each other exist. All that is required is proof that the transaction has taken place, which is facilitated by finality at the smart contract level. On  , finality is when the notary signs off on a transaction. Finality can work differently on different platforms, but as long as they have some way to prove that a transaction has occurred, the network can be interoperable.

To ensure interoperability, are multi-national standards (for example ISO) required before a CBDC can be deployed in one nation?

 If CBDCs have a high degree of commonality both technically and operationally there can be seamless levels of interoperability, however, in the early days of developing CBDCs, the level of commonality between them is unlikely to be this high. This doesn’t mean interoperability is impossible though – as explained in the previous question, provided both CBDCs meet the minimum requirements of evidencing that something has happened through finality, they can transact with each other. This means that it is not necessary to wait for everything to get sorted—including international standards—to take the first step forward in your CBDC journey.

For interoperability to work, do all CBDCs have to be on Corda?

No. Although transacting between two CBDCs on Corda, as shown in the webinar’s demo, is easy and seamless, different underlying platforms can be interoperable as long as they meet the minimum requirements of finality. It is also necessary that the interoperability protocols of other platforms align with the real world use case of central banks, who will want to be sovereign over determining whether a transaction in their currency has settled. On Corda, the central bank is able to control finality, but this isn’t the case on every platform. For these reasons, some platforms will make the cut for interoperability with Corda and others won’t.

Do I need to run my own node to transfer my CBDC money?

 To run an asset on a network some sort of presence is needed: this could either be you or a hosted identity, i.e. a commercial bank hosting your node on your behalf. Commercial banks exist to look after your money, be it physical or digital (i.e. a CBDC). If you trust your bank, the easiest option is to transfer money via a commercial bank hosted node. In deciding this, however, you give up the ability to validate transactions yourself.

In a trustless environment, you might want to host the node yourself and retain sovereignty over transaction finality, but this isn’t the real world situation for the majority of users. Both cash-like and commercial bank experiences are accommodated for.

Will CBDCs replace stablecoins?

As not all stablecoins are created equal, some will meet the quality of CBDCs and others won’t. If stablecoins pegged to reserve CBDC are involatile, used well, and accepted by the network using them, they can persist. However, there is an opportunity for CBDC to replace stablecoins which are backed by other, lower quality forms of collateral than CBDC.

Where does the the potential lie for cross-border CBDC at the moment?

 Cross-border CBDC offers transformational benefits both for retail and wholesale banking. CBDC will replace current cross border payments, which are incredibly slow, expensive, and complicated, and will increase efficiency and savings in commercial and enterprise processes. G20 countries are priorisitising cross-border CBDC in the retail space, and Project Jura, an R3 initiative with Banque de France, Swiss National Bank, SIX, and BIS, is currently focusing on wholesale CBDC interoperability. It is exploring the exchange of the financial instrument against a euro wholesale CBDC through a delivery versus payment (DvP) settlement mechanism and the exchange of a euro wholesale CBDC against a Swiss franc wholesale CBDC through a payment versus payment (PvP) settlement mechanism. These transactions will be settled between banks domiciled in France and in Switzerland, respectively.

 For more insights about connecting CBDCs, watch the full webinar here. If you would like to get more hands-on with your CBDC experience, request a demo of the R3 Sandbox for Digital Currencies.

 

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