In our ongoing exploration of CBDCs, we delve deeper into their position and relevance in the broader financial landscape. A recent paper titled "Introduction to Central Bank Digital Currencies and Their Technical Interoperability" by authors Matilde Faro, Xiaojun Luo, and Christopher Carrdelves deep into the position and relevance of CBDCs in today's financial landscape.
What is a CBDC? A CBDC is a digital representation of a country's sovereign currency, issued and backed by its Central Bank. Unlike other digital currencies, CBDCs are a direct liability of the Central Bank.
CBDCs and Decentralised Finance (DeFi): The paper highlights the relationship between CBDCs and the broader DeFi space. While DeFi represents a category of blockchain-based decentralized financial applications, CBDCs within this realm have a centralized governance.
Interoperability of CBDCs: One of the paper's significant contributions is its focus on the interoperability of CBDCs. It summarizes various strategies from existing literature and identifies the most efficient method for CBDC interoperability: DLT-relays, specifically trusted relays, combined with decentralized escrow parties.
Design Choices for CBDCs: The paper emphasizes that the design of a CBDC's interoperability is a conscious choice. It provides a comprehensive summary of the primary design choices Central Banks face, helping readers grasp the topic's intricacies. However, it refrains from advocating for one design over another, acknowledging that the potential risks and benefits of CBDCs vary based on each jurisdiction's unique circumstances.
This insightful paper is the collaborative effort of Matilde Faro and Xiaojun Luo from the University of the West of England, along with Christopher Carr from the University of Exeter.
Interested in diving deeper?
For a comprehensive understanding and to explore the nuances of CBDCs and their interoperability, read the full paper here.