Central Bank Digital Currency

By Othman Darwish

Recently, there is a growing number of Central banks that look seriously at the new revolutionary technology of Bitcoin and weight its potential applications.  Central Bankers, all over the world,  including but not limited to ( Fed, Bank Of England  ,and Bank of Canada )  studying the need for issuing their own digital currency  ,and trying to utilize this new innovated technology  to optimize their monetary policies , and   providing new business  services  using newly  innovated  blockchain technology ,by  building a national  digital currency  ,that compete current Bitcoin  disruption and threat for today financial ecosystems .

Central bank would benefit from  the technology behind   Bitcoin; blockchain, the  underlying  technology of Bitcoin payment network, or as  some economists like to call it the  distributed ledger technology ( DLT), is a decentralized immutable  public ledger that contains the details of every transaction that has ever been made, Using innovated technical protocols, that ledger has proven to be exceptionally accurate, reliable , secure and tamper resistance. Unlike Bitcoin payment permissionless open network, Central bankers along with commercial banks could build a permission payment network based on blockchain technology, in such trusted network central bank privileged to perform it monetary policy more effectively and with less cost.In such network, the central bank could deploy a particular program or what so-called smart contract to mimic money supply activities. 

The central bank, as smart contract owner would be privilege to  mint ( issue money), those tokens money  will be owned by central banks at the first place ,  the central bank could transfer those digital tokens to commercial banks  when more liquidity is needed in the system, for example when bank A need 1M in term of digital tokens, it  would exchange it excess  reserve it has with central bank  with rate 1: 1, the 1M will be deleted from central bank balance sheet and the worth of 1M digital tokens will be transferred from central bank to bank A, commercial banks  not limited to use their excess  reserve to buy digital tokens from central bank , they can use their owned debt instrument  ( government bonds) in the same way and exchange it with rate 1:1 .As for the banked customer, they can transfer digital tokens from their checking account or savings account to their mobile wallet, central bank along with commercial banks will study and carefully put a proper cap limit for such transfer in a way that does not impact commercial banks loans creation cycle. for a nonbank user, they can exchange their owned printed money with the central bank directly or any authorized payment service provider.In order the customers can transact and transfer tokens, KYC process is required, Centralize Authority ( CA), will be a significant part of this network and perform KYC processes, after then, the customer will be provided by public/private keys which enable them to join and transact the network .

Unlike Bitcoin network , which suffer from scalability , and limited number of transactions that could executed  per second , In Central bank permissioned network, the consensus of building the distributed ledger ( blockchain)  blocks will be managed  and distributed by authorized  nodes ( central bank and commercial banks ) and no need to perform  complicated proof of work algorithm, this will boost the network performance dramatically and enable it to be scalable easily .
HyperLedger project is a global collaborative effort which includes 120+ member and leaders in finance, banking, and supply chain to advance blockchain technology.By using HyperLedger technology, central banks would be in control and enjoy the decentralized nature of this new innovated payment network. 
  
Central bank digital currency would have many benefits; by using digital currency, a central bank will save on the cost of printing and storing cache as part of a payment system and would be difficult to forge thus reducing illegal practices and tax evasion.The ease of increasing or decreasing money supply is another significant benefit when using digital currency, and this will lead to better implementation of the monetary policy and better estimate of growth of money supply. Also, it will enable the central bank to apply negative interest rate policy when needed. The peer-to-peer transaction execution ( no third party )  will lead to real-time clearing and settlement and vanishing counterparty credit risk. Digital currency issued by the central bank will compete Bitcoins volatility and provide the same ease of it as a medium of exchange and provide fast financial services with less cost.