Key Points:
While central banks are researching or trialing CBDC pilots, the feasibility of current models is being questioned. In particular, there hasn’t been an actual CBDC model that is technically a replacement for cash and they all have several flaws. Issuing a CBDC would be a mammoth undertaking for multiple reasons.
The Bank of International Settlements (BIS) is working on a “unified ledger” system for global interoperability. However, Aboualfa raised concerns about the complexity of establishing trading pairs and difficulty in maintaining a peg between CBDC brands issued by commercial banks. He used the Silicon Valley Bank as an example, saying that if it had issued a CBDC, consumers would have lost confidence as soon as it fell into distress, causing its token to lose parity with other dollar-pegged CBDCs.
The researcher explained that CBDCs can be issued in two different ways, directly from a central bank or via commercial banks. While central banks don’t have the talent or the infrastructure to run a fully automated decentralized equivalent to cash, commercial bank-issued CBDCs could lead to chaos in decentralized open markets if scandalous news hits one of the banks. Consumer confidence issues could arise if tokens have specific commercial bank branding.
Aboualfa pointed out that the crucial factor of CBDC interoperability has not been adequately considered. Arguing current designs point to multiple blockchains with intermediaries controlling the flow, he questioned how everyone is supposed to agree on the design and structure of a CBDC worldwide at the same time. The designs and models need to allow for integration, not vendor lock-in, and every central bank will have different considerations and requirements.
CBDCs are still in their early stages and there is much work to be done in order to make them a viable cash equivalent for daily transactions. There are concerns about the feasibility of current models, complexity of establishing trading pairs, and difficulty in maintaining a peg between CBDC brands issued by commercial banks. Interoperability and integration are key factors that need to be addressed to ensure that CBDCs can be used effectively in a global context.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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