Focus Area:
Test feasibility of blockchain technology for CBDC
Overview:
Estonia’s central bank, Eesti Pank initiated a research project in 2020–2021 to investigate the technological aspects of blockchain technology in the context of Central Bank Digital Currency (CBDC). They partnered with the technology company Guardtime.
Motivations:
- End to End Payments
Test the CBDC platform if it can process large volumes of retail payments of up to 100 million users.
Financial institutions involved:
- Eesti Pank
Technology, Law and Design partners:
- Guardtime
Design considerations:
A centralised CBDC with Central bank acting as a Centralising function was considered. Some characteristics of blockchain-based money systems highly relevant for a CBDC were considered:
- Tokenisation — Digital representations of complex assets like bonds or derivatives can be stored on blockchains, enabling ownership transfer through digital signatures or cryptographic proof.
- Programmability — Programmable money facilitates numerous innovative applications for digital currency, encompassing the functionalities offered by smart contracts.
- Resilience —This ensures that the system remains available even if any individual component fails or becomes compromised, without any adverse effects on its overall functionality.
- Transparency — Authorized parties or relevant end users have the ability to independently examine transaction history as well as the characteristics of the monetary system, such as the size of the money supply.
- Identity — During the pilot phase, the process of onboarding and verifying users involved the utilization of e-ID. The electronic identities of the users were then connected to the digital bills stored in their wallets.
- Privacy — By utilizing KSI Cash, it becomes possible to publicly disclose the root ledger and emissions ledger while maintaining the confidentiality of payment history, which is stored in individual bill ledgers. A comprehensive analysis was conducted to explore various deployment models and privacy architectures for a CBDC platform based on KSI Cash.
- Security — The security measures of a CBDC platform should exceed those of current financial market infrastructures. The underlying KSI Blockchain has operated with no downtime incidents since its operational deployment in 2012.
- Scalability and Speed — The KSI Cash infrastructure was subjected to a variety of tests to assess its scalability, transaction speed, performance characteristics, and energy efficiency.
Technical Solution:
Pilot and testing was done on KSI Cash, a digital currency technology based on KSI Blockchain and a custodial layer holding the funds of users.
In KSI Cash, money takes the form of ‘digital bills’. Bills are a tokenised and dematerialised form of physical cash bills or banknotes, with a serial number, face value, and security elements. Bills are issued by the central bank using a pre-defined emissions procedure.
Payments take the form of a transfer in the ownership of a bill.
Conclusion:
The hypothesis that digital bill-based money systems are linearly scalable and highly efficient was confirmed with the pilot testing.
- The system was tested at speeds of up to two million bill transactions per second, where it operated with faster transaction times, lower energy use, and a smaller carbon footprint than current instant payment platforms. End-to-end payment time, including settlement, was 0.6 seconds on average.
- The CBDC platform can integrate with existing e-ID schemes, making know-your-customer (KYC) easier and automating the onboarding of users into the CBDC ecosystem.
- The CBDC solution allowed compatibility with conventional payments architectures.
- KSI Cash’s security model provides cryptographic verifiability of the state and operation of the system without compromising user privacy. The system is highly resilient and resistant to insider and sophisticated outsider attacks.
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