Tgrade, the case for a wholesale CBDC platform
Why do we need Central Bank Digital Currencies?
Central banks are connected through a web of intermediaries, and there is a strong case for wholesale Central Bank Digital Currencies to use blockchain to move their assets securely between each other. The central banks could, in the same model, use blockchain to interact with their wholesale banks while retaining the safeguards and risk mitigation currently built into the existing mechanisms.
There is public suspicion of CBDC for retail payments as it could potentially be used to track all activity. There are means to balance the need to monitor transactions to ensure the proceeds of crime and terrorist funding are detected, and action is taken with the need to safeguard an individual’s privacy. There are interesting solutions emerging through the use of verifiable credentials and zero-knowledge proof.
There are big implications for commercial banking and the current payments systems on how CBDC is implemented and the role banks have on credit, deposits, and the mechanisms of managing these businesses. The subject of commercial banking and CBDC is one that deserves its own blog post.
The wholesale CBDC market is a more clear-cut way of modernizing intra-bank payments, whether applied between central banks or the central bank and the commercial banks they work with.
Public vs. Permissioned
There have been pilots made in the blockchain space to test how the technology works, such as the mBridge project of the Bank of International Settlements and Banque de France, and the majority of the pilots have been conducted on permissioned blockchains.
Tgrade is built as a public, permissionless blockchain which has many advantages over private chains.
Public blockchains are more secure as they operate in an adversarial environment. There is a big focus on securing a chain with a network of people who ensure the defenses are in place, the design of the chain has been security first, and there are layers of defense built into a public chain.
Resiliency is an important element of the blockchain architecture, and a public chain such as Tgrade has a network of validators around the world who maintain and run the network as opposed to a private chain which has a smaller number of nodes run by the organizations who are participating.
The ability for a network to scale on a public blockchain is much faster and more cost-effective; a public blockchain is a global endeavor meaning that no extra nodes are required, and the onboarding of new organizations is seamless through the software layers.
What can Trusted Circles do for Central Banks?
The foundation of Trusted Circles is the governance tools that facilitate the creation and maintenance of a Trusted Circle.
Trusted Circles are self-sovereign, meaning that anyone can create one and set the rules. In the context of CBDC, there are several approaches; either a single entity acts as a central authority, or a network of central banks set up the Trusted Circle.
The design of Trusted Circles is left to the creators to implement the link between identity and the Tgrade address that is added to the Trusted Circle. This can range from a simple spreadsheet that maintains the addresses and the identity information to using verifiable identities using self-sovereign identity and zero-knowledge proofs.[1]
With a Trusted Circle in place, then the issuance of CBDC and setting the permissions for use in the Trusted Circle demonstrates the power of what Tgrade can do and lets the Central Bank participants focus on the business of managing their currencies.
Transfers of tokens issued and permissioned to the Trusted Circle can only happen between members of the Trusted Circle.
CBDC can either be manually transferred between participants, or an automated market-making facility can be set up, bringing DeFi to CBDC trading.
So now we have a Trusted Circle with the participating Central Banks, CBDCs that are restricted to the Trusted Circle that we can swap. How do we secure these valuable assets, and what are the custody solutions? Having a network of committed open source developers is a big plus, and the team at Nymlab has developed a smart contract wallet, Vectis. Vectis solves the issue of losing access to tokens if the keys are lost by introducing the concept of guardians, each of which keeps a part of the private keys safe, and recovery can be made by them sending the fragments that recreate the key.[2]
DeFi for Central Banks?
The speed of innovation in the Decentralised Finance wave that began in 2020 has been impressive, and it would be right for the central banks to leverage the technology.
In a wholesale setting, having a marketplace that runs 24 hours a day, 7 days a week, to allow central banks to swap CBDCs in a fully automated way would enhance the global way that central banks interact.
The central banks can set up the marketplace with the appropriate liquidity and agree on the fees as a collective.
Would you like to see a CBDC application work in practice?
A demonstration application has been created using a Tgrade testnet, and a Trusted Circle has been set up with the major currencies as CBDCs.
Open the application
Click on Connect wallet
Select the Web wallet (demo)
Click on the address to copy it to the clipboard and email it to martin.worner@oceanblue.foundation, who will add you to the Trusted Circle and send you a nice user manual with the address of the Trusted Circle to join.
