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A Deeper Look at CBDC Designs

A Deeper Look at CBDC Designs

30 Mar, 2023

In last week's blog post, Central Bank Digital Currencies Explained, we looked at some basic properties of Central Bank Digital Currencies (CBDCs). This week, we want to explore the design space of CBDCs in more detail. To this end, we will discuss a paper published by the Swiss National Bank in 2021 called How to issue a central bank digital currency

CBDC designs most often suffer from the issue that they only need to prove themselves in a very limited, Proof-of-Concept setting. This often leads to overly abstract, unnecessarily complicated, or downright sloppy designs. The present paper, in contrast, delineates very cogently a meaningful design space for CBDCs.

Do I Need a Blockchain for This?

CBDCs have exploded onto the scene as central banks reacted to the invention of cryptocurrencies. As such, their first impulse is often to adopt distributed ledger technologies in a copycat manner. This despite the fact that in the case of CBDCs, there is clearly a privileged node with special permissions: the Central Bank! The paper thus starts with the simple, yet often overlooked, observation that the permissionless-ness features of public blockchains are not actually needed for this use case.

This dramatically widens the design space for the underlying technology being used. Indeed, one of the paper's co-authors is David Chaum, one of the pioneers of research into digital money. As far back as the 80s (!), he had published designs for electronic cash systems. Those designs, however, lacked the ingenious usage of Proof-of-Work pioneered by Satoshi Nakamoto and always relied on a central clearing house. However, this requirement is perfectly acceptable for a CBDC, and many of the undesirable properties of public blockchains can be dispensed with, such as costly access or limited throughput.

What Is a Blind Signature?

The key ingredient for "Chaumian E-Cash" are blind signatures. This means that the signer, the Central Bank in this case, signs a "blinded" value that is opaque to them. This blinded value can be thought of as the money token being minted by the Central Bank and handed out to another party (more on this later). This value can be unblinded, transferred around, and later submitted to the Central Bank for redemption. The crucial "magic" of blind signatures is that the original signature over the blinded message can be verified against the unblinded version. This establishes some important privacy properties and, for example, prevents the Central Bank from tracing money tokens through their lifetime and across different holders.

The Role of Commercial Banks

Many CBDC designs completely ignore the role of commercial banks and focus solely on the emitting party, the National Central Bank. This is problematic because it is very questionable whether central banks would like to enter into customer relationships with citizens, which are the ultimate users of retail CBDCs (another very refreshing contribution of the paper is its outright dismissal of "wholesale CBDCs" where the ultimate users would be restricted to commercial banks, noting correctly that such a wholesale CBDC already exists today in the form of commercial bank reserves at the Central Bank, one of the two forms of base money).

Instead, the commercial banks take the natural intermediate position between the Central Bank and retail users. This fits with the Blind Signature E-Cash design because some entity needs to claim and redeem money tokens at the Central Bank.


To summarise, the paper suggests a CBDC design which exhibits two crucial desirable properties: First, it avoids the present obsession with blockchains for use cases where their tradeoffs make no sense. Second, it defines a clear role for commercial banks, thus fitting much more naturally into the present financial system when comparing it to other, more synthetic, CBDC designs.

Written by:
Senior Researcher, Co-Founder
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