The Harmonic Triangle: CBDC, Cryptos, Stablecoins

The Harmonic Triangle of Cryptocurrencies, Central Bank Digital Currencies (CBDCs), and Stablecoins is slowly starting to emerge as the digital future.

CBDC, Cryptos and Stablecoins are complements, not rivals

Far from being rivals, these three have the potential to be highly complementary. Look at what each of the three does best:

– CBDC: The universal acceptance, familiarity and total security that comes from a unit operated by a central bank and the potential to be inflationary when needed; but with very limited functionality.

– Cryptos: A deflationary (ie store of value) bias if designed that way (eg Bitcoin), and/or the ability to offer extraordinary functionality for financial and real economy transactions on a secure network (eg Ethereum).

– Stablecoins: If properly regulated, the potential in the digital future to take on much of the role in linking CBDCs to the financial and real economy that bank deposits currently perform for conventional central bank money, but without the risk of bank runs.

An imagined future architecture for digital money

I’ve imagined a future digital architecture that illustrates how The Harmonic Triangle can work in practice, drawing off recent research by Abdallah Mahdi. His excellent paper is attached below.

The role of the banks in this architecture is worthy of a separate article. For now I’ve assumed a controlled transition in which they gradually replace their deposits with other financing while losing some share of the loans market to decentralised credit — managing this would be a significant challenge for central banks.

To explain this architecture, I look at each of the three components in turn, beginning with CBDC.

CBDC’s role in The Triangle: total security; central bank control; functionality limited to payments; expandable

First, CBDC. Each country would operate its own CBDC on a highly secure, centralised ledger, possibly a blockchain, over which it retained total control. If access was granted only to authorised financial intermediaries – call them banks – this would be a so-called “wholesale” CBDC and would offer little more functionality than current gross real-time settlement systems, but with significant improvements in speed and security of operation. If access was also granted to individuals and companies with a low limit on the size of any individual holding, this would be a “retail” CBDC and would immediately bring the benefit of digital payments to the unbanked. For example, the “Sand Dollar” currently operating in the Bahamas allows each person living on outlying islands (where there are no banks) to hold a couple of hundred dollars or so of CBDC.

If this holding limit was progressively raised, businesses could begin to make widespread use of the CBDC to make and receive payments at ultra-low transaction costs and high security. Alternatively, in the wholesale model, there could be gradual growth in Authorised Stablecoins fully backed by CBDC (see below) which would bring similar benefits. In particular, there would be gradual downward pressure on current high domestic transaction costs. (I operate a small business in the UK and am not unusual in being charged 1.5% for all transactions, which with a profit margin of 15% on sales means that I pay 10% of my profit to process payments.)

The key to a successful transition from the old to the new architecture is for there to be a progressive and controlled growth in holdings of CBDC, whether direct as in the retail model or indirect via Authorised Stablecoins, to ensure that funds do not move rapidly out of (risky) bank deposits into (secure) CBDC – which could cause the greatest credit implosion and depression ever seen. To avoid this, as the banks lost deposits due to growth in directly or indirectly held CBDC, they would need to grow their other sources of funding such as bond issues, and meanwhile their need for funds would likely decline as the asset side of their balance sheets — their lending — tended to lose market share to decentralised credit on the Ethereum blockchain.

This vision is a middle way between two extreme models for the banks. One of those would see them left roughly as they are now, but that would rule out substantial direct or indirect emission of CBDC to the public and thus make banks the effective gatekeepers into the public blockchain, potentially damaging competition and innovation. The opposite extreme would be to allow them to contract and disappear, but managing that smoothly would be highly challenging and positive aspects of their expertise and structure would be lost.

Despite its potential advantages in improving payments, the functionality of CBDC as described here barely even begins to climb the foothills of what digital money is capable of. But there’s a good reason for that: trying to use the central bank’s secure ledger to operate smart contracts that can automatically close out derivative trades and instantly settle invoices on delivery just doesn’t seem a good idea. It does not seem appropriate to try and combine the absolute security required for central bank money with the full range of financial market and real economy transactions – it would be a bit like trying to settle expiring future contracts or Amazon logistics payments on the current central bank gross real time settlement systems.

But there’s one bit of functionality that CBDC could potentially offer, which is to impose negative interest rates or to allow a universal “helicopter drop” of money to everyone. I personally think the first of these has reputational risk for a retail CBDC, it’s somehow difficult to reconcile the narrative of total security that goes with central bank money with negative rates, which could be regarded as a form of confiscation. But the helicopter drop is very appealing as a way of giving extra cash to everyone and I can see it becoming popular as a macroeconomic tool – longer term it’s inflationary, but that’s the whole point, because sometimes a controlled inflation is needed to prevent a credit collapse. The ability to do this and the very limited functionality are arguably the two things that make CBDC so different from cryptos (the other big difference is the centralised versus decentralised ledger – the debate over which of these is most secure is more a matter of religious faith than absolute truth).

Crypto’s role in The Triangle: non-inflatable (Bitcoin); platform for all financial/real transactions (Ethereum etc)

Turning to cryptos. The strictly limited supply of Bitcoin means it’s inherently deflationary, which makes it a respectable candidate to have a long term uptrend against inflatable central bank moneys. But that’s not quite the same as saying it will trend up from here, for two reasons. First, because we can only guess at the starting price for this uptrend by (for example) comparing its market capitalisation to that of gold – is it $150,000, or more, or just $1? Second, because it’s not certain that its first-mover brand recognition and sheer proven brute resilience trump the ability of anyone to set up an alternative that could cannibalise investors’ portfolio allocation to such assets. These issues aren’t going to get resolved soon, if ever, but the real point is that Bitcoin is genuinely different from CBDCs and complementary to them: it has aspects of in-built deflation that a CBDC can never have, because there are moments when a central bank has to be inflationary to save the economy.

Staying with cryptos but moving on to Ethereum and other coins that support real functionality (eg Polkadot with its ability to facilitate interoperability), there is a very different kind of complementarity to CBDCs. The Ethereum blockchain can in principle do (more or less) all the decentralised finance that the controlled, centralised central bank ledger can never be allowed to do: peer to peer loans that embed the borrower’s credit history and genuinely syndicate the risk; derivative contracts that settle instantly; logistics processes with automated factoring, etc etc. But, that’s not much use if the two ledgers can’t inter-operate with one another without compromising the security and central control of the central bank’s, and that’s where stablecoins come in, as the third point of the Harmonic Triangle.

Stablecoins’ role in The Triangle: Allowing fiat transactions on public blockchains while protecting the integrity of CBDC

Let’s suppose that in our imagined future digital architecture there are Authorised Stablecoins, privately operated but approved and regulated by the central bank of the country in whose fiat currency they are denominated, that are 100% backed by CBDC in real time. These would operate on the Ethereum blockchain and would interact with all of its functionality – so a holder of an Authorised Stablecoin could use it not only to make payments, but also to settle derivative contracts, buy securities, and all the other features that the Ethereum blockchain will in future offer. Crucially, at the same time, the Authorised Stablecoins would also interact with the CBDC ledger. This would allow them to act as a bridge between the new world of digital money and decentralised finance on one hand, and CBDC and the old world of banking on the other.

A technology such as an upgraded version of the Baseline Protocol could be used for the link between the Authorised Stablecoins and the CBDC ledger; critically, this technology would allow the central bank to maintain total control over its own ledger. Each Authorised Stablecoin would hold a CBDC balance on the central bank’s ledger which would be updated in real time to maintain the 100% backing. To illustrate this: under a wholesale CBDC, when an individual switched funds from their conventional bank deposit into an Authorised Stablecoin, the latter’s balance on the central bank ledger would be increased by a transfer from the individual’s bank; simultaneously a message would be sent to the Ethereum blockchain causing creation of the same amount of new Authorised Stablecoin in the name of that individual. A transaction the other way round would see Authorised Stablecoin burnt on the Ethereum chain while on the central bank ledger, CBDC was transferred to the individual’s bank account. Under a retail CBDC, much the same would apply but without the need for a bank deposit.

All this sounds quite fussy but the point is to eliminate the risk that the central bank’s ledger can ever be compromised. Nothing ever actually moves between it and the big bad world of open blockchains. All that comes in from outside are instructions to move CBDC from one holder to another. There is always some risk that these instructions are fraudulent, just as currently fraudsters cause money to be moved between beneficial owners at banks, although the audit trail of events leading up to a fraud will generally be much better in the digital world. But such frauds would not pervert the integrity of central bank money itself.

Over time, as the system grew more familiar to users and more functionality became available on the Ethereum blockchain, the scale of Authorised Stablecoins outstanding and of transactions using them on the Ethereum chain would likely come to dwarf activity on the central bank ledger. Why would one want to keep switching from an Authorised Stablecoin, which was 100% backed by CBDC and allowed full access to the digital finance world, and take funds back into an old-fashioned bank which was slower and ultimately offered less functionality? The central bank’s ledger might almost drop into the background, rather as the current real time gross settlement systems sit in the background, yet still provide an absolutely crucial anchor to the whole system.

An irony of The Triangle: cryptos play a crucial, central role, but almost all transactions are denominated in fiat

Note that in this imagined future, it’s likely that a large majority, perhaps almost all, transactions in the real economy, and most financial transactions, would be denominated in conventional fiat – the currency issued by the central bank. And yet, crypto would be playing a large and crucial role, in a different background way: Ethereum driving all of the decentralised finance and real economy transactions on its blockchain, Polkadot ensuring inter-operability between chains, Bitcoin being used as a longer-term store of value, and Authorised Stablecoins being used for a very large majority of day to day transactions. We could even imagine the price of Bitcoin being used as part of a monetary conditions index by central banks: falling means conditions are tight, rising means they are easy.

In this sense, the Harmonic Triangle brings out the best of each of its three elements: the pivotal short to medium term stability and accounting role of CBDC; the longer term store of value and the incredible functionality of the cryptos; and the day to day payments functions of stablecoins. Conventional roles of banks would likely have shrunk, but as noted above the relative decline in their balance sheets would need to be handled very carefully, and the best among them would adapt their operations to play a leading role in the new world. And economists would need to update the traditional three functions of money (medium of exchange, store of value, unit of account). Those three functions would be split among different parts of this digital system, just as they are currently split between central bank money and bank deposits, but a fourth would be added: the ability to execute contracts automatically.

Moving closer towards The Harmonic Triangle — at least in the US

A divide seems to be opening up in approaches around the world. The common strand is that almost everywhere, central banks have now either actively introduced a CBDC or are at some stage in starting to talk about it, even if it is only preliminary.

But there the common strand ends. Possibly the biggest divide is between China and the US in their approach to stablecoins. China has banned them in Renminbi, even as it pushes ahead rapidly with its CBDC rollout. By contrast in the US, Fed Chair Jerome Powell has given a cautious signal that properly regulated stablecoins may have a role to play in the broader system, just as he has indicated that there needs to be public debate and the passage of a new law before the US issues its own CBDC.

Attitudes to cryptos vary in a similar way. At one extreme, India and Turkey have now moved to more or less ban their use/holding. At the opposite, other countries, notably Switzerland and Singapore, have signalled an openness to the new digital world, under recent laws that have been passed to facilitate it.

Crucially the US, while embarking on a tight enforcement of existing laws where they apply to the crypto world, has signalled the potential enactment of suitable new statutes to facilitate development of the technology. The future legislation on CBDC mooted by Jerome Powell would be one key building block for this. Although it has not been stated explicitly, the clear logic would be to include a structure for regulation of stablecoins within this legislation and, possibly, clarification of the legal framework for cryptocurrencies. Creation of constructive legislation in this area will clearly be facilitated by the depth of knowledge on cryptocurrencies of the new SEC Chair, Gary Gensler.

The Harmonic Triangle is still a work in progress, but the momentum towards it is rising fast, at least in the US.


Central Bank Digital Currencies and their relationship to Stablecoins and the Crypto ecosystem

By Abdallah Mahdi

  • CBDCs are a new form of digital central bank money that can be used by households and businesses to make payments and store value and settlement balances held by commercial banks at central banks.
  • When building their CBDC, central banks can opt for either a private, public blockchain or not even use a blockchain, and naturally conservative central banks would want to conserve control that comes with a private ledger.
  • Stablecoins are a type of cryptocurrency that are designed to maintain a stable market price and are often pegged to fiat currencies
  • Baseline protocol is a form of hybrid chain, that works by anonymising public blockchain transactions by using zero-knowledge proofs, meaning no enterprise data gets stored on-chain.
  • Using stablecoins, a central bank can transact on a public ledger without distributing CBDC onto the public ledger.
  • The Polkadot network could interact with a CBDC ledger in much the same way that the parachains interact with other blockchains, through a bridge.
  • Currently, the Bahamas, China, Sweden, Thailand and Ukraine have launched a pilot/trail CBDC, many more countries are in the research phase, and excitingly Brazil has launched the world’s first CBDC network, Pix.
  • HTLC uses hash locks and time locks to ensure the atomicity of transactions across two DLT platforms.


With the rise of cryptocurrencies and stable coins in the past year, many central banks have engaged in CBDC projects, which include: China’s digital Yuan, Singapore’s UBIN project, Canada’s Project Jasper, and Bahamas’ Sand Dollar and many others. In this digital ecosystem, all these different currencies will have to interact and operate with each other. It is important to remember that central banks would not want to cede control of their currency, whether paper or digital, to a third party outside their control. Therefore, a CBDC ledger would be controlled by the central bank. Furthermore, although controversial, the rise of stablecoins in the past year, most notably USDT, which claims to back all digital tokens with fiat currency, has shown a need for digital fiat currencies on public blockchains. With this in mind, there are many possibilities to achieve interoperability: technologies such as baseline protocol; stablecoins; cryptocurrencies such as Ethereum and Polkadot; and CBDC projects designed to interact with other ledgers. This paper will try to answer how CBDCs will operate with each other and other cryptocurrencies.

What are CBDCs?

CBDCs are a new form of digital central bank money that can be used by households and businesses to make payments and store value and settlement balances held by commercial banks at central banks. CBDCs are denominated in the national unit of account and are a direct liability of the central bank. There are various ways for central banks to design their CBDC, including: limiting access (by type of user or what can be held), ranging degrees of anonymity,imposing caps on holdings, and accruing or charging interest. The two main CBDC variants are wholesale CBDC, where access is limited to a group of commercial banks and clearing institutions, and general-purpose/retail CBDC, which would widen access to central bank money across the economy.

Although the term CBDC includes the words ‘digital currency’, CBDC would be something fundamentally different to cryptocurrencies such as Bitcoin. Many cryptocurrencies are privately issued and not backed by any central party. They are not considered a currency because they do not perform the essential functions of money: they are too volatile to be a reliable store of value, they are not widely accepted as a means of exchange, and they are not used as a unit of account. Stablecoins aim to overcome these shortcomings and provide stability of value via some form of backing. In contrast, a CBDC would be a new form of digital currency issued by the central bank and would therefore perform all the essential functions of money. CBDCs can increase financial inclusion in countries where many residents are unbanked or do not have ready access to banks. CBDCs can also speed up the introduction of technologies, such as smart contracts and DLT.

Adversely, unrestricted CBDCs can hollow out the banking system. As CBDCs open up payments to non-banks, commercial banks would see their payment-related income streams eroded by increased competition. Further, a larger central bank balance sheet could lead to a large-scale withdrawal of funds from commercial banks. Commercial banks could try to prevent a loss of deposits by raising interest rates or seek funding. This could lead some banks to raise spreads and increase transaction fees in order to maintain profitability. Depending on existing market structures, banks might have to shrink their balance sheets. In the long term this may indeed be the way of the future; however, in the short term this disintermediation will have to be carefully controlled to avoid a credit crunch.

The Blockchain

When building their CBDC, central banks can opt for either a private, public blockchain or not even use a blockchain. In public blockchains all historic transactions can be found on block explorer, by anyone, anywhere. Further all users have the ability to trade, interact, and participate on the blockchain without any permissions needed, this is why they are also called permissionless blockchains. As a result, they are transparent, decentralized, and immutable—they are a very secure way to log transactions, but not very private. Further, public chains, like Ethereum, have a host of decentralized applications. These applications can be used for different types of complex transactions and smart contracts. Public blockchains can be considered the most secure chain because the network is maintained by millions of users globally in exchange for rewards or ‘gas.’ In order to ‘hack’ the network, you would need to control 51% of the entire network. As a result, it is basically impossible to input a false transaction on a public blockchain. Most cryptocurrencies are built on public blockchains. Although naturally conservative central banks would want to conserve control that comes with a private ledger.

On the other hand, private blockchains allow for a higher level of privacy by using Zero-knowledge proofs and permissioned access granted through certificates to various data points, which can be monitored. Further, a private blockchain allows central banks to ensure that they are the only party capable of issuing or recording transactions on the ledger, meaning all transactions using CBDC would naturally be verified by the central bank. Private chains are secure for a central bank that has hundreds of employees who can maintain the network. However, private chains are costly and difficult to set up and maintain; they have to be built from the ground up, and importantly, they do not come with any public chain applications, meaning all applications would have to be set up by the central bank. Further, transactions can only be verified by permissioned parties, meaning central banks can give certain levels of access to their network to other commercial banks, thus allowing them to customise a range of services.

Private permissioned chains are an incremental improvement over currently available structures because they may lead to faster settlement times and better security, while maintaining many of the same characteristics of our current system. However, public chains can bring a paradigm shift in the way we conduct business. In the past year we have seen tremendous growth in public chains including Bitcoin and Ethereum; and if enough value is generated by users, private ledgers will be forced to connect with these public ledgers. As witnessed in many CBDC projects, central banks ledgers are likely to be on private permissioned blockchains.


Stablecoins are a type of cryptocurrency that are designed to maintain a stable market price and are often pegged to fiat currencies. Unlike other cryptos, stablecoins are designed to be resistant to market volatility. Therefore, stablecoins are very useful in the operation of CBDC because they are tethered to the value of a fiat currency and operate on a public blockchain. The idea behind stablecoins is to provide some of the advantages of fiat currency and cryptocurrencies. Currently, they are predominantly used as a hedge against the volatility of cryptocurrencies, but they can also be used as a stable currency that provides greater transparency and decentralisation. Further, they have faster transaction times and lower fees than fiat currencies, making them useful for everyday payments and international transfers. Both USDT and USDC claim to be backed 1:1 with USD. However, in the case of Tether, a court ruled not all tokens were backed by dollars, ultimately undermining people’s confidence in USDT. Therefore, in order for stablecoins to be widely accepted, there needs to be increased oversight and strong regulation.

Moreover, Central banks are anxious about stablecoins. There are dramatically different approaches; China and Thailand even went so far as to ban any local currency stablecoins. However, not all central banks share this attitude. The US Fed have acknowledged the risks of CBDCs, especially concerning the need for regulation; however, they have not made any comments against stablecoins. Excitingly, the past month has seen the Fed, under the guidance of Jerome Powell, effectively endorse stablecoins. Powell acknowledged the need for greater and more robust regulation of stablecoins, but he also opened the possibility of a stablecoin ‘bridge’ between a CBDC ledger and public blockchains. However, despite this positive development for stablecoins, there remains mixed attitudes towards them for the following reasons: people get muddled between stablecoins and local currency (USDT vs USD), they do not always maintain a 1-1 parity, and most importantly they could completely crash. This last point is the biggest worry for central banks. If a stablecoin crashed, the private sector would not be able to turn to the Fed for assistance because it is not central bank money. This could potentially result in a loss of credibility in fiat currency from a stablecoin. Regular bank deposits are also not central bank money; however, they are covered by a bank deposit guarantee. A potential workaround could be a deposit guarantee for stablecoins; however, this is not as clear cut; what event triggers the guarantee? Stablecoins are certainly an exciting addition to the crypto landscape; however, is the current hype merely a result of people using stablecoins as a means to trade other cryptocurrencies?

How can ledgers interact?

There are many technologies proposing various approaches for interoperability. This paper will look specifically at using Baseline protocol, stablecoins, and Polkadot to enable CBDC ledger interaction.

Baseline protocol is a form of hybrid chain, that works by anonymising public blockchain transactions by using zero-knowledge proofs, meaning no enterprise data gets stored on-chain. This protocol offers central banks a more private and secure alternative to public chain transactions, while still maintaining the natural benefits of a public chain. Baseline protocol runs on the public Ethereum chain. Although baseline protocol does bring public chain technology more in line with the current regulatory requirements around data residency and privacy protection, it does not yet meet current standards. In addition, current performance requirements are higher than any public ledger is currently capable of supporting. However, this does not mean that baseline protocol is not useful. Central banks could use a variety of public and private chain options in order to meet the regulatory and performance requirements and provide increased interoperability. Central banks could use a private ledger that interacts with a permissioned node on a public chain: the ledger would be completely private but would interact with a public chain through a permissioned system, i.e an application that has permission to interact with the private ledger. This hybrid system would allow central banks the autonomy of their own private chain, while allowing them access to the public chain ecosystem. This system could work through stablecoins.

Using stablecoins, a central bank can transact on a public ledger without distributing CBDC onto the public ledger. This works by creating a ‘bridge’ between the private bank ledger and the public ledger whereby banks can interact with a smart contract on the public chain for minting and redemption of stablecoin versus CBDC on the central bank ledger and adjust their balances on the two ledgers as per their needs. In this way, the banks would retain complete control and independence of their private ledger, while being to transact on a public ledger using essentially a like-for-like currency. This relationship would operate by burning stablecoin on the public ledger in order to redeem the same amount on the private ledger and vice versa. It is important to note that this bridge is a single point of failure; the security of the bridge would be less robust than a blockchain ledger. However, the security of these bridges would be akin to security of bank balances currently, so it is possible to mitigate those issues.

Polkadot and Ethereum have created digital ecosystems that prioritise interoperability in the hopes that these blockchains will be able to communicate with one another. Polkadot, specifically, is a cryptocurrency that uses ‘parachains,’ which are sovereign blockchains that can have their own tokens, that connect to the central relay chain, and can also connect and communicate with other blockchains like Bitcoin using bridges. Parachain technology is unique to Polkadot, therefore making it a potentially vital tool in the quest for interoperability. Parachains will have specialised characteristics for their use cases and the ability to control their own governance. Interactions on parachains are processed in parallel, ensuring a scalable system. Therefore, transactions can be spread out across the chains, allowing many more transactions to be processed at one time. The Polkadot network could interact with a CBDC ledger in much the same way that the parachains interact with other blockchains, through a bridge. This would allow the central banks access to the whole array of applications offered on the Polkadot network, while also maintaining an independent and wholly private ledger. A central bank could launch a parachain that connects to their CBDC network through a bridge. This parachain would share in the security of the Polkadot system, and be connected to the larger Polkadot ecosystem, giving the CBDC access to more applications. Further, the parachain does not even have to be a blockchain, allowing the central bank to design the interaction between their CBDC and their parachain to their specifications. Adversely, the central bank would not have complete control over the parachain, with certain operations left to the validator and collator of the Polkadot network. The Polkadot system in many ways mirrors what many CBDC projects are trying to achieve on their own; the value of a CBDC does not solely rest in the token, but rather the network is the most important part. Therefore, the network must not only be robust and secure, but also have utility.

Real world CBDCs

Over the last year, central banks all of the world, and indeed most large central banks, have completed CBDC projects with the goal of potentially building a CBDC network designed for their specific needs. For example, the Bahamas’ CBDC project, Project Sand Dollar, is in the pilot phase and is primarily designed to increase financial inclusion and strengthen security against money laundering. Another example, Switzerland’s CBDC project, Project Helvetia is mainly concerned with designing a CBDC network that can handle multicurrency transactions and is interoperable with other cryptocurrencies and CBDC networks. Currently, the Bahamas, China, Sweden, Thailand and Ukraine have launched a pilot/trail CBDC, many more countries are in the research phase, and excitingly Brazil has launched the world’s first CBDC network, Pix.

Singapore is a good example of a country that has done more than preliminary research into a CBDC. Singapore’s goal with Project Ubin is primarily to create a common payment platform for both domestic payments and cross border payments. This hypothetical international network would consist of central banks and banks from different countries transacting in multiple different currencies on a common platform. The Ubin network provides connectivity to currency issuers for the issuance or distribution of digital currency on the network.  This function can be performed by trusted parties such as central banks and commercial banks. The architecture of the network would be flexible where services and roles would be unbundled and modularised. This would be achieved by segregating control and imposing limits on control. For example, for a specific digital currency only the appointed issuer has the ability to issue digital currency, and no single party is able to exert control over an area outside of their designated scope.  Blockchain technology would allow the network to operate in a decentralised manner while providing sufficient trust between participants to transact on the platform. The intention is to enable interoperable wallets that can connect to Ubin, as well as other platforms. For example, a multinational corporation will likely connect to Ubin for payments specifically in Singapore, separate payments networks for payments in other countries, and other blockchain applications for different use cases. The use cases are blockchain applications that could benefit from integrating with the Ubin network.

In the Jasper-Ubin project, a joint project undertaken by the Central Banks of Canada and Singapore, the central banks proved the benefits of their networks for cross-border payments. Project Jasper and Project Ubin were launched respectively by the Bank of Canada and the Monetary Authority of Singapore with the goal of exploring the use of DLT for clearing and settlement of payments and securities. Although these prototype networks were built on different blockchain platforms (Corda in Canada and Quorum in Singapore), they were able to interoperate, allowing for cross-border payments to be settled on CBDC ledgers. This collaboration successfully demonstrated a cross-border, cross-currency, cross-platform atomic transaction without the need for a third party. The joint project identified three possible options for cross-border transactions: the first option involved using intermediaries, and the second and third involved granting transacting parties access to the central bank’s liabilities. Access to the central bank’s liabilities can be achieved through two different designs. The first design achieves direct access by granting transacting parties direct access to accounts or wallets on the network, i.e., allowing a financial institution to hold foreign currency issued by the central bank even if it is not a financial institution in that particular jurisdiction. The second design allows local currency to flow into foreign currency networks where it can be transacted directly. This can also be viewed as a multi-currency settlement system. Through all these approaches, HTLC protocol was used.

HTLC was originally designed for public blockchain networks, where there is no trusted central authority and transacting parties are possibly adversarial. Therefore, it works well in facilitating atomic transactions between DLT networks while minimizing risk to transacting parties. HTLC uses hash locks and time locks to ensure the atomicity of transactions across two DLT platforms. Importantly, because of HTLC no action would proceed if any action failed, ensuring end-to-end consistency of the transaction. The receiver of the payment must acknowledge receiving the payment prior to a timeout deadline by generating a cryptographic proof of payment, or hash lock. Otherwise, the receiver forfeits the ability to claim the payment, which results in the payment being returned to the payer. HTLC has no need for a trusted third-party. Rather, the intermediate escrow account is operated autonomously as a smart contract with predefined rules. A DLT platform must support locking, secret disclosure and timeout to successfully build HTLC functionality. However, there are no standards to govern how HTLC is implemented on each of the platforms; therefore, HTLC implementation may differ from one platform to another.


CBDCs are an exciting new payment method, which can potentially improve cross-border transactions, provide better digital security, prevent money laundering, increase financial inclusion, reduce transfer fees, speed up transactions, access to new technologies, and so much more. It is no surprise that nearly all central banks are looking into building a CBDC payments network; a CBDC network might increase the confidence in a currency. Nevertheless, all CBDC projects will have to be designed with their specific needs in mind. Further, a CBDC payment network that is designed to be interoperable with other cryptocurrencies, stablecoins, and other CBDC networks will be well placed to take advantage of the latest technologies. On the other hand, CBDCs can have unintended consequences on the banking sector, potentially driving bank deposits into central banks. In order to avoid CBDCs from working within the dodgy world of commercial banks, stablecoins potentially provide a way of working together, while still maintaining the total integrity of the CBDC. As described above, stablecoins can bridge the central bank ledger with the larger financial world, therefore there would be no interaction of CBDC with commercial banks, rather, the only link is that the central banks provide some sort of deposit guarantee for the stablecoins. How central banks approach this dilemma will be very important for the future of CBDCs.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: