Central Banks Experimenting with Blockchain: Here Are 10 Examples

Blockchain technology is a buzzword in the tech industry. And while research and development is underway, there are industries that are already using the technology to improve their processes and operations. Among these industries is the financial sector. In this article, we are going to discuss how Central Banks are experimenting with blockchain technology and why they do it.


Here are 10 ways of how Central Banks are using blockchain technology:

1. Retail Central Bank Digital Currency (CBDC) - CBDC or central bank digital currency can also be operated without an intermediary. It is settled in a decentralized manner making CBDC, in this form, easier to use. It also replaces cash (or even complements it) and it can also serve as a substitute to traditional bank deposits. Among the Central Banks that are experimenting with this are those that belong to the Eastern Carribean, Sweden, Cambodia, and the Bahamas.

2. Wholesale CBDC - If there is a retail version of CBDC (as explained a while ago), there is also a wholesale version. Just like the retail, it is also operated in a decentralized, peer-to-peer manner but this is only available to commercial banks, unlike its retail version. It is also exclusively used for clearing houses in the wholesale interbank market. Among the Central Banks using this technology are those that belong to Japan, South Africa, Thailand, Saudi Arabia, Cambodia, Singapore, and Canada. 

3. Interbank securities settlement - Interbank securities settlement are the focused-application of digital currency based in blockchain technology. It includes CBDC and it enables quick clearance for interbank transactions and settlement of securities for cash. The goal of this type of blockchain usage is to develop a “delivery versus payment” system for banks so that two parties can simultaneously exchange (the delivery and payment of) assets. Among the Central Banks that are exploring this option are those that belong to Japan, Singapore, England, and Canada.

4. Payment system resiliency and contingency - The use of Distributed Ledger Technology (DLT) in interbank and payment systems provide a certain level of security from technical and network failure, natural disasters, cybercrime, and other forms of threats. Central Banks using this such as the Central Bank of Brazil and the Eastern Carribean Central Bank are usually coupling this with other technologies to achieve the other benefits of DLT implementation.

5. Bond issuance and lifecycle management - Blockchain technology can also be used in transactions involving bond auction, bond issuance, and other lifecycle processes. These are all made often to reduce costs and increase efficiency. The use of DLT in these types of transactions can be applied to those bonds issued and managed by sovereign states, as well as those bonds used by international organizations and government agencies. Central Banks then serve as observer nodes in these types of transactions. In August 2018, the World Bank launched the first blockchain-based bond called the “bond-i.”

6. Know Your Customer (KYC) and Anti Money Laundering (AML) - These are requirements often used in the Regulatory Technology (RegTech) industry. Digital KYC and AML often use blockchain technology to track and record customer payments and use this customer information to streamline processes to make them quicker. This could potentially be used to interact with CBDC to track financial activities. The Hong Kong Monetary Authority is a famous Central Bank using this technology.

7. Information Exchange and Data Sharing - Alternative systems for information and data sharing can also be created using decentralized databases. This type of technology can be applied in institutions that belong to the government as well as those that belong to private industries. The Central Bank of Brazil is using this type of technology, among others.

8. Trade finance - A decentralized database allows for a faster and more efficient transaction that involves trade finances. This replaces traditional, paper-based trade finance processes that are often labor-intensive and time-consuming. Participants in a decentralized database can share information including customer information and transaction histories. What’s more, this type of technology is more secure thus maintaining privacy and confidentiality whenever needed. The Hong Kong Monetary Authority is one of the banks that use this technology, among others.

9. Cash money supply chain - Distributed Ledger Technology can also be used to issue, track, and manage cash delivery and movement from production facilities to the Central Bank and to the branches of commercial banks. This can also be used in regulatory reporting. Among the Central Banks that are using this is the Eastern Carribean Central Bank.

10. Customer SEPA Creditor Identifier (SCI) provisioning - This is a blockchain-based decentralized sharing repository for SEPA, or also known as Single Euro Payment Area credit identifiers, among others.

Over the next years, with enough time to improve this technology, more and more central banks are expected to use this technology to adapt to changing market conditions and security demands. Banks should also consider the risks of the adoption of this emerging technology.

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