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Blockchain is the wrong technology choice for delivering Central Bank Digital Currency (CBDC)

Thomas Kudrycki, Chief Technology Officer, eCurrency

Cryptographically chained blocks of data have entered the global vocabulary and mindshare through being used as a part of the Bitcoin implementation. Bitcoin gave the technique its fame and mystique fanned by a self-reinforcing cycle of significant investments and attention from the press. At the same time, central banks increasingly see the need for the digital versions of their sovereign legal tender. Some central banks also see Bitcoin as the central banks’ competitor andbecause of the digital currency’s association with Bitcoin, many central banks have assumed that Central Bank Digital Currency (CBDC) must be based on a similar set of technologies. This assumption is wrong, and the opposite is actually true.

To demonstrate this, we will first clearly distinguish between private or community cryptocurrencies such as Bitcoin and the centrally controlled fiat money that is CBDC.

Bitcoin is a tradeable commodity adopted by a group of people and businesses as a means of payment in some scenarios. It is digitally mined, i.e. extracted from a limited supply, through labor which in the digital world manifests itself as expensive computations requiring much time and energy. Bitcoin, by the desire of the initial creator, does away with a single controlling authority, which would establish Bitcoin’s value or authenticity. It removes the need for such authority by design. It also requires a community of consenting entities to adopt Bitcoin as a store of value and a means of payment, and provide a set of distributed controls to establish Bitcoin’s authenticity and value. All these characteristics make Bitcoin similar to the early commodity money, such as gold nuggets, before the central authority started stamping its seal on them and converted the nuggets into gold coins.

Even with this similarity, Bitcoin is different from commodity money in a significant way. Bitcoin’s value is represented by the transaction history. It is not something you can carry in your wallet, albeit a digital one, but rather a ledger.

The sum of the ledger’s entries is what gives a Bitcoin its nominal value. As a result, Bitcoins cannot be fundamentally anonymous, and to transact with bitcoins one needs to have real-time access to the network of the Bitcoin nodes.

CBDC: In sharp contrast to Bitcoin, the currency is a centrally controlled unit of account, store of value, and means of payment. It is an anonymous bearer instrument. Its value is not established by the speed of mining or the desire to hoard it, at least not under normative economic conditions. The value of currency within a sovereign country or a monetary union is established primarily by the level of trust in that country and the strength of the underlying economy. It is established in effect by an edict, a word, a fiat of a central authority within a country or a monetary union. CBDC must replicate these characteristics if it truly is to be a central bank currency.

The technologies used to implement such two fundamentally different concepts as Bitcoin and CBDC should be reasonably expected to be different as well. Let’s take the differences one at a time.

A bearer payment instrument versus a history of transactions. The values held in our bank accounts are represented by statements adding the history of the transactions and deriving the end of day balance. It is not so with the central bank currency. The banknotes created by the central bank have a unique existence as themselves, and their value is derived from the number printed on some secure substrate. The value does not depend on the number or the type of transactions the banknote participated in. This allows banknotes to be presented anonymously as a bearer instrument. A digital version of the banknotes needs to be able to replicate this characteristic. The value of the instrument must be separated from its transaction history, which ledger-based approaches do not do. By the very nature of Distributed Ledger Technology (DLT) the value is expressed as a set of transactions, i.e. a ledger documenting the value held by the individual entities (footnote 1).

On-line versus off-line. The desired bearer instrument nature of CBDC enables it to also transact without the transacting parties being always connected to the transactional network. Bearer instruments can change hands between two devices connected only through a short distance, peer-to-peer communication. The digital payment instrument simply moves from the buyer’s device to the seller’s device without going through any intermediaries. The ability to directly transact peer-to-peer is an essential characteristic of cash. It cannot be replicated in a system where, by design, the value is derived by recording the transactions in either a centralized or a distributed ledger.

Anonymity. Anonymity is closely related to the bearer instrument nature of the currency. A standalone object can be used anonymously, at least in principle and barring additional laws and barriers. Entries on a ledger cannot be anonymous in a very fundamental way. Obfuscation techniques and permission schemes can be used to limit the openness of the ledger, the same way that bank account records are protected. However, Bitcoin has been designed to be a record available for the community to create and verify and that fundamental design persists in all subsequent evolutionary steps of the technique.

Consensus. Bitcoin transactions require an elaborate and computationally expensive consensus to verify the validity of the transactions. When using banknotes, the transacting parties do not require a consensus above the consensus not to rob one another. When one pays cash for goods or services, the only consensus necessary is that the two transacting parties deliver the value and the payment. It is straightforward and does not have to be complicated by complex algorithms. A significant portion of the Bitcoin approach and the underlying technical implementation is, therefore, fundamentally useless in the context of CBDC. Evolution of the blockchain technology lead some to replace the consensus mechanism with a concept of a notary validating the transactions, but neither consensus nor a notary is needed in a peer-to-peer exchange of value represented by banknotes.

Liability of the central bank versus liability of a commercial entity or a group of individuals. An edict of the central authority has created the value represented by banknotes. This power to create banknotes bears a responsibility. The value of the banknotes is guaranteed by the sovereign power issuing them and is a liability of that sovereign power. Unlike a bank account value, which is a liability on the commercial bank’s books and is additionally insured by a semi-private insurance scheme, the value printed on the $20 bill is instilled by the trust in the United States economic and political system and guaranteed by the United States government. The liability is centralized, and so the responsibility for the security and the value needs to be centralized also not left to distributed network of independent nodes. The distributed nature of the possible technological approach is necessary only as a reliability measure but is not necessary as a fundamental characteristic of the solution.

Instant and final settlement versus probabilistic convergence. Exchanging the payment instrument issued by the creator of the base money, the M0, results in a final and instant settlement. Once banknotes are exchanged, there are no next steps, no transfers of money between bank accounts, no counterparty risk, and no need to involve the centralized infrastructure of the Real Time Gross Settlement systems (RTGS). CBDC must be able to replicate the ability to settle instantly and with finality. However, according to studies by some central banks (footnote 2), a blockchain-based approach did not deliver the necessary instant settlement. The fundamental nature of the approach only achieves settlement with increasing probability, never reaching an absolute 100%.

Replacement versus improvement. The blockchain approach is novel and requires replacing parts of the existing payments infrastructure. It is effectively a new type of a ledger which replaces the existing ledgers. In contrast, a digital bearer instrument requires only that the existing digital wallets be able to store and exchange the additional payload of CBDC units. As a result, in contrast to a ledger-based approach, the object, or token-based CBDC can flow through the existing payment systems, which are augmented in a relatively straightforward manner: the payment messages are modified to include an additional attribute holding the CBDC value. This modification is consistent with the overall evolution of the existing payment systems to which additional payment channels and payment message attributes are added frequently. CBDC truly reproducing the behavior of the physical currency must have central control of its security combined with fully de-centralized transactional capabilities using as much as possible the existing payment channels and the existing infrastructure.

Double-spending issue. In the Bitcoin network it is possible to spend the same coin multiple times. This issue is related to the majority attack (footnote 3) and is specific to DLT. In a well-designed, token-based CBDC the issue does not exist. The CBDC unit once spent becomes invalid and cannot be used again.

Performance and efficiency. Blockchain-based approaches continue suffering from severe performance limitations and large energy consumption. Well-established cryptographic techniques used to support the standalone, token-based CBDC do not require extraordinary computing power and therefore are energy-efficient, greener, cheaper and much more scalable.

In conclusion Blockchain technology continues making progress in addressing some of the above concerns, and some argue that it will become suitable for CBDC implementation at some point. However, we suggest that there is no need to start with something not suitable for the purpose and evolve it to be less and less of its original self. Performance can be improved by moving parts of the functionality off-chain, but based on the above analysis there is no need for a chain in the first place. Consensus can be replaced by a notary but neither is needed in a peer-to-peer exchange of value represented by banknotes.

People’s Bank of China (PBOC) is currently ahead of all other central banks in their understanding of the nature of CBDC and their progress towards implementing it in China. One of the principals of this effort, Liu Xiaochun, said the following in the December 2019 PBOC announcement:

“...most institutions, including regulators, study digital currencies based on blockchain technology, and the People’s Bank of China has broken through that thinking. If it is based on blockchain technology, then the use of digital currency can only be limited to blockchain, [and the use case] scenarios are greatly limited. The digital currency designed by the People’s Bank of China can be used on-line or off-line, even without a network, let alone blockchain. Therefore, we can imagine the space that uses the [PBOC digital currency] is very large.” (footnote 4)

We believe other central banks ought to move towards this thinking as well and realize together with PBOC that there exist much better and less risky ways of building a widely used, retail- level CBDC. eCurrency has built and deployed a complete CBDC system possessing all the characteristics required by the central banks without any of the issues exhibited by the blockchain technology.


  1. Recently the central banks and the IMF started referring to CBDC represented by a standalone instrument as a “token-based CBDC”.

  2. See for example the results of Bank of Canada research project Jasper content/uploads/2017/05/fsr-june-2017-chapman.pdf page 7.

  3. See

  4. See 刘晓春表示,大多数机构包括监管机构,研究数字货币都是基于区块链技术 and following lines.


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