- The Deutsche Bundesbank has concluded an experiment designed to run a blockchain system without issuing a central bank digital currency (CBDC).
- The transfer and settlement system is an attempt by the central bank to merge the features of traditional banking with emerging blockchain technology.
- The positive outcome of the test could be an incentive for mass adoption by European countries, according to Burkhard Balz.
- During the experiment, the German Finance Agency issued a 10-year federal bond through the distributed ledger technology (DLT) system.
CBDCs are the hot topic of the moment as central banks around the world are making frantic efforts to incorporate blockchain technology as part of their desire to keep pace with a rapidly changing financial system.
In light of this, the German Federal Bank (Deutsche Bundesbank) has conducted a series of tests on an experimental blockchain system that did not require the issuance of a CBDC or any token whatsoever. Their tests were a resounding success.
This development may have far-reaching implications as it is easier to deploy than CBDCs, and some European central banks may adopt it upon launch.
No CBDC, No Problem
The science behind the Bundesbank’s innovative technique involves using two systems to connect the Federal Bank and the blockchain. Usually, such a connection is made through the issuance of a token or a cryptocurrency.
In this instance, the Deutsche Bundesbank has established a program that sends a signal alerting parties that the transaction has been concluded and exchange can now take place. The experiment was conducted in partnership with the German Finance Agency and the Deutsche Börse Group.
According to Burkhard Balz, a politician and member of the executive board of the Deutsche Bundesbank, Germany is not a huge fan of CBDCs. Balz has argued that CBDCs may lead to a “structural disintermediation of the banking sector” which could “potentially dampen” the ability of banks to issue credit to society.
Another reason why Germany is not so interested in CBDCs is because of its role within the European System of Central Banks; the rise of CBDCs could potentially lead to the weakening of the Deutsche Bundesbank’s influence in Europe.
On the Flipside
- In contrast to Germany, other countries are preparing to create CBDCs. The Central Bank of Jamaica has unveiled plans to begin CBDC development in May.
- Jamaica has been working on a CBDC project since early 2020.
- Meanwhile, the director of the People’s Bank of China’s Digital Currency Research Institute has said that the digital yuan will be private but not anonymous.
What’s The Deal With CBDCs?
CBDCs are gaining traction as central banks around the world are exploring the idea of incorporating blockchain-based digital currencies as the world marches toward digitization.
China’s digital yuan has already concluded successful testing and is gearing up for a possible launch, while other countries are still conceptualizing their plans.
CBDCs are most likely to utilize a distributed ledger technology and could offer lower costs and higher efficiency for central banks relative to traditional currencies. In the US, the Federal Reserve Bank of Boston has already entered a partnership with the Massachusetts Institute of Technology to explore the possibility of a digital dollar.
The development of a blockchain system without the issuance of a central bank digital currency may halt the development of CBDCs in some countries in Europe. According to Balz, successful testing will allow European central banks to “implement a solution in a relatively short time” while CBDCs are still in their early stage of development.
