Canadian central bank identifies CBDC retail patterns in concept analysis

By: Henry Felix

October 7, 2022 12:27 AM

A Bank of Canada analyst has published a paper that examines the impact of common errors in CBDC models on various measures of performance.

A new analytical note from Bank of Canada staff members highlights five trends seen in retail central bank digital currency (CBDC) designs. The study compared software programs rather than actual or hypothetical CBDCs, and it looked at how the results could be used in retail payment systems.

Sriram Darbha used the term "archetypes" to describe the patterns he noticed. Differences emerged in the methods used to track and update the CBDC's "state," or data on available supplies and who owns what. Darbha claims that these traits have consequences for both monetary policy and physical infrastructure. What did he say?

"After researching different CBDC system architectures, we came to the conclusion that classifying them into a small number of archetypes that are neutral with respect to things like vendor, platform, and technology would be helpful."

The names of some of the archetypes were fairly self-explanatory; for example, the centralized and leaderless archetypes are indicative of fundamental concepts in the blockchain. Portioned entities, which are updated independently of the other archetypes, are essential to the functioning of the macro-partitioned, micro-partitioned, and direct ones.

Eight criteria are used to rank the archetypes, with centralized at the top and direct at the bottom. Most difficult to evaluate was privacy, where only the direct archetype performed well.

According to Darbha, the archetypes help central banks "focus their efforts on classes of systems that fit those archetypes" in order to articulate their policy goals. The rankings suggested avenues for additional study, and the paper's findings had theoretical implications for "the representation of money and the structure of state."

Darbha has contributed to this series of notes on CBDCs twice before. As part of a joint effort to create a digital Canadian dollar, the Bank of Canada has teamed up with the Digital Currency Initiative at the MIT Media Labs. On September 29th, the European Central Bank released a progress report on the digital euro investigation phase.