Central Bank Digital Currencies Can Settle on Centralized Ledgers Without Compromising Privacy, Says BIS
A collaboration between the Bank for International Settlements (BIS) and the central banks of Hong Kong and Israel has successfully demonstrated that central bank digital currencies (CBDCs) can settle on centralized ledgers while maintaining privacy. The joint experiment, known as Project Sela, has shown that a retail CBDC that combines accessibility, competition, and security is feasible without compromising the advantages of physical cash.
The experiment focused on reducing risks associated with liquidity and settlement while minimizing operating costs. To keep costs low, the BIS introduced a solution called “Access Enabler,” which allows merchants to participate in the network and facilitate settlement without holding users’ CBDC. Other considerations included lowering barriers for service providers to accept and use the CBDC and distributing certain activities related to CBDC accounts between public and private sector entities.
Preserving the Desirable Attributes of Cash
The BIS emphasized that a retail CBDC should preserve the “desirable attributes of cash” by being widely accessible, providing instant settlement, offering low-cost usability, and ensuring an appropriate level of privacy. The privacy aspect was maintained in Project Sela by obscuring personal identifiers associated with the CBDC.
Howard Lee, Deputy Chief Executive of the Hong Kong Monetary Authority (HKMA), commented on the project, stating that it provided valuable insights into implementing a retail CBDC in Hong Kong and elsewhere. While no decision has been made regarding introducing a retail CBDC in Hong Kong, Lee stated that Project Sela’s outcomes would inform their ongoing exploration of a possible e-Hong Kong dollar. He also expressed hope that other central banks would benefit from Project Sela in their evaluations of different retail CBDC architectures.
Hot Take: CBDCs Can Maintain Privacy on Centralized Ledgers
A joint experiment between the BIS, the central banks of Hong Kong and Israel, known as Project Sela, has demonstrated that central bank digital currencies (CBDCs) can settle on centralized ledgers without compromising privacy. The experiment focused on reducing liquidity and settlement risks while minimizing operating costs. Key considerations included accessibility for service providers, low-cost usability, and preserving an appropriate level of privacy similar to physical cash. The BIS introduced a solution called “Access Enabler” that allows merchants to participate in the network and facilitate settlement without holding users’ CBDC. This project provides valuable insights for implementing retail CBDCs worldwide.
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