The talk about Central Bank Digital Currencies (CBDCs) and the range of applications they may be used for has been intensifying as blockchain technology usage in the financial services industry keeps growing.

Here, we chat with Daniel Field, UST's Global Head of Blockchain and Director of Innovation, on how CBDCs will be changing in 2024.

From idea validation to values validation

Although there are differences in the developments of CBDCs between nations, Daniel believes that the field is expanding quickly. According to projections made by the Bank of International Settlements, there will be fifteen retail CBDCs by 2030.

He states, "We've already progressed from proof of concepts and piecemeal experimentation on various aspects into proof of values and designing prototypes of entire systems."

Stated differently, several central banks are currently focusing on the actual thing. More political and legislative work is being done concurrently, laying the foundation for next implementations.

Global financial messaging network SWIFT stated in March 2024 that it will integrate rapidly expanding, but otherwise autonomous, CBDCs with a platform that would be launched within the following two years.

Furthermore, the European Central Bank has already issued many sizable bids in 2024—not for CBDCs exactly, but rather for various system components that are essential to CBDC operation.

Daniel goes on: "A total of five bids covering everything from security issues to software development kits (SDKs) and mobile apps were put out to competition.

"The industry is well-positioned to maintain this trajectory for some time, but many remain cautious about the value equation—that is, not about the advantages in theory, but about the specific risk-reward and cost-benefit analysis in real-world scenarios.”

CBDCs: The advantages exceed the drawbacks

Daniel reminds us that risk-reward and cost-benefit calculations are intricate ones, notwithstanding the skepticism expressed by some regarding the value equation.

"Transformation is about more than just acquiring new skills," he claims. "Yes, CBDCs do provide those. For instance, in UST's collaboration with the Bank of England, we demonstrated how smart contracts may facilitate innovations like smart three-party locks, which establish mutually agreed-upon deadlines for payments.

"Yet change includes not just what we can accomplish but also how we accomplish it: effectiveness, promptness, user-friendliness, and more.

"We also demonstrated that making these complex functions available and with a low learning curve through standard APIs allowed users, in this case, both established banks and startups, to deliver the kind of services that today require large and complex technology and legal systems in Project Rosalind, an experiment in API prototypes for CBDCs from the Bank of England and Bank of International Settlements on which UST collaborated."

It is evident that projects like Project Rosalind, which cut expenses and remove obstacles to CBDC transformation, will have the greatest evolutionary influence on the industry and enable individual teams to develop quickly.

Skills needed to deliver a future with CBDC

Daniel argues that it would be incorrect to view CBDC as only a DLT entity. It goes without saying that experts in the inner workings of how transactions are made and recorded on a digital ledger, how smart contracts can carry out prearranged payments or escrows, and how such systems scale, are safe and interoperable are now needed.

UST collaborates with several specialized partners, including Quant-Network, our collaborator on Project Rosalind.

But the implications of CBDC for other areas of the company will also become more apparent.

Naturally, technological systems must be rearchitected to account for the changes. However, this process optimization will go one step further and ask, "Which components of the system become outdated because hazards are eliminated? What effects does a digital ledger have on agreements made in writing? Which and how of the enterprises will be disrupted?

"Systems knowledge becomes more relevant than specific DLT knowledge in these business areas."

For this reason, Daniel thinks that "it may be better to bring CBDC understanding into those other specializations and professions, rather than the other way around," in order to create a strong talent pipeline.

Details about Project Rosalind

Daniel outlines his main learnings from Project Rosalind in the section below, which was published in June 2023.

"UST created an API layer during Project Rosalind that demonstrated how innovation from the private sector might function on a limited scope public sector (central bank) ledger. It demonstrated that CBDC can maintain security and privacy without going beyond the authority of central banks.

It also became evident how people who are not knowledgeable about the underlying systems may convert advanced payment features—like escrowed payments for deliveries—into commercial value by removing obstacles to their execution.

Finally, Project Rosalind made a compelling case for how CBDC may spur innovation in the private sector and alter business practices in ways that go well beyond merely bringing modern payment systems closer to the public at a lower cost and with faster availability.