Blockchain technology and cryptocurrency have gained a lot of attention these days. Today, many blockchain advisors are sharing their knowledge of these technologies. Innovations in cryptocurrencies have created criticism, especially by central banks and financial institutions in general. Today, Central bank activities with distributed ledger technology (DLT) and blockchain technology are not always communicated or well known, which results in a lot of misunderstandings. Several central banks across the globe are actively examining whether blockchain technology can solve long term issues in banking, such as payment security, financial inclusion, and payment-system efficiency. In this article, we will see top blockchain applications that can be used in central banks.
A virtual currency issued by the central bank that is settled and operated in a decentralized way is generally available for consumer use. This sort of CBDC acts as a replacement or supplement for traditional currency and bank deposits. Central banks all around the world are researching on this application, including those from Sweden, Cambodia and the Bahamas.
A digital ledger technology(DLT) can provide safety from threats such as cybercrime, network failure, natural disaster etc. Often, this utility linked with another one to give a set of benefits that can be supplied by DLT implementation. This use case is being researched by Eastern Caribbean Central Bank and Central Bank of Brazil.
It is a focused application of cryptocurrency, including CBDC, which enables quick interbank clearing and securities settlement for fiat currency. The goal of this type of system is to provide a "delivery versus payment" interbank system where two organizations involved in trading an asset can offer both deliveries of assets and payment simultaneously. Central banks involved in this application are Bank of Canada, Bank of Japan, etc.
Digital Ledger Technology can find its application in the auction of bonds, issuance, or any other type of lifecycle process that can increase efficiency and reduce costs. This use case can be applied to bonds issued by sovereign states and government agencies. Government regulators, as well as central banks, could track any activity wherever required. "Bond-i" was the first-ever blockchain-based bond that was launched by the World Bank.
A decentralized database can offer an efficient, faster and more inclusive trade financing. This use case is an improvement in trade finance processes used today, which are time-intensive, labor and paper-based. A decentralized database can distribute transaction histories and consumer information between participants while maintaining confidentiality and privacy wherever required. Hong Kong Monetary Authority is the central bank that is researching on this use case.
A decentralized database can act as an alternative for data sharing and information exchange within the related private sector or government institutions. Central Bank of Brazil is researching this type of blockchain-based application.
In this article, we have seen a list oftop blockchain applications which central banks are researching for. There are several blockchain online courses for beginners that focus on the use of blockchain technology in central banks. Today, these banks all around the world are researching blockchain-based applications to solve their issues. Some examples of these central banks are Central Bank of Brazil, Bank of Japan In future, several central banks may adopt digital ledger technology or blockchain-based application to bring improvement to their processes. Given the importance of the central bank's system and blockchain technology's immaturity, banks and government agencies must carefully analyze all known and unknown risks that can arise through it. Finally, we can expect that blockchain technology will find more applications for government agencies and central banks in the future.