A project focused on cyber-resiliency, scalability and privacy of central bank digital currency (CBDC) has been launched by the Bank for International Settlements (BIS) Innovation Hub.
Project Tourbillon, which is being run by the Innovation Hub’s Swiss centre, is exploring how to ‘improve’ the trio of crucial components in a prototype CBDC that developers are looking to finish by mid-2023.
Designing a CBDC involves trade-offs between cyber-resiliency, scalability and privacy that are ‘complex’, BIS acknowledges in a project webpage. It explains, for example, that higher resiliency against cyber-attacks, ‘especially’ from quantum computers, requires additional cryptography, which can slow down payment processing. Privacy, meanwhile, needs to be balanced against ‘the need to counter money laundering, terrorism financing and other illicit payments’.
Project Tourbillon has the ambition of ‘reconciling’ these trade-offs by ‘combining proven technologies such as blind signatures and mix networks with the latest research on cryptography and CBDC design’ specifically suggested by US cryptography pioneer David Chaum and Swiss National Bank governing board alternate member Thomas Moser in a co-authored 11-page paper titled ‘eCash 2.0: Inalienably private and quantum-resistant to counterfeiting’.
The project’s conclusions will be relevant for both wholesale and retail CBDC systems (the former are CBDCs for inter-bank/corporate transactions, the latter are CBDCs for general population use), BIS states.
‘Pushing technological frontier’
In terms of cyber-resiliency, Project Tourbillon will be experimenting with quantum-resistant encryption tools that won a six-year competition organised by the US Department of Commerce’s National Institute of Standards and Technology (NIST) (the winners were announced in July). BIS calls this the ‘strongest-known type’.
For scalability, Tourbillon is using an architecture that is ‘compatible with but not based on’ distributed-ledger technology (DLT). ‘By making each transaction separate, the system resources scale linearly,’ the BIS website notes, adding that the project ‘seeks to verify the linear scalability of the design with realistic parameters’.
In respect of the issue of the privacy of transactions, Tourbillon ‘resolves this by providing privacy for the payment sender but not for the recipient’, with regulatory and compliance checks ‘continuing to apply’.
“I am thrilled to see these important advances in technology being tested out so that there is no doubt that privacy, including the more advanced type introduced here, can co-exist with the strongest type of quantum resistance and truly practical performance. This provides a better level of privacy than cash, with additional guarantees that the privacy cannot be taken from the end user,” said Chaum, who founded the blockchain-based XX Network.
BIS Innovation Hub Swiss centre head Morten Bech said that Project Tourbillon – a name that owes to a mechanism used in wrist-watches, as well as hinting at the mix network technology to be used – would “push central banks’ technological frontier”.
Cross-border CBDC collaboration
The BIS Innovation Hub was established in 2019 to encourage central banks to work more closely on fintech-related topics. CBDCs, as well as cyber-security in a broader context, have been among its thematic priorities in both its 2022 and 2021 work-plans.
It was announced earlier this month that the Innovation Hub’s Swiss, Eurosystem and Singapore centres would be working on a project – ‘Project Mariana’ – to explore the exchange and settlement of Swiss franc, Euro and Singapore dollar wholesale CBDCs with an automated market maker (AMM) arrangement. AMM enables the exchange and settlement of two or more digital assets to be performed automatically with a smart contract.
Separately, the Innovation Hub’s Hong Kong centre has published a report alongside the Hong Kong Monetary Authority, Bank of Thailand, Digital Currency Institute of the People’s Bank of China and the Central Bank of the United Arab Emirates (UAE) on the topic of cross-border CBDCs. The 50-page ‘Connecting Economies Through CBDC’ publication details how BIS and the four central banks completed a successful pilot of real-value transactions on cross-border CBDC platform ‘mBridge’. Specifically, 20 commercial banks used the platform to conduct 164 payment and foreign exchange transactions totalling over $22 million (about £18.6m) between 15 August and 23 September 2022.
The trial has advanced multi-CBDC experimentation ‘by settling real value directly on the platform’, BIS states, adding that the mBridge project team will continue building the technology and testing it ‘with a view to producing a product with enough features to be used by early adopters in the year ahead and a production-ready system thereafter’.
New York-Singapore link-up
In a further cross-border CBDC development, the Federal Reserve Bank of New York’s Innovation Centre (NYIC) – the partnership between the New York Fed and the BIS Innovation Hub network that launched last year – and Monetary Authority of Singapore (MAS) have announced a joint experiment to investigate how wholesale CBDCs could improve the efficiency of cross-border (wholesale) payments involving multiple currencies.
‘Project Cedar Phase II x Ubin+’ will ‘enhance designs’ for atomic settlement of cross-border cross-currency transactions, according to a jointly-issued press release, which explains that the collaboration is looking to ‘provide further visibility into the functionality and interoperability of multi-currency ledger networks utilising their own unique designs’. A report detailing the experiment and findings will be released in 2023.
Project Cedar, which is the NYIC’s inaugural project, is a multi-phase programme to develop a technical framework for a theoretical wholesale CBDC in the Federal Reserve context.
In its first phase, a prototype for a wholesale CBDC was developed to demonstrate blockchain’s potential to improve the speed, cost and access of one of the most common wholesale cross-border payments: a foreign exchange (FX) spot transaction. The prototype included design choices such as a permissioned blockchain network, an Unspent Transaction Output (UTXO) data model and Rust as primary programming language. A newly released 12-page ‘Project Cedar – Phase One Report’ provides details.
The multi-pronged ‘Ubin+’ project was unveiled by MAS during the recent Singapore FinTech Festival.
Global Government Fintech’s dedicated ‘Digital Currencies’ section