Ripple recently announced its partnership with the Royal Monetary Authority of Bhutan to pilot that nation’s first central bank digital currency (CBDC) using the technology underlying the XRP Ledger. The technical requirements for this project, as for all CBDCs, are demanding — we’re pushing the limits of conventional blockchain technologies, and inventing new technologies along the way. Though we can’t talk about many details of Ripple’s CBDC solution, some general reflections around CBDC development can help illuminate the full potential of this area.
Some key considerations for CBDC Ledgers include:
- Financial inclusion
- Speed, throughput, transaction cost, sustainability
- Interoperability & liquidity (e.g., via sidechains)
- Smart contracts and programmability
- Robust security (key management, threat models, and more)
CBDCs help close existing gaps in commercial financial systems in a variety of ways, but perhaps the most important benefit is their ability to provide convenient, affordable access to basic financial services — such as payments — to every citizen, regardless of their ability to access the banking system. Bhutan has excellent existing financial infrastructure, and the vast majority of its citizens have access to it, but having a digital currency that can support universal access for every citizen is still an important goal.
Performance is also critical for CBDCs. Because Ripple’s CBDC solution leverages the same software as the public, decentralized XRP Ledger, we’ll be able to deliver incredible features like low transaction commit times, high throughput, and ultra-low fees — all the while doing it in a sustainable manner using one of the most energy efficient consensus mechanisms in the world.
Capable of sustaining thousands of transactions per-second, our CBDC Ledger is orders of magnitude more performant than many industry leading blockchains, and also much more performant than most legacy payments systems. While this type of performance will undoubtedly suffice for most central banking scenarios, we will continue to expand the capabilities of our solution to accommodate even the largest of nationalities. For example, any system powering a retail CBDC in the United States would likely need to sustain upwards of 100,000 transactions per second during peak times — all while maintaining high security, resilience and correctness of operation.
In addition to performance, interoperability of CBDCs with other token types, including other CBDCs, will be a key attribute of any successful future financial system. This is because increased mobility of assets will lead to increased and more efficient token liquidity, streamlining both domestic and cross-border payments by shrinking FX and other operational costs. To facilitate this vision, developers could build CBDC sidechains to allow value to move between chains that provide differing operational characteristics. For example, a developer may want to use sidechain X because it’s very fast and cheap. Later, that same developer may wish to use sidechain Y, possibly because that chain is more innovative and provides more features (but maybe is a bit more expensive from a fee perspective). No matter what the use-case, we envision a future where central banks have a menu of interoperability choices when providing programmable money to their citizens while at the same time maintaining full control of the system to meet their own policy objectives.
Another appealing component of systems running on Ripple’s CBDC solution is our proposed vision for smart-contract technology. Ledger programmability could make the execution of fiscal and monetary policy both extensible and even automated because developers will have the opportunity to build custom functionality into their ledgers. For example, streamlined tax systems, instant stimulus check deposits, improved and streamlined insurance claim processes — the possibilities are endless.
Of course, despite all of the amazing capabilities these technologies can enable, one crucial element to underscore is the elevated security risk that accompanies any CBDC Ledger. The system must be able to handle potential nation-state attack vectors that could compromise the health of an entire economy, and even a nation’s political equilibrium. To mitigate these threats, we have a variety of tools in our toolkit, such as: robust cryptography, multi-signed transaction submission, state of the art key-management and recovery systems, robust auditing, and a variety of other security and transaction approval mechanisms to help ensure that any CBDC Ledger system is safe for operators, developers, and end-users alike.
To allow for further exploration, Ripple has created a CBDC Ledger sandbox, which provides an ideal test environment to explore new ideas and solutions to these and other challenges involved in CBDC deployment. The extreme requirements that come with CBDCs are proving again how solid the underlying XRPL technology is, and providing developers with new opportunities to tune and innovate for the unique needs of each country.
Let us know in the comments what you think of these insights. And, when it comes to scalability, let the community know your thoughts — which is a better path for the XRPL for maximum scalability: sidechains, or a potential Layer-2 solution?