Introduction to Central Bank Digital Currencies and Their Technical Interoperability

This paper aims to clarify the position of Central Bank Digital Currencies (CBDC) in relation to other forms of payment in use today and in relation to the broader Decentralised Finance (DeFI) space. Our finding is that a CBDC is an object-based type of payment means which is settled in a unit of account and can be based on a centralised or decentralised technology, although only the latter is taken into consideration in this study. A CBDC digitally represents the sovereign currency issued by and as a liability of a jurisdiction’s Central Bank (CB) or monetary authority. In relation to the DeFi space, it is a category of blockchain-based decentralised financial applications with a centralised governance. The paper contributes to the current literature by summarising the main interoperability strategies present in the literature, explaining them and identifying the interoperability method that is considered to be more efficient for heterogeneous CBDCs, namely DLT-relays (more specifically, trusted relays) with decentralised escrow parties. Therefore, this paper encourages blockchain interoperability between not just CBDCs, but also between platforms that meet the required regulatory and prudential criteria.Considering that CBDC interoperability is a design choice, a summary of the main design choices that CBs are faced with are also included to ease the reader into the topic. Arguing in favour of a design choice rather than another is not within the scope of this research, as potential risks and benefits of CBDC are unique to each jurisdiction’s circumstances. A review of the main interoperability options that have been proposed by CBs is also included