New digital technologies have the potential to disrupt the essence of money and payments. These technological advances are empowering national authorities to explore the digitization of money in the form of retail central bank digital currencies (CBDCs), with the intention to provide cash-like safety and convenience for peer-to-peer payments.
Over the last five years, VMware has been actively conducting research and developing innovative products focused on trust infrastructures and enterprise blockchain technologies. This experience enables us to provide meaningful contributions to CBDC challenges: cybersecurity, privacy, trust, and performance. This blog post explores our viewpoint on the global CBDC dialogue.
Anchoring public trust in CBDCs will require a digital trust foundation that is designed from the ground up to fulfill the demanding requirements of retail CBDCs. To achieve monetary and financial stability, the technology underpinning this foundation must provide the highest degree of reliability, availability, and fault tolerance. Building this digital trust foundation will require stakeholders to be open and transparent.
Delivering on the aspirations of CBDCs will be a multi-year journey, requiring deep partnerships across public and private sectors, as well as collaboration between technologists, economists, and policymakers.
CBDC public-policy principles and digital trust infrastructure
The Group of Seven (G7) recently published a comprehensive set of public-policy principles to support and inform policy deliberations pertaining to retail CBDCs. Below are our thoughts about how digital trust infrastructures can provide the technology to support the core principles included in this report.
Legal and governance frameworks
The requirements for rule of law, sound economic governance, and appropriate transparency all mandate a permissioned infrastructure that is operated by licensed, supervised, established, and highly regulated parties. Such an approach provides pragmatic decentralization of the system without requiring siloed databases and costly reconciliation processes that plague the current real-time gross settlement systems (RTGS).
We at VMware believe that providing the right degree of privacy is critical for instilling trust and confidence in a CBDC ecosystem. Privacy is also a property with some of the most complex technical challenges. Achieving the right balance of privacy and auditability — especially to safeguard against illicit activity — will likely require the use of advanced privacy technologies. VMware is actively partnering and conducting research on privacy-preserving technologies, such as innovative techniques to provide accountable privacy.
Operational resilience and cybersecurity
Through VMware’s work with leading Financial Market Infrastructure providers, we have gained considerable experience with the technology foundations of fault tolerance and operational resilience, which are necessary for critical infrastructures of strategic importance. In our view, such systems require the highest levels of technical resilience, known as Byzantine Fault Tolerance (BFT). VMware has both commercialized BFT products and has been actively leading research in this space.
An open, secure, resilient, transparent, and competitive ecosystem is essential for a viable CBDC. The digital foundation of CBDCs should be based on open standards and leverage a layered architecture built for interoperability. Distributed trust technologies can enable technology vendors to simultaneously collaborate and compete with each other in a way that incentivizes social welfare and increases public trust.
The distributed trust technology underpinning a CBDC must provide innovative ways to balance the need for speed, privacy, and cost efficiency against the need to uphold anti-money laundering and countering financing of terrorism (AML/CFT) regulations and obligations. Accountable privacy technology can enable less-drastic tradeoffs that provide better balance.
Energy and environment
VMware has a strong commitment to achieving net-zero carbon emissions for our operations, as well as to providing technology that enables carbon-efficient digital transformation. Aligned with this principle, our approach to digital trust infrastructure starts with a Byzantine Fault Tolerant core and uses efficient, permissioned, licensed, supervised parties to achieve trust — not energy-intensive, permissionless proof-of-work mechanisms (such as those used by Bitcoin and currently by Ethereum, although the latter has announced that it will be transitioning to proof of stake).
Digital economy and innovation
We believe that digital trust infrastructures should, through modularity, provide a high degree of flexibility in the programming languages, ecosystems, and rules engines that they can support. VMware’s digital trust infrastructure adheres to this belief by supporting various smart contract frameworks and provides flexibility to integrate this infrastructure with existing and future payment solutions.
Technology should be designed specifically to reduce barriers and increase inclusion. VMware is actively exploring technologies that can increase financial inclusion. For example, we are currently exploring the use of identity-based cryptography (IBC) that can significantly lower barriers for the use of digital identity and advanced privacy-preserving technologies.
Payments to and from the public sector
CBDCs must provide mission-critical performance — both throughout normal times and in times of crisis. VMware has considerable expertise in delivering high-performance, robust critical infrastructure that provides the highest degree of fault tolerance. Our research project around privacy-preserving CBDC payment infrastructure has shown that tens of thousands of privacy-preserving payment transactions per second can be achieved while adhering to the strictest BFT design foundations.
VMware has been researching interoperability technologies at all layers: shared infrastructure, a shared smart contract layer, and the ability to use tokenization and bridging technology to provide the maximum flexibility and efficiency for interoperable transactions. We are committed to working openly and collaboratively with all stakeholders to create a safe, regulated, and highly efficient mechanism to support cross-border functionality.
This is an exciting era in which revolutionary technologies like trust infrastructures are providing an opportunity to transform fundamental financial constructs, including money. As technologists, we are energized to step up to the challenge to contribute to this transformation. In future posts, we will provide additional details to expand on our initial, broad point of view on the value of trust infrastructures for CBDCs. We invite relevant stakeholders to email us and/or read more about our research, products, and team.