There has been a lot of hype around central banks, interbank payments, blockchains, and central bank digital currencies (CBDCs), but the narrative has become confusing and often misses the point. What’s going on? Actually two independent things are being actively explored:
- Decentralisation of interbank payment systems
- Wider access to digital central bank money (Central Bank Digital Currencies – CBDCs)
I aim to explain them both in this post.
How do banks pay each other? In most countries, when banks want to transfer money to each other, perhaps upon instruction from a customer, they don’t put bundles of banknotes in vans, they pay each other digitally. How does this work?
This post is intended as a primer about payment systems and explains correspondent banking, nostros, real time gross settlement (RTGS) systems and deferred net settlement (DNS) systems. It supports other posts where I discuss decentralisation of these systems using distributed ledgers.
Currently a number of central banks around the world are exploring two things:
- A decentralised interbank payment system
- A central bank digital currency
Though often conflated, these are slightly different concepts. You can decentralise your interbank payment systems without allowing the public to have digital access to the central bank’s balance sheet, and vice versa.
This short post is about the first set of experiments: decentralising the interbank payment systems.
This article attempts to explain the difference between the revolutionary disruptive innovation of bitcoin and the evolutionary efficiency innovations of industry workflow tools, and why calling them both “blockchains”, even as a generic term, is incredibly confusing.
For the rest of this post, I will use the phrase “industry workflow tools” instead of industry blockchains, as some of the emerging solutions being proposed in this space are not blockchains (eg, R3’s Corda is not a blockchain but Digital Asset’s solutions are – however, both companies are proposing industry workflow tools).