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India: distributed ledger technology, blockchain and central bank

Time : 19/08/2021 Author : 9ejis0 Click : + -
        In recent years, distributed ledger Technology (DLT) and blockchain have made great progress in function and complexity, and can provide solutions for various industries including the financial sector. Some central banks have carried out pilot projects to study and understand DLT and explore the potential benefits of its operation and financial system. So far, most of these projects are experimental in nature. The report issued by the Central Bank of India focuses on distributed ledger technology, blockchain and central bank. The Financial Technology Research Institute of Renmin University of China (wechat ID: ruc_fintech) compiled the core part of the report.
        At present, there are more than 2000 cryptocurrencies listed on the world's major cryptocurrency exchanges, and there are many blockchain start-ups. Blockchain has become a buzzword. Without its reference, any discussion on financial technology is incomplete. Following the rise in cryptocurrency valuation at the end of 2017, the recovery in June 2019 and the recent rise after the coronavirus outbreak, blockchain and DLT have become more and more popular in recent years. Central banks and other authorities are increasingly aware that they can use this technology to reduce risk, prevent fraud and implement monetary policy more effectively. Therefore, some central banks began to promote and guide the industry in an uninterrupted manner, while maintaining financial stability and ensuring the use of DLT to develop financial market infrastructure.
        However, several central banks and other regulators have shown caution in adopting this technology. The rest of this paper is divided into five parts, including the basic knowledge of DLT and blockchain, the latest development and problems of DLT, the DLT projects implemented by various central banks, the central bank digital currency (CBDC) and the conclusion. Although DLT and blockchain are often used interchangeably, there are certain differences between them. Blockchain is a linear connected blockchain and a specific type of DLT. While DLT is a decentralized ledger, it may not be a linear chain. Cryptographic hash function is a special type of function, which accepts an arbitrary size input and converts it into a small fixed size output, called hash.
        It has three significant characteristics. One is deterministic, that is, the same input will always give the same hash value. The other is irreversibility, that is, input data cannot be estimated from a given hash value. Third, it is sensitive. Even small changes in the input will produce very different outputs, which makes it very difficult to crack the output. In public key cryptography, everyone has his own unique set of public and private key pairs. To ensure that the message is transmitted without eavesdropping, the public key of the intended recipient can be used to encrypt the message. After receiving the encrypted message / document, the recipient can decrypt it with its private key (the public key is used for encryption and the private key is used for encryption) for decryption.
        In the DLT platform, nodes interact with each other to transfer information or conduct transactions. There can be different types of nodes with different functions in the DLT platform. A token is a unit of a physical or virtual object and can also represent the ownership of the object. Tokenization refers to the generation of tokens, which are digital representations of objects in DLT. The native tokens of the blockchain can be used as payment tokens. For example, the bitcoin blockchain takes bitcoin tokens as the native payment tokens, and the blockchain records the transactions of its bitcoin tokens. The main purpose of the block is to record transactions. Using an encrypted hash function ensures that the block is valid and tamper resistant. In a blockchain, blocks are linearly connected like a chain using an encrypted hash function.
        Under the pow protocol, the process of creating new blocks is called mining, and the nodes are called miners. It is one of many consensus mechanisms and is used in many blockchains, such as bitcoin and Ethereum. Blockchain is popular because of the cryptocurrency bitcoin. The central bank is the only currency issuer in an economy. Central banks around the world began to monitor the risks brought by cryptocurrencies. However, while monitoring these developments, the central bank has shown optimism and interest in blockchain based applications other than cryptocurrencies. In the past five years, several central banks have initiated projects to study and use DLT technology to evaluate the potential application of DLT in financial infrastructure.
        The goal of most projects is not to replace the existing financial infrastructure, but an investigative project, that is, to study the feasibility of the existing system on the new decentralized platform. Such projects are mainly aimed at improving the central bank's understanding of DLT and exploring the feasibility of phased implementation of CBDC in financial infrastructure. In March 2016, Bank of Canada cooperated with paymentscada, R3 and Canadian commercial bank to launch Jasper project to study and understand DLT and its application in the financial ecosystem. In the first stage, it developed the proof of concept (POC) 5 of the wholesale inter-bank payment system based on DLT using the Ethereum platform.
        Members of the network use digital deposit receipts (DDRs) issued by Canadian banks to trade and settle inter-bank payments, which will eventually be settled based on the bank's deposits in Canadian banks. In the second stage, more functions such as liquidity saving mechanism (LSM) of corda platform were added to ensure transaction privacy between financial institutions. In the third stage, the project extends the application of DLT to the securities settlement of DDR on the distributed ledger. In the fourth phase, the project cooperates with other central banks to use DLT for cross-border and cross currency settlement systems. Overall, the project concluded that DLT based applications may improve efficiency and save costs.
        However, to realize these benefits, it is important to expand the coverage of assets on the distributed ledger and the participants in the network. The monetary authority of Singapore (MAS), together with other financial institutions and R3, launched the Ubin project in November 2016 to develop and produce POC for inter-bank payment cash ledger using DLT based figures. In the first phase of the project, a prototype of wholesale inter-bank payment was developed on the Ethereum blockchain. In the second stage, on the basis of summing up experience, the advanced features of LSM were added to the original POC, and analyzed and developed on other DLT platforms such as hyperledgerfabric, corda and quorum, which were completed and released in November 2017.
        On March 3, MAS and Singapore Exchange jointly developed the delivery and payment (DVP) function, which is used to settle token assets, such as securities, on the DLT platform. In phase 4, MAS and BOC cooperated to realize cross-border inter-bank payment across different DLT platforms, and released Jasper Ubin design document in May 2019. Currently, phase 5 of the project is in progress, which will support the same network of payments in different currencies. So far, the central bank's Experimental Research on the DLT project has followed the pattern: first, it is applied in inter-bank wholesale payment, then it tests the transaction of token assets in delivery and payment settlement, and then it turns to cross-border payment.
        Some central banks adopting similar projects are the European Central Bank in cooperation with the Bank of Japan, the Central Bank of Brazil and the Bank of Thailand. The National Bank of Cambodia has developed a blockchain based retail payment system under its Bakong project. It is one of the first central banks to launch a blockchain based P2P system for public use. In addition to the central bank, several private banks are also working together to benefit from blockchain and DLT. The people's Bank of China has established a digital currency Research Institute to study and carry out digital currency research and explore the technology for realizing the central bank's digital currency. DLT and blockchain have been widely explored by the people's Bank of China as possible technologies for starting CBDC.
        With the decline of Sweden's cash use, the Swedish central bank has been studying CBDC and analyzing the impact of launching e-krona from multiple perspectives. In order to implement e-krone, the Swedish central bank has explored various technical solutions including DLT. However, the bank said that at present, the development of DLT is not perfect enough to provide the required electronic Krone application. In the past decade, DLT and blockchain have made great progress in function and complexity. Some central banks have carried out pilot projects in cooperation with other institutions to study and understand DLT. So far, most of these projects are experimental in nature to explore the feasibility of inter-bank settlement, digital asset and token settlement and cross-border payment on the DLT platform with existing system functions.
        Even in the context of CBDC, the Swedish central bank said that the current DLT was not mature and could not be used to implement e-kronor. Nevertheless, such projects and their benefits have increased the ability of central banks and regulators to guide the development of financial market infrastructure based on distributed ledger technology.
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