Page 22 - FIGI: Security Aspects of Distributed Ledger Technologies

6� USE OF DLTS BY CENTRAL BANKS

6�1 Internal Uses to changing regulatory requirements and promote
Many regulators are exploring DLT use by conduct- more efficient markets. Specifically, the range of
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ing theoretical research or through practical test- emerging DLTs – such as Iota, Hashgraph, and Ripple
ing, with more than 6 central banks engaged in DLT - can be used for various financial operations such as
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initiatives or discussions at the end of 2017. Hitachi settling interbank payments, verifying trade finance
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Data Systems has been using the Monetary Author- invoices, executing performance of contracts and
ity of Singapore’s (MAS’) sandbox to test DLTs for keeping audit trails.
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issuing and settling checks. These DLT-based initia-
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tives are in the early stages of development, but have 6�3 Central Bank Digital Currencies
shown promise in improving financial infrastructure The use of digital currencies has been proposed as
by increasing speed, security and transparency. 98 a means of stemming the tide of de-risking, more
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specifically through the issuance and use of a central
6�2 Supervisory Uses bank digital currency (CBDC) – also known as a
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Manual collection and handling of data features lags in digital fiat currency (DFC) - especially for remit-
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regulatory responses and limitations for data model- tances. 110
ling. However, new technologies are opening up Fiat money can be minted in physical form, such
access to new flows of information, providing data as cash in the form of coins or banknotes, but the val-
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from previously untapped sources, driving access to ue of money is greater than the value of its material.
real-time data for supervision and obtaining insights While there are a number of variations such as retail
from unstructured data. Increase in volume, veloc- or wholesale CBDCs, value issued as a DFCs exist
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ity and variety of data can fuel better supervision if exclusively in an electronic format and not within a
regulators have the capacity to analyze them. tangible physical medium, is central bank issued and
A ‘permissioned’ blockchain’s inherently shared considered legal tender. 111
design provides access to new flows of informa- Proponents of CBDCs say that there are signifi-
tion. If regulators can become part of blockchain, cant benefits that CBDCs over traditional crypto-cur-
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they can view all transactions, and monitor com- rencies, especially the fact that it is fiat currency.
pliance in real-time, even potentially being able to Theoretically there is less price volatility with CBDCs
enforce regulations. Regulators and market partic- than is typical with crypto-currencies, even among
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ipants will also not have to store replicated records. the most popular such as Bitcoin.
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Moreover, applications can be built on top of block- CBDCs are not nirvana for all jurisdictions though.
chain technology such as smart contracts which For example in 2018 the Republic of the Marshall
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self-execute, requiring less monitoring once set up Islands (RMI) – which uses USD - enacted law to
and easing supervision burden. launch the ‘SOV’ digital token, a type of decen-
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Despite the security issues, financial infrastruc- tralized currency to be run by a private entity and
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ture based on blockchain technology can potentially acting as a second legal tender in the jurisdiction.
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reduce cost of compliance, increase ease in adapting The IMF and US treasury have vehemently opposed
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Box 1:
South Africa: New fintech unit of the central bank 101
The South African Reserve Bank (SARB) established a fintech task force in 2018 to monitor and promote
fintech innovation to assist them in developing appropriate policy frameworks for FinTech regulation.
Security Aspects: The taskforce reviewed SARB’s position on crypto-currencies, especially regulatory
issues concerning cyber-security, taxation, consumer protection and AML, and will scope out a regula-
tory sandbox and innovation accelerator. The taskforce launched ‘Project Khokha’ in partnership with
US-based DLT technology provider, ConsenSys to assess the risks and benefits of DLT use.

20 Security Aspects of Distributed Ledger Technologies