What You Need to Know About Retail CBDC Pilot Project Rosalind (#149 - 26 June 2023)

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The BIS and the Bank of England announced the results of a very impressive retail CBDC pilot called Project Rosalind.?

You will find below a summary of the project and most importantly what could be its potential impact on the future of CBDC development globally.?

First some background.?

Project Rosalind launched in June 2022. The project is named after British scientist Rosalind Franklin, whose work was key to understanding DNA sequencing.

The goal was to explore practical features of retail CBDC and how API interfaces could best enable a central bank ledger to interact with private sector service providers to safely provision retail payments.?

There are various retail CBDC models, but the BIS and BOE chose a two-tier CBDC model, which is a model where the private sector is involved (as is the case in the banking system today)..?

As I explain in my last book , there are various types of two-tier retail CBDC models.?

To oversimplify, it often comes to whether the central bank has no visibility of retail transactions (Platform/Hybrid Approach) or has full visibility on all retail transactions (Two-Tiered/Intemediated Approach).

Project Rosalind would fall between both categories.

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Separately, it is important to understand that there are also two types of retail CBDCs: account-based (similar to a bank account) and token-based (similar to fiat cash).?

Both types were tested in Rosalind, with over 30 use cases tested, and the project showed that a retail CBDC works for both account-based and token-based approaches.?

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From a technical perspective, 33 APIs in 6 categories were tested, and over half a million API calls were made on the ecosystem.?

Categories were accounts, payments, programmability, participants, service providers and offline transactions.?

The account-based model was built on an Ethereum-based Hyperledger BESU, and the token was based on Hyperledger Fabric.?

There are a number of key takeaways from Project Rosalind.?

Privacy from the central bank was possible in Project Rosalind. All transactions were made with personal identifiable information (PII) and transaction data residing only with the various providers and not with the central bank.?

This is very good for central banks, who can show that a CBDC can address privacy issues. But crypto maximalists will say that if a central bank (or law enforcement) wants, it can subpoena to get access to that data.?

The project also showed that the desired level of security could be achieved in various ways from non-repudiation to anti-replay (that ensures that you cannot do the same transaction multiple times to trick the system). This is essential in any payments system with any goals of scaling.?

Additionally, the project showed that we could use the common industry standards (e.g., ISO 20022 messaging standard) to enable a smooth transition and allow service providers to use the ecosystem.?

This is important as having to agree on a new set of standards would be the de facto death of a retail CBDC in the short term.?For example, ISO 20022 alone took over 20 years (and lots of policy drama) to get all the major players to agree.?

Project Rosalind was also successful as it tested a broad range of use cases - from retail and business to even programmable money.

This showed that many of the key features of digital assets could be implemented successfully in a retail CBDC.

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What was unique about this project was that many major TradFi players were involved, from MasterCard and Amazon to the Bank of Canada and Barclays.?

As I have mentioned many times, we will all see CBDCs become mainstream during our working careers.

Project Rosalind showed once again that from a technical perspective, we are there (as China has already shown ).?

The big debate now will be on policy matters, especially when it comes to privacy in payments. Rosalind showed that we can address these.?

There is no doubt that retail CBDC will become an important political and policy topic of debate in the next decade, especially in the US and Europe , especially as other major countries that do not need to directly address privacy concerns move forward and implement retail CBDCs.?

The final report of Project Rosalind is available here (for those of you looking at some extra weekend reading!)

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*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only and none of its content should be construed as investment or financial advice of any kind.?

Who is Henri?

Henri Arslanian is the co-founder and managing partner of Nine Blocks Capital Management, an institutional-grade hedge fund focused exclusively on digital assets, with a market-neutral crypto fund focused on generating alpha from inefficiencies in crypto markets using relative value, arbitrage, and quantitative strategies.?

Henri was previously a partner and global crypto leader at PwC. In that role, he advised many of the world’s leading crypto exchanges, investors, financial institutions, and tech firms on their crypto initiatives and numerous governments, regulators, and central banks on crypto regulatory and policy matters.

With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author, and is regularly featured in global media, including Bloomberg, CNBC, CNN, BBC, The Wall Street Journal, The Economist, and the Financial Times.?

Henri was named by LinkedIn as one of the 2022 global Top Voices in Finance and is the host of the CryptoCapsules? social media video series as well as The Future of Money podcast and newsletter.