Central banks around the world have been investing significant resources into the development of central bank digital currencies (CBDCs) in recent years. According to the Bank of International Settlements (BIS), 94% of the world’s central banks are actively working on CBDCs, with 19 of the G20 nations already in advanced stages of CBDC development.
However, recent decisions by some governments suggest a shift in sentiment towards CBDCs. For example, Canada recently announced that it was shifting its focus away from a retail CBDC to a broader focus on payments. This move follows Australia’s decision to pivot towards a wholesale CBDC over a retail currency.
The decisions made by governments regarding CBDC development have implications beyond their own citizens and financial systems. They also impact the broader Web3 ecosystem, particularly in terms of interoperability.
CBDCs are complex ecosystems that must take into account various participants, use cases, tech stacks, data formats, and governance models. They also need to be compatible with foreign CBDCs and legacy systems. The challenge of creating a functional CBDC that is interoperable with other systems is significant.
Central banks are aware of the challenges of achieving interoperability with CBDCs and have been considering this issue from the outset. Creating an interoperable CBDC ecosystem is even more daunting than achieving interoperability in the Web3 space. Cross-border payments, one of the main use cases for CBDCs, involve navigating a complex web of pre-existing domestic payment systems and currency exchange challenges.
The challenges of achieving interoperability in the CBDC space are not dissimilar to those faced in the Web3 ecosystem. For instance, connecting two prominent public blockchains like Bitcoin and Ethereum has proven to be a complex task, resulting in various stop-gap solutions that come with their own compromises.
The widespread adoption of CBDCs could potentially offer a solution to the interoperability challenges facing the Web3 ecosystem. However, if too many governments decide to abandon CBDCs, the CBDC landscape may end up fragmented, similar to the current state of Web3 with its multitude of incompatible networks.
Countries that remain committed to the development of CBDCs will have the opportunity to influence the standards for CBDC interoperability, potentially giving them a competitive advantage in the global Web3 landscape.
CBDCs have the potential to be inherently interoperable, unlike some public blockchains that have struggled to achieve interoperability after deployment. Central banks have a unique opportunity to work closely with experienced developers to design CBDCs that are interoperable from the outset.
A lack of interoperability remains a significant obstacle to the development of CBDCs, mirroring similar challenges faced in scaling the Web3 ecosystem. However, CBDCs have the potential to pave the way for resolving these industry-wide interoperability challenges and contribute to the long-term health of Web3 as a whole.
In conclusion, while there are challenges to achieving interoperability in the CBDC space, the potential benefits of creating an interoperable ecosystem are significant. Central banks have the opportunity to work together to develop CBDCs that can serve as a blueprint for interoperability in the broader Web3 ecosystem. By addressing interoperability challenges early on, central banks can lay the foundation for a unified and decentralized network of blockchains built on industry-wide interoperability standards.