Technology | Understand the overall framework and architectural implementation model of the central bank's digital currency in one article

Source: Blockchain Base Camp

Author: Pang Yuxiong

The introduction of blockchain technology is of great significance to reducing social credit costs and improving the social credit environment. At present, the application of blockchain technology in domestic commercial banks is still in the application exploration stage, but as domestic commercial banks deepen their understanding of this technology, more commercial banks will inevitably use blockchain technology.

The competition among banks is becoming increasingly fierce. In order to gain a firm foothold in the market and develop steadily, banks must closely monitor the application and development of blockchain technology and fully grasp the situation of international and domestic banking technology finance in order to adjust development strategies and take effective countermeasures in a timely manner. Research on the application of blockchain technology in commercial banks is of practical significance.

This article will first help you understand the overall framework and architectural implementation model of the central bank's digital currency.

The overall framework of central bank digital currency

1. Operational framework of central bank digital currency

There are two modes for the operation framework of central bank digital currency: one is that the central bank directly issues digital currency to the public; the other is to follow the traditional central bank-commercial bank dual model. In the first case, the central bank directly provides the issuance, circulation, and maintenance services of legal digital currency to the whole society; in the second case, the current paper currency issuance and circulation model is still adopted, that is, the central bank issues digital currency to the business library of commercial banks, and commercial banks are entrusted by the central bank to provide legal digital currency deposit and withdrawal services to the public, and work with the central bank to maintain the normal operation of the digital currency issuance and circulation system.

Central bank management prefers the latter. The reason is simple:

First, it is easier to allow legal digital currency to gradually replace paper currency within the existing currency operation framework without subverting the existing currency issuance and circulation system;

Second, it can mobilize the enthusiasm of commercial banks to jointly participate in the issuance and circulation of legal digital currency, appropriately disperse risks, and accelerate service innovation.

Under the binary model, the central bank is responsible for the issuance and verification monitoring of digital currency. After commercial banks apply for digital currency from the central bank, they directly face the society and are responsible for providing digital currency circulation services and application ecosystem construction services.

The prototype system divides the operation of CBDC (Central Bank Digital Currency) into a three-layer system according to the overall design principle of the binary model (see the figure below):

The first layer of participants includes the central bank and commercial banks , which are involved in the issuance, withdrawal and transfer of CBDC between commercial banks. The first phase of the prototype system completes the closed loop from the central bank to commercial banks, that is, through issuance and withdrawal, CBDC is transferred between the central bank's issuance library and the commercial bank's bank library, and the total amount of CBDC in the whole society increases or decreases, while the mechanism ensures that the total amount of money issued by the central bank remains unchanged;

The second layer is the CBDC deposit and withdrawal from commercial banks to individual or corporate users . CBDC is transferred between the commercial bank vault and the digital currency wallet of an individual or corporate user.

The third layer is the circulation of CBDC between individual or corporate users , where CBDC is transferred between the digital currency wallets of individuals or businesses.

Central bank digital currency operation diagram

2. Core elements of the central bank digital currency system

The core elements of the central bank's digital currency system are "one currency, two banks, and three centers."

One currency refers to CBDC : an encrypted digital string representing a specific amount of money, guaranteed and signed by the central bank; the two vaults refer to the central bank's issuance vault and the commercial bank's banking vault , and also include digital currency wallets used by individual or institutional users in the circulation market to use CBDC; the three centers refer to the authentication center , registration center, and big data analysis center.

Authentication Center : The central bank centrally manages the identity information of central bank digital currency institutions and users. It is a basic component of system security and an important part of controllable anonymous design.

Registration center: record CBDC and corresponding user identities to complete ownership registration; record transactions to complete the registration of the entire process of CBDC generation, circulation, inventory verification and extinction.

Big Data Analysis Center: Anti-money laundering, payment behavior analysis, regulatory control indicator analysis, etc. The prototype system will explore the expression form of CBDC, and on this basis, establish the central bank digital currency system and the commercial bank's internal system, and realize the functions of the central bank's issuance library and the commercial bank's bank library respectively. Since the first phase of the prototype system mainly solves the closed loop from the central bank to the commercial bank, the content of the digital currency wallet is not involved at this stage.

According to the principle of gradual progress, the first phase of the prototype system focuses on the registration center to realize the registration of the entire process of CBDC issuance, transfer, and withdrawal, record the CBDC transaction process, and expand the registration center to provide online confirmation and inquiry services. The authentication center is mainly responsible for commercial bank identity authentication and management in the first phase of the prototype system. The big data analysis center is not involved in the first phase of the prototype system.

3. Issuance and withdrawal mechanism

The existing central bank currency system based on the account model is to realize the central bank's currency issuance and withdrawal through commercial banks setting up deposit electronic accounts at the central bank. For CBDC, a new form of currency, without changing the total amount of central bank currency issuance, it is necessary to design a mechanism for exchange with existing electronic account currencies and explore feasible mechanisms for CBDC issuance and withdrawal within the existing currency operation framework.

CBDC issuance refers to the process in which the central bank produces CBDC owned by commercial banks and sends it to commercial banks. CBDC withdrawal refers to the process in which commercial banks deposit CBDC and the central bank cancels CBDC. In order to ensure that issuance and withdrawal do not change the total amount of central bank currency issuance, the prototype system has designed a mechanism for equal exchange of commercial bank deposit reserves and CBDC.

In the issuance phase, the commercial bank deposit reserves are deducted and the CBDC is issued in equal amounts. In the withdrawal phase, after the CBDC is scrapped, the commercial bank deposit reserves are increased in equal amounts. Because it involves changes in deposit reserves, the prototype system is implemented by connecting to the central bank accounting data concentration system (hereinafter referred to as the central bank accounting system).

The issuance process is shown in the figure below. The commercial bank digital currency system initiates an application to the central bank digital currency system. The central bank digital currency system first conducts management and approval. This step is for the central bank to implement regulatory reserve extension functions. After that, a deposit reserve deduction instruction is initiated to the central bank accounting system. The central bank accounting system deducts the commercial bank's deposit reserve and increases the digital currency issuance fund by the same amount.

After the deduction is successful, the central bank digital currency system produces a CBDC owned by the commercial bank and sends it to the commercial bank digital currency system, and the commercial bank completes the bank vault entry operation.

Central Bank Digital Currency Issuance Process

The withdrawal process is shown in the figure below. The commercial bank digital currency system initiates a deposit application to the central bank digital currency system. After the central bank digital currency system conducts management and approval, the deposited CBDC is first invalidated, and then a deposit reserve increase instruction is initiated to the central bank accounting system. The central bank accounting system deducts the digital currency issuance fund. At the same time, the commercial bank's deposit reserve is increased by the same amount. After completion, the central bank digital currency system notifies the commercial bank that the withdrawal is successful.

The process of central bank digital currency withdrawal

Architecture Implementation Pattern

Through unified consideration of multiple levels such as the prototype system's hardware and software infrastructure, application functions, and business data, a prototype system with supporting functions and technical verification that conforms to the current CBDC operating framework is formed. The entire system is divided into three parts: the central bank's related central bank digital currency prototype system and central bank accounting test system, the commercial bank's internal system participating in the prototype experiment, and the digital bill trading platform as a CBDC transfer experiment scenario.

The central bank digital currency prototype system includes the following parts.

(1) Registration center : records the issuance of CBDC, CBDC ownership information, and completes the registration of the entire process of CBDC issuance, transfer and withdrawal. Its main functional components include issuance registration, title confirmation release, title confirmation query website application, and distributed ledger service. Issuance registration records the issuance, withdrawal process and ownership of CBDC; title confirmation release desensitizes the title information of issuance registration and publishes it to the CBDC title confirmation distributed ledger; the title confirmation query website provides online title query services for commercial banks; and the distributed ledger service ensures the consistency of CBDC title information between the central bank and commercial banks.

(2) Authentication Center : Centralized management of CBDC user identity information is a basic component of system security and an important part of controllable anonymity design. Its main functions include authentication management and CA management. In the first phase of the prototype system, it provides institutional verification and certificate management functions. In the future, it can build authentication support for end users based on technologies such as IBC (Identity-based Cryptography).

(3) Big Data Analysis Center: This includes functions such as KYC (Know Your Customer), AML (Anti Money Laundering), payment behavior analysis, and regulatory index analysis. It is the basis for CBDC risk control and business management. The functions of the first phase of the prototype system’s big data analysis center are not yet implemented.

(4) CBDC basic data set : Maintain the complete data resources of the central bank digital currency system, including data generated by the business processes of CBDC issuance and withdrawal, as well as data generated during the transfer process; and use distributed ledger services to conduct ownership information registration experiments to provide data support for CBDC issuance registration business and data analysis business.

(5) Operation and management system: provides configuration, management, monitoring and other functions during the operation of the entire central bank digital currency prototype system.

(6) Central bank digital currency system front-end: It is the entrance for commercial banks to access the central bank digital currency prototype system, providing information forwarding services between the core business systems of commercial banks and the central bank digital currency prototype system. Its main functions include receiving, forwarding, signing, and verifying signatures.

(7) Issuance registration subsystem node: It is the entry point for the digital bill exchange to connect with the central bank digital currency prototype system. Its main functions include CBDC transaction confirmation, communication with the central bank node of the digital bill system distributed ledger, and other operations.

(8) Central bank node of the digital bill distributed ledger: It is the front node of the central bank digital currency prototype system in the digital bill distributed ledger, publishes CBDC smart contracts, and realizes digital bill transactions DVP (Delivery Versus Payment).

The central bank digital currency prototype system realizes the CBDC issuance and withdrawal mechanism by connecting with the central bank's accounting test system. Commercial banks and digital bill exchanges are important participants in the prototype system experiment. Among them, commercial banks need to transform the core system, establish their bank vaults and save CBDC, and jointly establish a distributed ledger with the central bank to register CBDC ownership information.

Add central bank nodes to the digital bill distributed ledger of the digital bill exchange to realize DVP transactions between CBDC and digital bills based on the distributed ledger.