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Research Says CBDC Has Downsides

The research on CBDC involved two architectural models demonstrating different capabilities.

The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT) published the results from Phase One of Project Hamilton on Thursday.

Project Hamilton is a multi-year collaboration between the Boston Fed and MIT’s Digital Currency Initiative that was announced in 2020. It explores the use of existing and new technologies to research for CBDC.

The project has two phases. Phase one has been completed. It has tested two models of architecture.

Results of the Two Architectural Models of CBDC

The first model processed transactions through “ordering server” Distributed Ledger Technology (DLT) or blockchain. It organizes fully validated transactions into batches or blocks to create an ordered transaction history.

This model completed over 99% of transactions in under two seconds, and the majority of transactions in under 0.7 seconds. Its capacity peaked at 170,000 transactions per second, due to obstacles created by the ordering server.

Moreover, storing the history of transactions means the central transaction processor can reconstruct the transaction graph, which combined with other data sources, could reveal sensitive user information. Plus it has scalability issues.

The second model processes transactions in parallel on multiple computers and does not rely on a single ordering server to prevent double-spending. It demonstrated throughput of 1.7 million transactions per second with 99% of transactions completed in under a second and the majority of transactions completed in under half a second. It has superior scalability but does not materialize an ordered history for all transactions.

Both architectures can withstand the loss of two data centre locations and can seamlessly continue to process transactions without losing any data.

What This Means for India

It remains to be seen whether the upcoming INR CBDC will cater to the wholesale segment or retail segment.

According to a report by Economic Times, the transactions made using the Unified Payments Interface (UPI) scaled a new peak in December 2021.

The report states that 456 crore UPI transactions worth about Rs 8.27 crore were conducted in December 2021.

If India adopts the aforementioned first model, in ideal circumstances at the speed of 170,000 transactions per second, in a single day over 14.6 billion transactions could be processed. Even half of that could be sufficient for UPI transactions.

Considering the privacy implications the model using DLT may not be the preferred or it could be tweaked to make it suitable for the requirements.

The next financial year will be a landmark event in the history of Indian economy, as the country might get its CBDC. It could kickstart another wave of fintech revolution. The major question to answer is how it will impact the burgeoning crypto industry of India.

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