Stellar for CBDCs

After reviewing the Stellar whitepaper, Stellar for CBDCs, here’s my take on the topic.

The Stellar platform and Stellar Consensus Protocol (SCP) have some elements that would support their use in CBDC development and deployment, especially a 2-tiered one. (The whitepaper seems to describe a hybrid model.)

Stellar assumes that every account accessing a CBDC will require some sort of KYC. This information would be collected by “verifiers” that would connect individual accounts to the CBDC. But, Stellar also allows for some advanced account settings: authorization required, authorization revocable, and clawback. These allow for mandatory KYC, shutting down an account, and reversing a transaction. In Stellar’s view, private banks would the natural choice as verifiers, since they already perform that function.

According to Stellar, banks would also be ideal in the roles of “validators” in a CBDC built on the SCP. In the protocol, validating nodes in this decentralized system are known and trusted. So, such a decentralized CBDC would be monitored and managed by private banks chosen by the central bank.

Interoperability of a Stellar-based CBDC with legacy financial systems would be through APIs, which are part and parcel of the Stellar platform. Interoperability between CBDCs, Stellar argues, would be easiest if all CBDCs used the Stellar platform. Otherwise, a bridge system, using Stellar Lumens (I believe) would be necessary. Lastly, Stellar also allows for CBDC programmability.

Of course, a central bank might balk at a decentralized system, no matter how trusted the validating nodes might be. And, will each node be able to hold the entire ledger of a CBDC? Also, as I understand it, transactions currently take 5 seconds to finalize. This may be too slow for a nationwide CBDC.

I think Stellar presents some interesting options for CBDC development, especially a decentralized one.