Decentralization Beyond Disintermediation: The Case of Central Bank Digital Currencies

Over the past 10 years, private and public actors have been experimenting with the application of blockchain and distributed ledger technologies (DLTs) in the financial sector. In particular, central banks have explored different approaches toward the issuance of digital versions of cash – i.e., retail central bank digital currencies (CBDCs) – and toward improving interinstitutional transfers and settlements – i.e., wholesale CBDC systems. These projects put forward challenging techno-regulatory questions related to the associated system architecture to meet end user and institutional demands. This includes compliance with data protection rules and financial integrity safeguards, such as anti-money laundering (AML) and counter terrorist financing (CFT). Often, these goals seem conflicting, so CBDC models require a careful design of the corresponding technology stack. We argue how supplementary cryptographic components, such as decentralized digital identities and zero-knowledge proofs (ZKPs), can support both centralized and decentralized deployments of CBDCs. Accordingly, this chapter explores the techno-regulatory building blocks of CBDC designs and outlines different design choices that have been discussed, therefore challenging the narrative that necessarily associates decentralization with disintermediation.