Digital assets and new forms of money on programmable platforms (DLT) are an emerging phenomenon that is increasingly gaining attention in various global forums and research initiatives, both from academia, international organizations, and the financial industry itself.

For the Central Bank, these developments raise questions regarding their scope and impact on the financial system and the economy as a whole. Proof-of-concept projects in this area allow for the analysis of these advancements not only from a theoretical perspective but also from a practical standpoint, considering the Central Bank’s mandate to ensure the proper functioning of domestic and international payments, while promoting the stability and efficiency of the financial system.

What did the Proof of Concept consist of?

The Central Bank of Chile developed an exploratory proof of concept (PoC), aimed at building internal capabilities in DLT technology, which consisted of deploying and operating a programmable platform based on a private, permissioned blockchain network (Hyperledger Besu) within a controlled environment isolated from the Bank’s production systems. The platform enabled the simulation of the issuance of a wholesale central bank digital currency (CBDC), intended exclusively for interbank and institutional use; the transfer of CBDC among participants; and the redemption (burning) of this digital money. The platform also supported the integration of tokenized asset use cases.

All participants, assets, and financial instruments were simulated. No transaction involved real assets or real institutions. It is important to emphasize that this proof of concept does not represent, under any circumstances, a decision to issue a digital currency, nor does it anticipate any public policy decision regarding the use of a wholesale CBDC. Rather, it was conducted as a controlled experiment.

Blockchain

Central Bank Digital Currency

Tokenized Assets

Smart Contracts

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Blockchain

 

• The deployment and administration of a private, permissioned blockchain network were tested, enabling the development and deployment of smart contracts and improving understanding of the technology and its potential applicability.
• The creation and management of accounts for different participants using this technology were tested, as well as the management of cryptographic keys.
• Transaction recording on the blockchain was tested through the execution of smart contracts and interaction with digital wallets.
• Counterparty confidentiality mechanisms were tested, together with the separation between transaction execution, visible to both counterparties, and balance custody information, which remained confidential.

Central Bank Digital Currency

 

• The simulated issuance of a wholesale central bank digital currency (CBDC) through a smart contract was tested.
• The transfer of CBDC from the Central Bank of Chile to fictitious participants was tested (simulating the crediting of reserves).
• The transfer of CBDC between fictitious participants was tested.
• The redemption (burning) of CBDC was tested, removing the digital currency from circulation.
• The use of CBDC as a settlement asset for wholesale financial transactions was tested.

Tokenized Assets

 

• The tokenization of simulated Central Bank debt instruments (Central Bank notes and inflation-indexed bonds) and simulated bonds issued by private financial institutions was tested.
• The main operational stages of the domestic fixed-income market were replicated within a single platform, including primary issuance, secondary-market trading, settlement, and lifecycle events.
• Instrument lifecycle events, including coupon payments and maturities, were managed by validating the list of holders and executing the corresponding payment in CBDC, together with custody functions.

Smart Contracts

 

• A smart contract was developed that enabled atomic delivery-versus-payment (DvP) settlement.
• The execution of a transfer through a delivery-versus-payment mechanism between tokenized financial instruments and CBDC was simulated, with both legs settling simultaneously under the same consensus mechanism and without the need for external coordination or additional validation processes.

Findings: Attributes, Trade-offs, and Limitations

The proof of concept made it possible to assess, within a limited and controlled environment, the technological feasibility of issuing a wholesale CBDC and using it as a settlement asset. It also highlighted a number of attributes and trade-offs associated with the design decisions adopted. The main findings are summarized below:

1. Operational Integration: Bringing CBDC and financial assets together on a single platform simplifies operations, reduces dependence on multiple infrastructures and external messaging between systems, and enables atomic settlement.
2. Flexibility and Programmability: Smart contracts make it possible to introduce new business logic, financial instruments, and operations using the same CBDC without redesigning the underlying infrastructure.
3. Privacy: The transparency and immutability inherent in DLT networks coexist in tension with the confidentiality requirements of financial markets regarding positions and transaction flows. The solutions tested address this tension, but add complexity and may limit network scalability.
4. Governance: The design explored, in which the Central Bank operated all network nodes, facilitates control over integrity and confidentiality but concentrates functions that are currently distributed across institutions and may limit benefits such as resilience.