Mastercard’s CBDC project explores use of eAUD on public blockchains – Ledger Insights

Last week, the Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Center (DFCRC) outlined their retail and wholesale central bank digital currency (CBDC) pilot projects. One of the partners selected for the 14 CBDC use cases is Mastercard, which is working with Cuscal on an interoperable CBDC for trusted Web3 commerce. The goal is to enable the use of an eAUD on public blockchains.

The pilot proposal will use CBDC to pay for an NFT on Ethereum. Since CBDC itself is not issued on a public blockchain, the test will “lock” the required amount on the CBDC platform and mint a corresponding amount of wrapped tokens on Ethereum. But for the transaction to go through, the Ethereum wallets of the buyer and seller and the smart contract itself must first be whitelisted. This will illustrate the possibility of implementing controls on public blockchains, such as know-your-customer (KYC) rules.

However, wrapping is not without risk. Essentially, a wrapped token is a tokenized copy of a coin that exists on another blockchain, tied to the value of the other asset and backed on a 1:1 basis. Therefore, wrapping allows building bridges between different chains, bypassing the limitation on non-native assets on public blockchains such as Ethereum or the BNB Smart Chain.

The Risks of Wrapping CBDCs

Nevertheless, the process must be transparent. Earlier this year, it emerged that the Binance USD (BUSD) stablecoin, which is issued by the New York regulated trust company Paxos on Ethereum, was not always 1:1 backed on other chains, despite being rock solid on Ethereum. It turned out that Paxos was not involved in managing or supporting packaged versions of BUSD, as was upfront on the website. Instead, other players issued wrapped or attached BUSD on other chains.

Equally important is who is packaging a CBDC, not specifically for this particular use case. Locking currency on one blockchain and issuing on another means that the code runs the process. Numerous vulnerabilities in smart contracts have resulted in the loss of significant sums of crypto through bridges between blockchains. It’s one thing if a vulnerability damages the reputation of a crypto firm, but another if it’s institutional reputational damage or one linked to a central bank.

Additionally, a group of people will be responsible for the keys that control wallets. It is not unheard of for protocol creators to run away with funds. So they must be trustworthy.

Apart from that, the central bank will be more fussy about fighting money laundering than an issuer of stablecoins. So they will influence who wraps CBDC. But on permissionless public blockchains, in theory, anyone can package whatever they want if someone is willing to use it.

Central banks around the world are taking different approaches to public blockchain. Many completely ignore public blockchains, such as Europe, which have so far focused on payments for retail sales and P2P transfers. Others are more accepting, including Brazil, which tested its digital reality for a couple of retail applications using public blockchains. But CBDCs will inevitably be packaged, so some regulations on what is allowed will likely be implemented.

The Mastercard solution will enable CBDCs to be tokenized onto other chains with controls to ensure that only authorized parties can hold, use and redeem them. According to the project team, this will allow consumers “to participate in crypto-ecosystems using trusted and reliable forms of money”. More generally, it will increase the utility of CBDC and leverage many of the benefits offered by cryptocurrencies and Web3 commerce.