Central bank digital currency technology should allow an unlimited number of transactions to be made securely



Former Chair of the Eesti Pank Supervisory Board Mart Sõrg said that Money is a creation of the market and we can think of the market as a chemistry laboratory that synthesises money.

Innovation and the technological development that accompanies it are the catalysts for this type of chemical process. We can see this today in the major qualitative leaps in goods markets, services markets and financial markets, and in the increasing globalisation in them, accompanied by the rapidly changing requirements for money. The coronavirus pandemic has also had an impact on this, and is rapidly changing the payment preferences of those with money.

Private-sector payment solutions have already come a very long way, and it may be assumed that efforts to find ever more convenient and efficient means and methods of payment will be made at increasing speed.

As the economy and various markets within it become more digital, there could be a use for a digital currency that is generally recognised, guaranteed by a central bank, and able to offer people new, secure, smart, simple and convenient ways of making transactions. Cash, which works very well in the real, physical world, is unfortunately not usable in the digital world. This is one reason why the European Central Bank is considering the benefits and drawbacks of a digital euro. No decision has been taken yet about introducing a digital euro.

Several components that would be needed for a central bank digital currency to be launched are already in use in Estonia. We have been using secure digital identity here for a long time for example. The Estonian world-leading e-government gives us a strong technological base, and very many public services and financial services can be accessed digitally. Several internationally successful fintech companies operate in Estonia. This all creates a platform on which to introduce a general-purpose central bank digital currency.

Developing the technology needed

Introducing a digital currency presents both a significant technological challenge and a broader challenge  to the financial and monetary system. A central bank currency that is issued in digital form could for example affect the business models of commercial banks and financial markets, while also giving the central bank entirely new monetary policy tools.

Technological requirements are closely linked to the various possible configurations of a central bank digital currency. It is not yet fully known what all the requirements could be for the technological development of an entirely new central bank digital currency. This makes the process unavoidably iterative, so that the technology will be constantly improved after the first version is launched, and it places great demands on the technology.

To make matters even more complicated, the requirements for the technology may change over time. It may be important for example for the central bank to set the interest rate for the digital currency or to decide if the interest rate should depend on the amount of money held in an account. The owners of the money meanwhile may consider it very important to be able to make conditional payments with a programmable digital currency. The most important approach to this is probably for the technology to be as flexible as possible and to offer certainty for the future.

Scalability and speed

The technology may have to meet many different requirements, but it is unlikely that the owners of money would want to use a central bank digital currency that does not allow secure and instant payments. This means a top priority is for the technology to allow a very large number of accounts to settle exceptionally large numbers of transactions simultaneously. This is made complicated because even when there is a very large number of payments, there can be no compromises on the settlement time, cyber security, privacy or resilience of the digital currency system and its ability to recover rapidly from any interruptions to it. Meeting this entire set of requirements simultaneously is a major technological challenge.

Central bank money is mainly available today to commercial banks. This is supported by account-based technology with which the central bank validates payment transactions by checking that they meet the requirements and then updates the account balances of both banks in the central database. Adding further computing capacity to an account-based solution does not cause the same rate of increase in the performance of the system. Such a solution is not necessarily the cost-efficient or ecologically-sound one that account holders and digitalising markets will require.

It is quite certain for example that as markets digitalise, the amount of transactions for each account holder will increase very fast. The technological infrastructure behind card payments is today estimated to be able to cope with a maximum of around 25,000 transactions a second. For comparison, the maximum number of transactions per second in the Alibaba online store in China on Singles Day on 11 November reached 583,000, which was 39,000 more than a year earlier.

The ideal for account holders in the market is for payment orders and settlement to be simultaneous events. It is clear that a digital currency that is slower to settle than instant payments and takes longer when there are more transactions is clearly not doing its job. Several forms of distributed ledger technology today offer alternatives to account-based technology, but their scalability and cost efficiency are not of a level that would meet the expectations of account holders.

For a digital currency to meet the requirements of general usability today, never mind in the future, its scalability will be of vital importance. This is not a trivial matter technically, and it makes the general architecture of the system more complex. Achieving high-level performance could then mean abandoning account-based digital currency and introducing a value-based central bank digital currency using innovative technology. The Eesti Pank research project is focusing on researching and testing just such a technology.


The introduction of a central bank digital currency would make the core technology behind it into a critical system. The reliability, security and auditability of a technological solution for digital currency must be absolutely infallible without limiting the volume of transactions for account holders or delaying settlements. Account holders must be able to audit the technology and the system at any time without infringing on the privacy of any party. It must also be possible for them to do so without the central bank being involved, meaning that any ordinary citizen can audit whether the central bank is functioning correctly. This makes it important to remember when the technology is being developed that the system must not be dependent on the trustworthiness of the operators and must be able to identify inside attacks.

To meet all of these targets will require a high-performance, cost-effective, and quantum attack-resistant blockchain technology that can deterministically prove the correct state and operation of the system and that all transactions are correct, secure against fraud, and auditable. Since 2012, the Estonian state has been using KSI blockchain technology, which meets these needs, to handle its data securely, and this creates good conditions for using the same technology to build the core infrastructure for a digital currency. The research project will also analyse whether and how much such technology could be used for a central bank digital currency. The European central banks will decide jointly on the launch of a digital euro project in the middle of 2021. This will be followed by a research phase to map user requirements and potential service providers.

Mart Sõrg, Raha. Tartu Ülikooli Kirjastus, 1997.
Ahto Buldas and Märt Saarepera, General Theory of e-Money Systems. Manuscript, 2020.