Ripple’s Private Ledger: The Solution for Central Bank Digital Currencies
In March 2021, Ripple declared its creation of the Ripple Private Ledger, a private version of the open-source, public XRP Ledger. This innovation is designed to offer Central Banks a secure, controlled, and adaptable mechanism for issuing and managing Central Bank Digital Currencies (CBDCs). Given that 80% of central banks are currently exploring digital currency options, the birth of new CBDCs is inevitable. The term CBDC refers to a digital manifestation of a fiat currency — a tokenized or electronic representation of a nation’s official currency.
CBDC Implementation Challenges and Ripple’s Solution
The technology that underpins the majority of CBDCs, as well as most cryptocurrencies, is the distributed ledger. However, Central Banks seeking to utilize existing blockchains for swift CBDC implementation often encounter challenges related to handling the necessary transaction volumes.
In addition, a distributed digital ledger requires a cryptocurrency to perform transactions. A significant drawback of utilizing existing (public) blockchains lies in their public nature, making all transactions visible. Since Central Banks necessitate privacy for their transactions and demand greater control over their currency than a public ledger provides, Ripple’s private ledger for CBDCs offers a more attractive solution.
A Closer Look at the CBDC Private Ledger
The CBDC Private Ledger is constructed on the same blockchain technology powering the XRPL, rendering it perfectly suited for payments.
Ripple has stated that transactions on the CBDC Private Ledger will be cost-effective, reliable, and nearly instantaneous. It can also manage the high transaction volumes required by Central Banks, processing tens of thousands of transactions per second initially, with the potential to scale up over time. Importantly, transactions on the CBDC Private Ledger are validated by the consensus protocol used by the XRP Ledger, making it less energy-intensive and less costly than public blockchains utilizing proof-of-work.
With the CBDC Private Ledger, Central Banks can flexibly and securely generate their digital currency, meeting high security standards while maintaining privacy and policy compliance. This solution allows technology to adapt to them, rather than forcing them to adapt to technological constraints.
Ripple has described its solution as a “game-changer for central banks”. Monica Long, General Manager of RippleX at Ripple, stated that XRP would serve as a bridge or intermediary between a CBDC and other currencies.
Matt Hamilton, Principal Developer Advocate at Ripple, verified that the CBDC Private Ledger is based on the public XRP Ledger, each institution managing its own private ledger.
David Schwartz, Chief Technology Officer at Ripple, explained the necessity of the private aspect for central banks and how XRP can facilitate private ledger transactions just like non-XRP transactions on the XRP Ledger.