Home Blockchain When the CBDC revolution happens, it won’t be on the blockchain

When the CBDC revolution happens, it won’t be on the blockchain

When the CBDC revolution happens, it won’t be on the blockchain

Bank of England Deputy Governor Jon Cunliffe, who oversees the bank’s work on central bank digital currencies (CBDCs), recently said the Bank plans to release a research paper at the end of the year. year on the appearance of a retail CBDC. . He expects it will be five years or more before e-books are available to consumers and I’m sure that’s a conservative estimate as a retail CBDC needs to keep up with the demands many competing stakeholders and it will take time to elucidate and reconcile such.

The Deputy Governor further stated that any proposed digital book would be probably be managed through some sort of account rather than functioning like coins or banknotes. His comments seemed to imply that tokens on a blockchain weren’t all that when it came to a population-scale cash alternative or a form of electronic legal tender.

These remarks were met with dismay by many cryptocurrency enthusiasts who imagine that some form of blockchain would be at the heart of any digital currency system. But the Bank of England’s views in this regard echo findings from the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative (DCI). Their “Hamilton ProjectThe Phase 1 executive summary notes that they found that “a distributed ledger operating under the jurisdiction of different actors was not necessary to achieve our goals.”

In plain language, they stated that no blockchain is needed to implement a CBDC. Additionally, they stated that a distributed ledger did not fit the “trust assumptions in the Hamilton Project approach” which assumes that the platform would be administered by a central actor (e.g., a central bank) and they found that even when running under the control of such a single actor, the architecture creates “performance bottlenecks”.

(In other words, the core of their discovery was that a blockchain is a very specific solution to the problem of forming consensus in the presence of untrusted third parties, but in a Federal Reserve digital currency of some kind whatever, there would be no such parts.)

Additionally, as the folks at the Hamilton project note, the design choices for CBDCs are more granular than commonly thought and the “tokens or accounts” categorization is limited and insufficient to bring out the complexity of the choices when it comes to data. access, intermediation, institutional roles and data curation in CBDCs. Broadly speaking, the distinction between the two — as stated in various reports by BIS, Bank of Canada, IMF, etc. — is that an account-based system requires verifying the identity of the payer, while a token-based system requires verifying the validity of the object used to pay.

In reality, however, no central bank will allow a token-based system that operates anonymously and therefore digital identity will be an integral part of the CBDC rollout. This is why I think it will take some time for all these architectural choices to be worked out even after the requirements, objectives and constraints of a national digital currency have been agreed. I don’t see this wide range of design choices as a problem, but rather as an optimistic cry to policymakers and regulators: if you can actually tell us (i.e. the digital financial services industry) what you want from a digital currency, then we can deliver it because we know all the technology needed to build it already exists (unless your requirements include time travel or perpetual motion.)

(To take an example at the customer interface level, wallets can support both an account balance view and a coin-specific view for the user, regardless of how the funds are stored in wallet, database or AI-powered quantum blockchain in the cloud.)

To sum up, then: the Bank of England’s apparent view that a retail CBDC is best implemented through the transfer of account balances is consistent with other findings. Additionally, in my view, the ability to transfer limited balances directly between offline devices is key to making a CBDC a viable population-scale alternative to cash.

turn it off

One of the reasons some people think a blockchain is necessary for digital currency is the potential for smart, programmable money. I agree that programmability is sure to be one of the most exciting features of retail digital currency, but that doesn’t mean “smart” “contracts” and blockchains.

(I’m talking about retail CBDC here. As for wholesale CBDC for institutions, trading more complex instruments, the full panoply of smart contract capabilities might just be appropriate.)

The Bank of England, and as far as I know pretty much every other central bank, has no interest in running a digital currency system itself. All envision “two-tier” systems in which they control the system but have it run by others. The Bank of England calls these third parties Payment Interface Processors (or PIPs), which I think is a little too generic: I would have gone for Currency Connectors (CC) or something like that , but whatever.

Lee Braine and Shreepad Shukla of Barclays Bank’s Chief Technology Office have an article”An illustrative industrial architecture to mitigate potential fragmentation between central bank digital currency and commercial bank moneywhich expands on the Bank of England’s CBDC Platform Model to make some suggestions for what the PIP ecosystem will look like. They point out that implementing programmability in this ecosystem, rather than on a blockchain using smart contracts, should “reduce security risks and complexity” and I’m sure they’re right.

Smart contracts (or “persistent scripts”, as they should be called) have some interesting features. But they impose an incredible responsibility on their creators, who are held write perfect code to implement perfect logic. If there is a flaw in the logic or an error in the code, it will inevitably be exploited by attackers. It goes on all the time, as even a cursory glance at the cryptocurrency newsfeeds will confirm. I just can’t imagine a central bank forking a country’s currency to correct a mistake made in a smart contract!

Instead of smart contracts, what if intermediaries (i.e. PIPs/CCs) provide a rich and well-defined set of APIs that wallet providers can use to deliver services to end consumers, then we have the basis for creative new products and services without the hassle of testing, certification and control of smart contracts. Given the frequent and severe nature of smart contract errors we see on public blockchains, such APIs are very attractive.

All things considered, then, it seems that blockchains are neither necessary nor desirable for a retail digital currency and since – according to the Bank of England, the Fed, the Bank of Japan and others – there is no as a “hot platform” for retail CBDCs and it will take time for them to hit the mainstream, there is still plenty of time to explore other architectures more suited to an electronic fiat alternative.


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