The rise of CBDC and the role of a regulated blockchain

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If there’s one story that has dominated the headlines this year in the world of blockchain and crypto it’s Central Bank Digital Currencies or CBDC. It seems like virtually every week there’s a new story about the growing momentum these initiatives are gathering, with countries around the world investigating their viability.

We’ve seen the head of crypto at Visa state that CBDC will be the most important trend in payments over the next decade. This follows recent announcements from major central banks like the Bank of England and the Bank of Japan that suggest they are investigating blockchain as a technological base for the CBDC they are considering.

Of course, not all CBDC are equal. If we look at China’s efforts, for example, we don’t know a lot about the process because of the closed nature of the state but we do know that it was one of the first major nations to really start to push the idea in a big way. The US Federal Reserve seems to be playing catch up with other nations on CBDC while simultaneously working out how to deal with ‘corporate currencies’ like Libra.

It’s against this backdrop that a recent thought article by Zurab Ashvil proposed that a regulated blockchain is required to power CBDC. He suggests that existing decentralised blockchains have failed to be adopted en masse because of the anonymity they allow, which also makes them unsuited to CBDC. He says:

“Rather than decentralisation and anonymity at all costs, governments are looking for the speed of transactions and smart contract efficiencies that this technology can provide, in order to operate regulated digital economies that benefit their citizens. This is why a new approach is needed and why regulated blockchain is the future of this transformational technology.”

It’s certainly true that speed of transactions would need to be a key characteristic of a CBDC if it was to be implemented as part of a payment system that drives a sovereign state’s digital economy. At its core, a CBDC is a digital currency that a central bank issues as electronic cash, rather than having to print physical money. This can then be used by businesses and households to make payments.

These initiatives are gaining ground for a number of reasons but one of the most important is the fact that digital card payments are increasing, while payments in physical cash are decreasing. There is also the belief that, as payments become increasingly digitised, they can be made more efficient and automated, which is where the use of blockchain-based smart contracts play a role.

As mentioned, different states are at completely different stages in their development of CBDC and, as with all new technologies, there are bound to be teething problems. Essentially though, a core feature of all CBDC would need to be a ledger of transactions, with payment interfaces working on top of these.

Zurab Ashvil argues that existing decentralised blockchains would never be the right technology to power these currencies because the proponents of these networks have essentially been anti-establishment from the very start. His view is that if you don’t believe in a centralised authority, how are you going to operate a CBDC issued by a central bank?

With CBDC getting so much attention at the moment, it’s therefore worth looking at the L3COS system he has designed to address the needs of governments in more depth. It involves all 195 sovereign states operating a super node at the top of a triple layer consensus mechanism. According to the article, these nodes can communicate with one another via a Proof of Government mechanism that would, for example, allow the Bank of England to settle transactions with the European Union via a rapid Real Time Gross Settlement system.

In a nutshell, it looks like the regulated blockchain that L3COS provides is aimed at underpinning all CBDC in a way that other decentralised blockchains are not set up for. This is undoubtedly a big aim but, with CBDC set to stay on the agenda for some time, may be the radical new direction that is required.

Author: Zurab Ashvil, Founder and CEO, L3COS Photo by Launchpresso on Unsplash