Younger generations are used to instant low cost access and sharing of information. One might even call this a need for instant gratification in every aspect of life, be it shopping, communicating with one another or accessing information, to name a few. Except for payments – there we need to stick to opening hours of banks or pay high fees for cross-border transactions.
To go with the times and approach the modern understanding of processing speed, the transfer of money needs to be updated to echo the needs of our digital economy. In short: we need to reimagine our monetary system.
CBDCs (Central bank digital currencies)
CBDCs – are a form of digital fiat currency issued by a Central Bank – and they might be the perfect update to our outdated payment infrastructure. Currently, most of the central banks worldwide are working on CBDCs – some have already implemented it. (Like the eNaira in Nigeria or the Bahamas Sand Dollar). The hurdle which needs to be overcome is the different laws and regulations every country has, leading to a diverging design of infrastructure and therefore so called “walled gardens” – non compatible payment infrastructures.
Unified programmable Ledger
Agustin Carstens – CEO of the Bank for International Settlement – proposed a solution in his recent speech. An unified programmable ledger as underlying infrastructure for CBDCs, designed in partnership with the public and private sector. This translates to an open digital infrastructure uniting the monetary system with real and financial assets through tokenization. Which is a digital representation of a real or digital asset on the blockchain.
This new underlying infrastructure offers improvements and new features compared to the current payment set-up. Money can flow and settle almost instantly. Programs can be implemented and automating processes through so called Smart Contracts (a program on the blockchain, which runs automatically when predefined criteria are met). For example, policies and regulations can be embedded into smart contracts leading to more automation and therefore more convenience for the user. This new form of money should replicate existing forms of money but in a technologically superior way, fostering innovation in the monetary system.
With the central banks being the core of the system, the private sector is in charge of the consumer-facing activities to keep the current central bank – banking sector relationship intact.
Conclusion
Mr Carstens’s point of view appears to be valuable and correctly calls for central banks to embrace innovation. If the unified ledger is designed properly, it can lay the foundation of innovation comparable to the implementation of standardised protocols of the internet, which lead to the internet we know today.
However, if designed incorrectly, it would offer no privacy for users and create a “Big Brother”-like surveillance system, watching every step and every purchase of the population. A potential solution may be to include privacy-preserving technology on top of the unified ledger – the technology is already available as David Chaum and Thomas Moser demonstrate in their paper eCash 2.0.
It is just a matter of design….
