As blockchain technology gains traction, central bank digital currencies are among the most significant applications being developed. But these will inevitably fall far short of the ideal, for one simple reason: control. In particular, that has implications for composability and privacy, and much else besides.
Central bank digital currencies are no longer a theoretical application of blockchain technology. The list of countries developing CBDCs is growing rapidly, with several now trialing state-backed digital cash.
CDBCs are not built on classic, open blockchain technology. While there are various approaches, they are all based on permissioned ledgers that restrict the role of securing the network and processing transactions to a group of approved entities. They also include a control layer that gives administrators the ability to intervene in transactions, blocking or reversing those they deem invalid.
It’s a far cry from the ideals of Bitcoin, and the Ergo platform that aims to build on these. But it’s only to be expected. The state has a role and a remit, and it’s unlikely to give up the control it exercises. Unfortunately, though, there are two ways that holding onto control will mean that CBDCs fall far short of what they could be, meaning they may ultimately cede ground to open platforms like Ergo.
As we wrote in a recent blog, composability is a core feature of DeFi. It’s what gives applications network effect, instantly adding value by plugging into existing dapps’ user bases and functionality.
Programmable money is a huge development. The current system is clunky and complicated to use, at best. It’s not possible to attach detailed conditions to transactions, and have them interact seamlessly with software, as can be done with blockchain and smart contracts.
Imagine the value that could be unlocked if CBDCs were programmable, and smart cash could be integrated frictionlessly into new applications – banking interfaces, investment services, stores, social networks, games. The list is endless. But this is hardly likely. The freedom to program money will exist, for many years at least, in the open blockchain space alone.
Secondly, we consider privacy to be a core requirement of DeFi. Money is too important to be used as a tool of surveillance, but there is no question that this is what it will become as soon as the first CBDCs are rolled out to a large user base.
China is one of the furthest ahead in its creation of state-backed digital cash. This is a state that is notorious for its internet censorship and online surveillance of its population. Its human rights record is dire, and in recent days we have learned more about its oppression of the Uighur minority. Moreover, China already uses a social credit system, which grants or denies citizens access to certain services and amenities depending on their social score, with model citizens enjoying greater privileges.
There is, again, no question that a state-backed, traceable CBDC will be used as a tool of surveillance on a scale that is unprecedented in human history. And it will be the same across any nation that implements money within the same framework.
That giant eye on the dollar bill? You ain’t seen nothing yet.
Private, programmable financial services
Ergo has a very different vision for blockchain-based cash and financial services. In the new paradigm of blockchain, value is not retained by constraining it. It is only maximised through open systems that make it as accessible as people want it to be. Money without borders, in both senses: cash that can be programmed, sent and received freely but privately, between any two individuals or organisations – and even blockchains – anywhere in the world.
This is what money needs to be, and what Ergo is building.