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Do Central Bank Digital Currencies need a blockchain operating system?

Guest Post | Sep 4, 2020

Central bank digital currencies - Do Central Bank Digital Currencies need a blockchain operating system?

One of the hottest topics in blockchain circles right now is Central Bank Digital Currencies or CBDC. Ever since Facebook announced its Libra project roughly a year ago, the CBDC trend has gained a lot more attention as governments weigh up how to react to private sector involvement in the world of money.

Of course, some CBDC initiatives were in place long before Facebook announced anything. China, for example, had already made clear its intentions to issue a CBDC. No doubt the combination of a large geopolitical rival and one of the world’s most powerful private companies both investigating digital currencies spurred some states into action.

Now, we’re seeing major central banks, like the US Federal Reserve, European Central Bank, Bank of Japan and many more, demonstrating their intention to get involved. So much so that the Head of Crypto at Visa recently called CBDC one of the most important payment trends of the next decade.

The pros and cons of the Bank of England’s activities in this area were laid out in detail in a recent article in The Verdict that looked at whether a blockchain operating system could form the foundation for digital currencies. In particular, it focuses on the Bank's own paper about the opportunities, challenges and design of a CBDC, as well as a response to it from L3COS.

As the founder of L3COS, Zurab Ashvil, is quoted as saying:

“The L3COS platform will facilitate a central bank digital currency (CBDC) for the Bank of England...this would be an electronic form of central bank money that could be used by households and businesses to make payments.”

Furthermore, he went on to say that:

“Commercial banks and other financial institutions will benefit from the Real Time Gross Settlement System (RTGS) that is built into the L3COS ecosystem. The blockchain operating system would create an immutable digital ledger of all transactions made using the digital currency, which would enable them to be fully audited and traced as required.”

There are a huge range of factors affecting the successful issuance of CBDC and these statements point to some of the most important. Firstly, there’s the growing importance of electronic money in general. For many years, consumers have been gradually switching their day-to-day payments from cash to digital and this has accelerated in recent years. A CBDC would be one way of increasing the speed and efficiency brought about by this change.

However, the elimination of cash is not just about a preference for more efficient digital payments. It is also about eliminating the criminal activity that is enabled by cash being an anonymous payment method. In the case of the L3COS proposal, an immutable ledger that would ensure transactions could be fully audited and traced is the proposed solution.

Taking this sort of direction does, of course, come with its own privacy implications, in terms of what should and shouldn’t be tracked. This is clearly a scenario that the Bank of England has already considered though, with a member of the digital currencies team quoted as saying they want to ensure users of a CBDC can be confident about privacy of payments.

See:  Visa’s digital dollar concept opens a door to central bank currencies

According to L3COS, if a blockchain operating system is implemented, it could empower governments to regulate digital economies while providing security and legitimacy of transactions. Whether that occurs, we will just have to wait and see but it seems clear that, for a CBDC to work, it would need to operate in a holistic way.

If we think of the analogy between blockchain now and the internet in its early days, it's clear that a lot of progress has to be made to get to the point where it is globally integrated and comprehensive. However, we also know that the internet has got to this point. Undoubtedly it will take time but, were blockchain to eventually replicate the spread of the internet, it would make sense to think of it as a blockchain operating system.

Taking this one step further, it would be the perfect foundation for a CBDC to operate on, especially if various states are using it for their own flavour of CBDC. When you take this all into account and step through the logic of what might occur as governments delve further, the idea of a blockchain operating system seems more and more likely.


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