Creating CBDCs on a blockchain network: The Bitcoin Masterclasses #6 with Dr. Craig Wright

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Trigger warning: This fifth session of The Bitcoin Masterclasses with Dr. Craig S. Wright discusses central bank digital currencies or CBDCs. It’s more about the practical and technical implications of creating them on a blockchain. To appreciate this session, assume for the moment that we want to create a CBDC, not whether you think they’re a great idea. What is a great idea, though, if you’re going to make a CBDC, is to build it on a secure and stable protocol like Bitcoin.

“Why will we always have government currencies? Taxes.” In other words, as long as governments still exist, they will charge taxes in their own approved currency. Governments will charge taxes and always want to monitor large transactions. Dr. Wright says he has no tolerance these days for people who think Bitcoin should be a way to perform large and untraceable transactions, avoid legal obligations, or evade taxes.

You can use technological hubris to invent new ways to get around the rules, but that will never last long. Dr. Wright compares ‘crypto-anarchists‘ to the various heroes in Greek mythology who dared to challenge the gods—it never worked out well for them. Better to put your time and energy into creating government currencies with better rules.

Anyway, back to CBDCs

CBDCs are likely inevitable because, at some point, it’ll be far cheaper to have digital-only currencies than continue to manufacture physical money. Sure, millions of people still rely on physical coins and notes, but since CBDCs aren’t going to just appear tomorrow, there’s still time to prepare for that.

A good CBDC could (and probably should) have identity and privacy built into its rules. How do you have both identity and privacy built in? Bitcoin has several techniques. Creating the asset on an open-use, open-source blockchain like Bitcoin’s leads to more trust in the system. “Closed-source code is really really easy to hack,” he says.

CBDC rules can exist on a structured, standard template that will run inside Bitcoin. Bitcoin’s rules handle the timestamping and prevent double-spending. CBDC policy rules should also be open and auditable, so anyone can see how it works (and if there have been any changes).

Dr. Wright also notes that he doesn’t consider “Back to Genesis” a problem for additional assets built on Bitcoin. Also known as the “traceback problem,” it refers to the ability to trace the validity of an asset back to the original transaction where it was created.

He talks about how there can be roles for various other contracted third parties to play in managing a CBDC. One could even be responsible for minting the tokens. Others could handle processes like monitoring large transactions, validating IDs, or auditing rules.

There’s also an explanation of “layers” and why rules like these should be built into a system rather than something separate that merely “settles” on a blockchain… for example, BTC’s Lightning Network.

“Lightning is not a protocol. It’s a separate system,” Dr. Wright says. “By definition, layers encapsulate others. Ethernet encapsulates IP. IP encapsulates TCP, which means that the whole of TCP is always inside (IP) as a higher-level layer. If it’s not encapsulated, it’s not a higher-level layer.”

The fifth session of The Bitcoin Masterclasses season 6, Day 2, starts here. You can view all of Day 1 and all previous seasons of Dr. Wright’s The Bitcoin Masterclasses series on the CoinGeek YouTube channel.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

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