Over the last week, another member of Hive and I discussed central bank digital currencies (CBDC) and what is happening. Much of this stems from the online posts that the Fed and Bank of Japan are about to release one. The view is we will see CBDC from these countries starting this year.
It is appearing that if you really do not want to know what is going on, head over Twitter. The apparent lack of understanding of even basics is mind-blowing.
Here is a headline from an article on Coindeks:
Notice how it says that it will "decide on issuing a digital yen in 2026". That is basically 3 years away.
So where does the idea that the BoJ is releasing one this year come from. Probably the same place that says FedNow is a CBDC when anyone who looks at the design sees it is an account based system, not a token.
Perhaps it is best to look at some of the basics.
Blockchain Basics
Are these networks even going to be blockchains? This is a question that the Twitter gang doesn't discuss. How is the network going to be established? Naturally, it will likely be a closed system yet there is a chance that something like Ethereum could be used. It is, after all, moving in the direction where compliance is possible.
Presuming they are going to use blockchain technology, even if it is closed, here are some other questions:
- What is the governance mechanism?
- Who is going to run the nodes?
- How will 3rd parties access the system?
- How will existing payment systems be incorporated?
- What happens if there are settlement delays?
- How will they deal with a system that is incompatible?
- How much time will institutions have to convert to the new system?
- What attack vectors are opened up?
- Who is liable for hacks?
- What does the architecture look like?
- Are there backdoors built in? Who has access?
- Will it used distributed ledger technology (DLT) or something else?
- What oracles are going to be used? Who is going to set them up?
- How much risk is there with smart contracts? What steps are going to be taken to limit that?
- How do they scale the system?
- What changes can be made? When is the system immutable? Will it be?
Then we have a few other important questions:
- Who is going to build all this?
- What will the bidding process be?
- How much is budgeted?
- What oversight is required?
To carry this a little further:
- What are the legal ramifications?
- Can the central bank be sued over this? What legal responsibility do the commercial entities have?
- What laws have to be changed?
- How long will the legal challenges to said changes take?
Does anyone know the answers? Do you see this posted on Twitter?
So what is the Bank of Japan doing? This is from their paper earlier in the year.
In fiscal 2023, the Bank will select participants for the CBDC Forum and contractors for developing the experimental system, proceeding with discussions and explorations with the participants and the development of the system accordingly. The Bank will issue public updates on these matters in a timely manner.
During this fiscal year, there were be a forum for the public to comment upon along with contractors choices for developing the experimental system. This isn't even for the final product. It is for something to experiment with.
So basically the BoJ will decide on contractors to build a testnet. That is their goal for fiscal 2023.
The Confidence Game Means Going Slow
There is another piece to this puzzle that is repeatedly overlooked.
The game of money and finance is one of confidence. It is based upon trust. That is what brought out Bitcoin to begin with. It was designed to be trustless in a world where Satoshi felt the banks were losing the trust of the population.
For that reason, central banks have to go at a snail's pace. If something like Stellar gets hacked, what is the loss? On the grand scheme of things, very little. Even if Bitcoin suffered a setback, the proportional impact is minor.
Things are completely different when you are dealing with the USD, JPY, or EUR. There are hundreds of trillions in commercial and financial activity tied to those currencies. Central banks need to develop networks that are safe.
We also only need to look at the history of cryptocurrency to see how things progress. The industry basically operated without safeguards and broke a lot of stuff. In spite of that, progress was rather slow. We are only now getting to the point where things are gearing up in a significant way.
Central banks and the associated governments have a lot of work to do. They are behind by a wide margin, something that is going to be difficult to close. The resources tied to cryptocurrency keep expanding. Each day, we see more entities involved in some fashion. Development is going at a furious pace.
How long would it take these entities to develop something even on the scale of Lightning Network? Even after all these years, that is still rather limited.
Failures Are Mounting
Many point to the eCNY as the shining example of a successful CBDC. While we take that for face value, we know the Chinese are not exactly forthcoming with information. That means we do not exactly know the success rate, nor the problems being encountered.
We do have a few other examples.
The first was El Salvador. While this was not a CBDC, the adoption of Bitcoin as legal tender did not exactly take off. Do you recall the problems that were faced by the wallet system? How could they overlook something as basic as the wallets?
They did.
Of course, most recent was the eNaira which was designed to replace cash. The government totally bungled that up, pushing the overwhelming majority of Nigerians to call for the return of cash.
There is always the human element to technological adoption. Even government mandate doesn't mean the technology will work as promised.
So, once again, we have a lot spewed online touting ideologies and misinformation about what is taking place.
CBDCs are not close to becoming a reality. Just look at the list of questions and find some of the basic answers. How is the Bank of Japan going to bring a CBDC out this year if it is only looking to hire the contractors to build what is basically a testnet?
The answer is it cannot.
In the meantime, permissionless blockchain networks are expanding and building in the wild. Each day, they are open to attack, further strengthening their position.
We are already on the track running the race and the central banks are still designing their cars. They might have huge resources yet they still have to design then build.
Anyone who has done development knows a few basic facts:
- it takes times
- there are always bugs
- you never know where the bugs will be
There is no way for the institutions to get around this.
Remember this the next time someone shows up on your Twitter feed espousing how the Fed or BoJ is bringing out a CBDC soon.
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