Trigger Alert: 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 it on a blockchain. To appreciate this session, assume for now that we want to create a CBDC, not whether you think it’s a great idea. However, what is a great idea, if you are going to create a CBDC, is to build it on a secure and stable protocol like Bitcoin.
“Why will we always have government currency? Taxes.” In other words, as long as governments exist, they will levy taxes in their own approved currency. Governments will levy taxes and always want to monitor large transactions. Dr. Wright says he has no tolerance these days for people who think Bitcoin is a way to carry out large and untraceable transactions, circumvent legal obligations or evade taxes.
You can use technological hubris to come up with new ways to get around the rules, but it won’t last long. Dr. Wright likens “crypto-anarchists” to the various heroes in Greek mythology who dared to challenge the gods – it never worked out well for them. It is better to invest your time and energy in creating government currencies with better regulations.
Anyway, back to CBDCs
CBDCs are probably inevitable because at some point it will be much cheaper to just have digital currencies than to continue producing physical money. Of course, millions of people still rely on physical coins and notes, but since CBDCs aren’t just appearing tomorrow, there’s still time to prepare for them.
A good CBDC should (and probably should) have identity and privacy built into its rules. How did you build in both identity and privacy? Bitcoin has different techniques. Creating the asset on an open-use, open-source blockchain like Bitcoin’s leads to greater trust in the system. “Closed source code is really easy to hack,” he says.
CBDC rules can exist on a structured, standard template that runs within Bitcoin. Bitcoin’s rules ensure the timestamp and prevent double spending. CBDC policies should also be open and auditable so that everyone can see how it works (and if there are any changes).
Dr. Wright also notes that he sees “Back to Genesis” as no problem for additional assets built on Bitcoin. Also known as the “traceback problem,” it refers to the ability to trace an asset’s validity back to the original transaction in which it was created.
He talks about how there can be roles for various other contracted third parties to play in the management of a CBDC. One could even be responsible for minting the tokens. Others could handle processes such as monitoring large transactions, validating IDs, or checking rules.
There’s also an explanation of “layers” and why rules like this should be built into a system rather than something separate that just “gets stuck” on a blockchain… BTC’s Lightning Network, for example.
“Lightning is not a protocol. It’s a separate system,” says Dr. Wright. “Layers, by definition, encapsulate others. Ethernet encapsulates IP. IP encapsulates TCP, which means that the entirety 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 play 1 and all previous seasons of Dr. Watch Wright’s The Bitcoin Masterclasses series on the CoinGeek YouTube channel.
To find out more about central bank digital currency and some of the design decisions to consider when creating and launching it, read nChain’s CBDC playbook.
The Bitcoin Masterclasses: Breakout Session: Using nLockTime for Business Finance
New to Bitcoin? Check out CoinGeek’s Bitcoin for beginners section, the ultimate resource guide to learning more about Bitcoin – as originally conceived by Satoshi Nakamoto – and blockchain.