One of the most interesting trends in blockchain right now is that of Central Bank Digital Currencies or CBDC. These initiatives are the latest incarnation of digital currencies and one that the Head of Crypto at Visa said would be very important for payments in the next decade.
Clearly the payments giant is keen to be involved in what it sees as a growing market but there are other players too. In fact, one of them seems to be really stepping up its efforts. L3COS, a startup that is trying to develop technology to run a new digital currency for banks, including the Bank of England, has made a key announcement of a new strategic advisor.
According to an article in the Times, Sir Mark Lyall Grant will advise L3COS as it seeks to woo central banks to its blockchain-based technology. Sir Mark was British Ambassador to the UN from 2009 to 2015 and then went on to advise Prime Ministers Cameron and May until 2017.
What’s interesting about this appointment is the fact that Sir Mark clearly has close links to the British Government and the UK is one of the nations that is openly assessing the potential role of blockchain in CBDC.
Earlier this year, it released a discussion paper called ‘Central Bank Digital Currency: opportunities challenges and design’ in which it outlined how “CBDC could present a number of opportunities for the way that the Bank of England achieves its objectives of maintaining monetary and financial stability”.
According to the Times article, L3COS’s founder Zurab Ashvil says he is in discussion with various central banks about these initiatives but the discussions are at an early stage. The question is, will this activity result in central banks adopting blockchain technology?
Although it has mainly been used to power systems outside the traditional financial system, blockchain would have some clear advantages for central banks. Firstly, it would do away with a whole range of inefficiencies that come about from cash circulating in the economy. These types of transactions are difficult to monitor when it comes to stopping criminal activity and ensuring taxes are paid, so more digital payments is always going to be a good thing.
Furthermore, having a transparent and auditable ledger of all transactions would also eliminate the need for a whole range of financial intermediaries, bringing down costs for both central banks and society as a whole.
At the same time though, having a blockchain-based system to power the currency of a large economy like the UK would clearly need some key features that are not easy to support. For a start, security would be paramount and there would have to be zero possibility of a data breach. Secondly, the system would need to be extremely fast in order to power the vast number of transactions that take place everyday in a large, open economy like the UK’s.
Getting the balance of security, speed and decentralisation has been one of blockchain’s ongoing issues so we’ll have to see whether it’s possible. Everyone from the US Federal Reserve to the People’s Bank of China is currently investigating blockchain for a CBDC to some degree or another. Which one actually starts to make progress with these investigations is difficult to predict.
It does seem that this trend is increasing rather than fading away though. China, which never gives a lot away, is clearly making progress on this front and could be the first major economy to release a CBDC into circulation. With Facebook having released Libra roughly a year ago, it seems unlikely that the US would want to be outmanoeuvred by both a major geopolitical rival and a private sector tech giant, and we can expect something from them in response.
Will blockchain be the solution that underpins these major financial innovations? That’s a much harder question to answer but, at present, it seems like an increasingly safe bet.