For many who may perceive the 235 year-old Bank of England (BoE), the United Kingdom’s central bank, as a stodgy and stuffy institution, quite a different picture emerges when you consider its approach to central bank digital currencies (CBDC). The BoE has issued a public discussion paper in March that kicked off a three-month period that included a public webinar with live polls last week for stakeholders and ongoing discussions with experts around the world in digital currencies, monetary policy, and distributed ledger technology.
The United Kingdom’s central bank takes a risk even in suggesting the idea of a CBDC, However, with cash use on the decline and the increase of private money digital currencies such as Facebook’s Libra entering the marketplace, the Bank of England grows concerned that its mission of maintaining monetary and financial stability will be impacted by these developments.
Ben Dyson, Lead on CBDC and Crypto Assets along with Tom Mutton, Director of FinTech, and Manisha Patel, senior analyst for digital currencies, hosted the webinar last week and authored the CBDC discussion paper called ‘Central Bank Digital Currencies: Opportunities, Challenges, and Design’ in March. Dyson stated on the webinar, ‘This is the right time for the Bank of England to think about the future of money and whether we as the Bank of England should consider the type of money we provide to the public.’ CBDC was defined as ‘an electronic form of money, issued by the Bank of England, which can be used by businesses and households to store value and make payments.’
‘At the highest level, it is absolutely wonderful to see an increased interest in digital currency and the potential for borderless exchange of different kinds of assets and currencies across the globe,’ stated Emin Gün Sirer, an Associate Professor at Cornell University in computer science and the Co-Director of IC3, the Initiative for Cryptocurrency And Contracts.
Sirer is a well-known expert on blockchains and digital currencies, known best for his creation of a peer-to-peer, proof-of-work digital currency called Karma six years before Bitcoin in 2003. He also is known for identifying, with a research graduate student, several vulnerabilities in a novel organization on Ethereum called the DAO run by computer code instead of human beings. Ultimately, the DAO was hacked for $55 million from one of the bugs Sirer located but did not share based on the graduate student’s perception it was not a major concern.
Currently, Sirer is currently on leave from both Cornell and IC3 where he is focused on his new role as the founder and CEO of Ava Labs. As the Bank of England is looking to consult the best experts around the world on digital currencies and blockchain, it was no surprise to learn Sirer was already in talks with with Dyson and Mutton. In an interview with Sirer, there were three interesting takeaways from the discussion:
- Sirer does not believe that Bitcoin, Facebook’s Libra stablecoin, or a sovereign central bank digital currency is the ideal form of digital money for the world.
- Sirer sees the benefits of the Bank Of England’s open process of developing a CBDC in a public-private partnership as the right way to create a digital currency system and platform, as opposed to the prescriptive and closed development and model of Facebook’s Libra.
- Sirer describes Ava’s network as a semi-permissioned blockchain network, a description I had not heard before but look forward to learning more about.
As a final note before the interview, it is important to know Sirer is outspoken on his criticism of blockchains including Bitcoin and permissioned networks. With his competitors likely eager to return the favor now that he has entered the private sector, Sirer should be credited with stepping into the arena of competition in the marketplace with what he considers is a better solution rather than remaining a critic who sits on the sidelines.
Jason Brett: Professor, what are your thoughts about the Bank Of England’s approach to the subject of central bank digital currencies, particularly in its decision to take a public-private approach in the provisioning of a CBDC?
Emin Gün Sirer: At the highest level, it is absolutely wonderful to see an increased interest in digital currency and the potential for borderless exchange of different kinds of assets and currencies across the globe. The United Kingdom has always been at the forefront of blockchain technology and is one of a small group of countries, including Switzerland, Singapore, and the U.S., that have kept a watchful eye on blockchain technology. The Bank of England does not want to create their own bespoke system but rather open it up to the private sector. What does that mean? Bespoke solutions have nowhere to go and have been roundly rejected by the market over and over again. We have seen this with every permissioned network so far, including those by Fortune 500 companies, which typically remain highly siloed.
There lies the conundrum – the core of central bank digital currencies does have a centralized component. I think they realize they can only have control over certain aspects of this technology and will turn to private sector providers for their expertise, with the understanding that these systems, coupled with interoperability to other permissioned and permissionless networks, offers a bigger universe of asset exchange. I am very encouraged by this and if you read between the lines, the Bank of England hints at a deployment strategy that is not closed. This is not just the Bank of England operating a database. This is a genuinely open system where the Bank of England only brings its value add with regard to one particular component.
Jason Brett: Professor, how do you see Ava Labs playing a role in CDBC?
Emin Gün Sirer: Ava’s approach is unique: it bridges siloed public and private blockchains, thus enabling two things at once. It allows the asset creators to have complete control over the definition and control of assets. At a technical level, it means it gives you control you over how data is executed and who manages the data. Central banks can control how the asset behaves and who the legitimate owners are at all times. Secondly, Ava’s hybrid asset creator means anyone can become a validator as long as you abide by certain rules. Semi-permissioned networks will also be able to connect with other permissioned networks.
Jason Brett: Professor, during the webinar, the researchers commented that while decentralization may enhance resiliency, it may have a negative impact of performance, privacy, and security. What are your thoughts about a centralized vs. decentralized approach and how important is that in the Bank’s decision for a CBDC?
Emin Gün Sirer: We have extensive experience with centralized systems. The entirety of the web is providing you with centralized services, and it’s been proven time and time again, how a centralized entity is in command of all data and is in a position to use them. One of the most infamous forms of data is financial data. Decentralization in the technology that makes critical decisions with financial data will of course face challenges, which is part of what makes blockchain design difficult and non-trivial. However, if you get the protocol right, researchers have shown that you can build these highly resilient systems, where the security assumptions are upheld and privacy is guaranteed for all users, yet where the efficiencies and performance guarantees of the centralized counterparts are preserved. These new forms of blockchain technologies exist, albeit they haven’t yet been deployed widely.
Jason Brett: Will the Central Bank Digital Currency be a replacement for paper currencies?
Emin Gün Sirer: I do suspect it will be opt-in. Banks will be too reticent about new tech if pushed too quickly, and I am ok with that perspective for some time to come. However, this technology does need to be pushed soon. I do not see central banks providing strong privacy to their users. I have spoken to these authors and they do have a concern about consumer privacy. We are early on in the game of designing these new financial experiences.
Jason Brett: If you could wave a magic wand and introduce a digital currency to the world, would it be Satoshi’s Bitcoin, Facebook’s Libra, or Bank of England’s CBDC?
Emin Gun Sirer: None. It certainly would not be Bitcoin that uses tremendous energy, has enormous leakage of value out of the system and does not scale. Libra, which is backed by a mix of currencies and is controlled by a small group of private enterprises, would not be a central bank backed currency either.
I would create a currency that was controlled and governed by people themselves. Not technocrats. The behavior is open and transparent to all, scales to perform global transactions that can support all seven billion people on the planet without any borders. That’s exactly what we have been trying to do at Ava Labs and our technology looks to provide this.
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