Category: Cryptocurrencies & NFTs

For those paying even limited attention to the news, it is almost impossible to finish a day without hearing words like “Cryptocurrencies,” “NFTs (Non-Fungible Tokens)” and “CBDC (Central Bank Digital Currency),” especially after the Super Bowl 2022. The best question to ask at this point is not whether crypto will stay and grow, but how to deal with changes in currency — something that has not happened for decades or a century — to make the transition more smoothly, costing less and gaining more.

CBDC = Authoritarianism?

Some commentators, like this opinion piece by Aubrey Strobel, went out of their ways to argue that we should avoid CBDC by all means because it symbolizes authoritarianism. If the US adopts CBDC, it “will be the end of American freedom” according to Strobel, and “the American government will be on a surefire path to authoritarianism.” “CBDCs would create an authoritarian surveillance state and constitute a severe overreach of power.”

Strobel is not alone, and she has companies in the US Congress. For convenience I will only cite the words from Congressman Tom Emmer (R-MN), which were cited in this Harvard Business Review article, “Central banks increase control over money issuance and gain insight into how people spend their money but deprive users of their privacy.” Other politicians may say similar things.

What are the problems with this way of thinking?

Two in my view: It ignores or at least underestimates the power of rule of law, and it jumps to conclusions prematurely. I will discuss each below in turn.

Keeping Rule of Law in Mind

There are “China haters” who would criticize anything and everything China does and would push the US away from doing anything remotely similar to what China is doing or has done. But they forget — ironically for lawmakers — that the key difference between China and the US is rule of law: The latter has it, but the former has not.

Under the current leadership of Xi Jinping, China clearly shows more interests in “rule of party” than rule of law. It would be a shameful waste if the US follows a strategy of eschewing anything China does, because the US has long existing and detailed laws to protect citizens’ privacy, while China can only resort to its top leaders’ goodwill or personal preferences.

To be sure, China has come from a long way behind and has made long strides of progresses. There is no better way to summarize the situation than simply saying that time has changed. Even the top leaders can no longer do what their processors could do. If China shifts from Xi Jinping to “Wang Jinping” or “Li Jinping,” whoever takes the helms today is unlikely to go back to Mao’s era completely.

As a good example, just when seemingly everyone in the US or EU is accusing China as a surveillance state, even with a model to link surveillance cameras with internal citizen control to turn everyone into his own policeman. Few has bothered to mention the fact that “(r)oughly 770 million surveillance cameras are in use today, and that number is expected to jump to one billion by 2021, according to a market forecast reported by the Wall Street Journal last year.”

China has also moved toward guarding citizens’ privacy. According to the BIS (Bank of International Settlement) 2021 report, which cites different approaches taken by countries to protect citizens’ privacy, China’s version of CBDC, called e-CNY, “is to shield the identity of the user by designating the user’s public key, which is issued by the mobile phone operator, as the digital ID. The central bank would not have access to the underlying personal details.”

Yet China still has a long way to go, and the strong legal guardrail preventing power abuse, like the system we see in the US, is simply not there. Missing that, Chinese citizens can still only count on the goodwill of top leaders and little else. This is likely to be the key and long lasting advantage the US has over China.

Sometimes I get angry after repeatedly seeing public events taking (the usual) bad turns in China, where governments have the knee-jerk reactions case after case: blocking the news from spreading instead of addressing the root of the problems. Take a look at this latest example of a trafficked woman who was chained to a small shed after producing eight children. What the ABC News report did not mention is that local governments, while promising to conduct a thorough investigation and “detained six people and fired eight lower-level Communist Party officials,” are also investigating who gave the pictures to the media that caused a big fuss on the domestic Internet. These are exactly the kind of developments that kills my confidence in China’s system — the same confidence that Xi Jinping told the world to have with China.  

“Have faith in your own institutions. Know your competitors but first, know yourself better.” These are the words I want to say to some Americans.

Tactic vs. Strategic Institutions

It is important to remember that CBDC is not an institution standing by itself, separating from everything else. CBDC is not falling from the sky and randomly landing itself anywhere in the world, either. It is not CBDC that creates authoritarianism, just like it is not Bitcoin that will turn a country into democracy. CBDC and Bitcoin are what I call “tactical institutions.” It is the bigger, higher level — the “strategic institution” of rule of law — or lack thereof, that controls the nature of CBDC.

The BIS 2021 report, my favorite document on the CBDC topic, says it well: “The same technology that can encourage a virtuous circle of greater access, lower costs and better services might equally induce a vicious circle of data silos, market power and anti-competitive practices.” Furthermore, “whether a jurisdiction chooses to introduce CBDCs, FPS or other systems will depend on the efficiency of their legacy payment systems, economic development, legal frameworks and user preferences, as well as their aims.”

Rule of Law Brings Surprises

One way to understand and to remember what rule of law is about is to think of it as capable of bringing “surprises.” Without rule of law, those who are stronger and more resourceful would “logically” dominate those weaker and less resourceful. Without rule of law, those who have free access to precious information would “naturally” use it anyway they see fit with little consequence. Without rule of law, those at a higher hierarchical position would “normally” smash or abuse those below anyway pleases them and expect little repercussion.

But rule of law changes all that, and there is very little left to be taken for granted with rule of law. Think you can ­dominate the less powerful others? Think again! Think you can use all the information you have access to? Sorry but think again! Think you can wield all your positional power on your subordinates, once again it would be smarter to think again!

Why are those “surprises” good for the society? Because (1) they send a signal out that justice is possible; (2) they bring at least some power to the presumably powerless; (3) they turn the world into a more level playing field than other models of social governance where rule of law is missing or weakening; (4) they prevent “winner takes all” from happening, at least from happening all the time; and (5) they redefine strength and weakness not by a single type of resource but multiple types.

Simply put, the biggest advantage of rule of law is to organize and mobilize social resources, public or private, by transparent, carefully designed and universally applied rules. Xi Jinping of China does not believe it and is trying to revive the legacy “rule of men” system. He is wasting time — his and China’s. The best test of rule of law is how many surprises like those listed above an average citizen will encounter on an average day. Until China someday proves itself capable of producing more surprises, China is still a weak country no matter how big its GDP figures are.

Don’t get me wrong: Rule of law will not be completely watertight or completely bulletproof but acts like human immune system: the most efficient, adaptive and holistic first line of defense.

In the case of CBDC, rule of law changes the question to be asked: It is not whether central banks have direct access to citizens’ private information or not, but what they can do about it and what consequence they must face in case of abuse, that separates authoritarianism and democracy.

Of course, we can design the CBDC model such that central banks do not always or do not automatically have direct access to citizens’ transactions data. I will come to that point later.

Is Nakamoto Too Radical?

I know there are many enthusiasts out there who would accept nothing but Satoshi Nakamoto and his Bitcoin. With all due respect for the pioneer, Nakamoto has shown a tendency to forget or to underestimate the power of rule of law. He designed Bitcoin in a way like it was in the wild and lawless west. As a result, Nakamoto and his Bitcoin bring truly radical changes.

A good framework of evaluation is to consider the three dimensions of an information system: architecture (concentrated or distributed), access (permissionless or permissioned) and control (centralized or decentralized) as discussed in this insightful essay.

Nakamoto goes all the way to change all three dimensions at the same time by making Bitcoin a distributed ledger (i.e., financial bookkeeping records distributed over numerous public nodes with redundant copies), with completely open (i.e., “permissionless”) access and entirely decentralized control. His design came at the time when we had an entirely concentrated, permissioned and centralized monetary system. Bitcoin was consciously made as the anti-thesis of the status quo.

When someone tries to do too much at a single shot, the solution is inevitably radical rather than balanced. This does not mean the proposal will be a total failure. Consider Warren Buffett who used to call Bitcoin “rat poison” years ago, but just invested $1 billion to a cryptocurrency friendly bank, Nubank based in Brazil. It is safe to say that Bitcoin is here to stay.

However, radical solutions tend to have an excessive cost. As the BIS (Bank for International Settlement) 2021 report points out, “it is clear that cryptocurrencies are speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks and other financial crimes. Bitcoin in particular has few redeeming public interest attributes when also considering its wasteful energy footprint.”

Even Bitcoin fans or early adapters have voted by feet. In terms of picking the best crypto exchanges the centralized exchanges (Coinbase, Binance, Kraken & Gemini) are far more popular than decentralized ones as discussed in this Investopedia article. The latter also do not necessarily do better than their centralized counterparts in safety. According to this Wikipedia article, “(i)n July 2018, decentralized exchange Bancor was reportedly hacked and suffered a loss of $13.5M in assets before freezing funds.”

By the way, I have little doubt that Satoshi Nakamoto is the person’s real Japanese name because his words and deeds match the behavioral pattern under the influence of Confucianism.

While being modest and maintaining a low key in spite of great success is a virtue, I wish Nakamoto had some exposure to psychology to help him understand imposing constraints in access, control and architecture is itself a valuable incentive, while leaving everything open can be a big turnoff because it can significantly weaken the sense of individual responsibility.

China has a famous proverbial story that says a Buddhist temple was deeply hidden in the mountain and people had to go downhill to get drinking water. First there was just one monk in the temple, who always carried two buckets of water on his shoulder and climbed uphill. Life was hard but manageable. Later one more monk joined the temple, and the two decided they both should share the responsibility of getting one bucket of water uphill as nobody wanted to be the one carrying two buckets. Soon another monk came and since none of them wanted to be the “water carrier,” the three all died of thirst.

So the famous saying goes: One monk = 2 buckets of water, two monks = 1 bucket of water and three monks = 0 bucket of water (一个和尚挑水喝，两个和尚抬水喝，三个和尚没水喝).

In the Nakamoto’s case, according to this article published in August 2021, there were 12,130 public nodes running on the Bitcoin network. Such a global “temple of Nakamoto” is much larger than three “monks.”

But my intention is never to mock all free and open entities as the “temple of three monks.” Instead, I strongly believe temples of one, two or three monks should all be allowed to exist, at least to try out. Diversity makes life beautiful, while the same model of life never fits everyone.  

How Rule of Law Helps Protect Privacy

I have two counterarguments to weaken the equation of CBDC = Authoritarianism. First of all, not everything is to be changed by CBDC. At the end of day, customers own their transaction records and have the right to keep them private. Shifting from commercial banks to central bank (if the US decides on a “retail CBDC” model, see later for details) will not change that. The same laws and regulations should apply tomorrow as they do today. Following my thesis of “rule of law = surprises,” laws offer protection to the weaker, less resourceful agents, entities or parties. Just because someone has access to free information does not mean they are free to use it anyway they want.

Secondly, while CBDC may allow central banks easier access to transaction records than before, pending on which business CBDC model we choose to follow, one may argue that the risk exposure will be lower rather than higher today. With about 85,000 branch offices of commercial banks in the country according to this article in Harvard Business Review (HBR), all allowed to access or to hold customers’ transaction records, hacker attacks and information leaks are bound to happen. The same HBR article says that the “cost of fraud to U.S. financial services companies is estimated at 1.5% of revenues, or around $15 billion annually.” By handing over the records to the central bank (again pending on the retail CBDC model, which may not be the best) that is better equipped with security resources than commercial banks do, we expect fewer attacks, although each attack may be more devastating if it does happen, as the loss will be higher.

The moral of the story is that we hardly ever see decisions completely risk free. Far more likely we will face trade-offs that force us to weigh benefits and costs, to compare solutions and to arrive at the conditionally best choice.

Enough for philosophical talks and let us see which business model of CBDC will allow us to avoid or mitigate some costs and seek more benefits from transitions. Before doing that, however, we have to clear one more mental hurdle first.

A Little Patience Helps Everyone

The second problem with the “CBDC = Authoritarianism” equation is lack of patience to jump to conclusions too quickly, which reduces the possibility of keeping an open mind. This may not seem a big deal but lacking patience can be fatal for developing good, sensible and smooth agenda of changes.

The last time I checked, with China moving the fastest, not a single CBDC project on the face of the earth has been set in stone. We are seeing white papers, proof of concept and experimentations. There are just too many variables and too little certainty at this moment.

To begin, it is not even sure that all CBDC models will have the central bank getting all the retail transaction information. To be sure, some fintech experts, like Ajay S. Mookerjee in an HBR essay, seem to favor retail CBDC when he pictures “a scenario in which every citizen has, in essence, a checking account with the Central Bank” that makes “the central bank effectively becoming the sole intermediary for financial transactions” and “becomes the lender of first rather than last resort,” therefore eliminating all “bank runs” and the need for FDIC insurance as “the depositor carries no risk.”

The Three CBDC Business Models

I am not sure whether such a scenario will arrive anytime soon — if ever — with any degree of certainty. You do not have to listen to me but do listen to what banking experts have to say. In the 2021 BIS (Bank of International Settlement) report cited earlier, the authors summarized three CBDC models (in Graph III.7), although less informative and less insightful discussions can be found elsewhere by Ernst Young and McKinsey.

First we have “direct CBDC” or retail CBDC, in which the central bank is dealing with every individual customer, be it business or household, covering all operational tasks with user-facing activities like account opening, maintenance and enforcement of money laundering.

This is the least likely model that the Fed will follow. I know this because on Jan. 20, 2022, seven days before Strobel publishedheropinion in Newsweek, the Federal Reserve Board (FRB) released a discussion paper on the pros and cons of creating a central bank digital currency (CBDC) for the United States. In the paper, which invites public comment through May 20, 2022, the FRB already makes it clear that the US CBDC “must be intermediated (the private sector, not the Fed, would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments).” The reason: Such a model would ignore or bypass all the intermediaries of commercial banks and other fintech players, who are better equipped to deal with retail customers than the central bank does.

Direct CBDC model also means the central banks will act like Strobel has claimed as a “money printer” (i.e., regulating monetary policy) and “personal banker” at the same time, which is not a smart idea — not for ideological reasons but for efficiency considerations. But if one must look at the issue from a pure ideological lens, something Strobel is clearly doing, I would say direct CBDC model smells more like authoritarianism than the wholesale model does, as the former inevitably leads to a much deeper penetration of citizens’ financial lives than the latter does.

The second model is what BIS calls “hybrid” CBDC architecture, in which the private sector “onboards all clients, is responsible for enforcing AML/CFT (i.e., anti-money laundering and counter-terrorist financing)regulations and ongoing due diligence and conducts all retail payments in real time. However, the central bank also records retail balances.” According to BIS, “The e-CNY, the CBDC issued by the People’s Bank of China and currently in a trial phase, exemplifies such a hybrid design.” As I quoted above, it looks like the FRB will also be on board, as well as the European Central Bank (ECB).

With such a model, existing financial institutions like banks and other financial or fintech entities will be handling customers’ digital accounts. Although CBDC is the sole liability of central bank — just like hard cash is — operationally the private sector is not “off the hook” from the CBDC liability. In case when hackers attack, separating customers into different financial institutions makes the risk containable at local level. One may even say that this model is resonant with the decentralized and defused blockchain technology, despite the debate on whether permissioned (or private) blockchains, with which CBDC fits better than with public or permissionless blockchains, can be counted as genuine blockchain (I believe they should, see more later).

The last model discussed by BIS is the “intermediated” CBDC, which has been more commonly referred to as the “wholesale CBDC.” As the name implies, wholesale CBDC limits interactions of central bank to financial institutions, where central banks will run a wholesale ledger, although “PSPs (Payment Service Providers) would need to be closely supervised to ensure at all times that the wholesale holdings they communicate to the central bank indeed add up to the sum of all retail accounts.”

A recent (undated) report by Ernest Young (EY) entitled “Crypto Assets the Global Regulation Perspective” (in downloadable PDF) also points out that the wholesale (i.e., with intermediation) model leverages existing (private) financial institutions to make CBDC like a central bank reserve account, “leaving a considerable role for existing market participants, such as banks and payments providers, avoiding the risk of disintermediation, and alleviating central banks from operational tasks such as customer due diligence (CDD) procedures.”

BIS is in favor of the hybrid model and urges CBDC to avoid a large footprint in retail and consumer facing financial activities, and instead to allow financial intermediaries to do what they do best: “CBDCs are best designed as part of a two-tier system, where the central bank and the private sector each play their respective role. A logical step in their design is to delegate the majority of operational tasks and consumer facing activities to commercial banks and non-bank PSPs that provide retail services on a competitive level playing field.”

This is the conclusion I like. Of the three models, direct (aka, retail) CBDC marks the largest deviation from the current central bank functionalities, while the wholesale model is likely to produce the least amount of changes from the current role of central banks. The hybrid model sits in between the two.

Privacy Has Not Been Forgotten

The BIS 2021 report has a separate section on how to identify and safeguard privacy of customers. It compares two models of the “token-based” versus “account-based.” BIS concludes that “a token-based CBDC which comes with full anonymity could facilitate illegal activity and is therefore unlikely to serve the public interest.” Instead, “Identification at some level is hence central in the design of CBDCs. This calls for a CBDC that is account-based and ultimately tied to a digital identity, but with safeguards on data privacy as additional features.”

It is not particularly hard to sell the idea of account based model, given the current system all demand for establishing accounts. The key challenge is how to balance digital money safety and privacy. The former is essentially about public safety like cyberattacks, money laundering and financial theft, while the latter about individual safety like identity theft, data abuse or even personal safety. “Consequently, it is most useful to implement anonymity with respect to specific parties, such as PSPs, businesses or public agencies. CBDC designs can allow for privacy by separating payment services from control over the resulting data.” “CBDCs could give users control over their payments data, which they need only share with PSPs or third parties as they decide.”

In other words, just because CBDC is issued by the central bank does not mean the latter has automatic access to transactions information involving CBDC. This is not much different from hard cash, which is also issued by central bank and yet the latter has only limited knowledge of how every dollar is paid by whom to whom, unless it involves a hefty sum of cash.

Every party, other than the owner of the data, including government agencies, should only have access to transaction information at a “need to know” basis, nobody possesses automatic and sweeping rights. That way, the users maintain their data right and ownership, everyone else would take access as a privilege rather than as a right.

My Grand View of CBDC

I am not as “left leaning” as Satoshi Nakamoto is and I prefer not to discuss decisions or choices based on value judgements alone. I also do not see the need of treating governments as inevitably public enemies. They are just human created institutions with strengths and weaknesses like all of us do.

Although I do not judge others by the values they hold, I do hold my own value preference or value proposal. I care most about two things: Institutional inclusiveness and transitional efficiency. I call for the most preferred — also the least costly — scenario to emerge at the end of the transition period, in which central banks and decentralized cryptocurrencies will stay together rather than to kill or defeat each other. Given that, as pointed out by BIS, CBDC offers the unique advantages of “settlement finality, liquidity and integrity” for the digital economy, I entitled this post “CBDC by All Means.”

When a new innovation emerges from the horizon, we have always seen fans so enthusiastic that they predict the new innovation will wipe out or obsolete the old ones. History frequently proved them wrong because it takes time and trial-and-error for society to become aware, enticed, learn and eventually accept the new and drop down the old ones. This is a tall order and sometimes we may have to rely on the nature to get the job done. For example, we may have to wait until the entire old generation passed away to completely obsolete the land line phones.

History has also shown repeatedly that institutional inclusiveness pays. Humans are better off by having both centralized and decentralized controls, both open and limited accesses, both concentrated and distributed power /information structure.

These three dimensions — control, access & architecture — are discussed by this academic article, to which I want to add two more: Humans need both trusted and trust-free exchanges and we also need both disintermediated and intermediated transactions. I know some Bitcoin supporters strongly prefer disintermediation of anything, but the truth is that we often end up replacing one intermediary by another. Coinbase is a good example. Cryptocurrency traders do get rid of the traditional banks, but they pick up Coinbase or other (centralized) exchanges.

Will Central Bank Have Total Control of All Transactions?

To see why the US CBDC will not “give the government total control and oversight over every person’s holdings and transactions” like Strobel claims, let us first see what the Fed had said. On Jan. 20, 2022, seven days before Strobel publishedheropinion in Newsweek, the Federal Reserve Board (FRB) released a discussion paper on the pros and cons of creating a central bank digital currency (CBDC) for the United States. In the paper, which invites public comment through May 20, 2022, the Fed specifically notes that if a U.S. CBDC is created, it should “(c)omplement, rather than replace, current forms of money and methods for providing financial services.”

In other words, it is not in Fed’s plan to wipe out traditional forms of fiat money and to replace it with CBDC. This means even if every CBDC dollar is used for the evil “authoritarian” purposes, the Fed cannot gain “total control and oversight over every person’s holdings and transactions” like Strobel said, because traditional forms of fiat money will continue to exist — unless one regards all government issued money as authoritarian tokens.

If the goal is to gain the best control of all transactions, the Fed is better off replacing current forms of money by CBDC. This is because transactions using hard cash are still harder to be tracked than digital money. Drug dealers and money launderers often transact by paying cash, as recently reported by a credible study of SWIFT (Society for Worldwide Interbank Financial Telecommunication), rather than paying crypto.

The fact that the Fed is not pushing for complete replacement of cash by CBDC means it has something else in mind. Perhaps reducing the shock of radical transition or waiting for the blockchain technology to become more mature? It is safe to say there are multiple considerations in which controlling for transactions is just one of them.

What If All Fiat Money Is Gone?

But let’s stop guessing what is on Fed’s mind and simply assume Fed wants to replace all traditional forms of fiat money in the future. Furthermore, let’s also assume all governments want the same thing: controlling and overseeing everyone’s transactions. Now, with these assumptions will CBDC help the Fed achieve that goal?

The answer has to be “No!” In order to control all transactions, it is insufficient to make CBDC the only form of fiat money. We already know the reason: Even if the Fed makes CBDC a legal tender (i.e., the money that is legally established as satisfactory payment), which is certainly in the plan if the Fed decides to go with CBDC, CBDC will not be the only digital currency available in the market to cover all transactions. Other cryptocurrencies are already there. The only way for CBDC to have full control is to wipe out, or to drive out of circulation, all cryptocurrencies not issued by central banks. This would bring us back to the old days when Fed issued fiat money is the only currency available for all transactions in the market.

CBDC & Monopoly Power of Central Banks

How likely is it for the Fed to eliminate all cryptocurrencies so that its CBDC will be only legal tender and used exclusively for all transactions by all people? It is extremely unlikely. The reason is not because of the love affair between central banks and cryptocurrencies. If you know the history of Bitcoin, you should know that Satoshi Nakamoto created Bitcoin not to pave the way for CBDC to come later but exactly the opposite: to win a major battle in the arms race with government. Nakamoto was not shy in saying it out loudly why he wanted a decentralized currency: “Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.”

We now know the story after Nakamoto said that: Blockchains and cryptocurrencies have won a battle with the government — more generally with the central control of currencies. The fact that the Fed is talking about CBDC is a sure sign of that victory. It is like the old saying: If you can’t beat them, join them, which is what the Fed said it may do next.

Given this scenario, it is clear that CBDC will have to learn to co-exist with other crypto that emerged before it. This Investopedia article even asks about the possibility for cryptocurrencies to dismantle the central bank. Although that is unlikely, nor beneficial, to happen, it is clear that the crypto has dismantled the monopoly power of the central banks (see more on this later), not the bank itself. To break up or to end a monopoly all it takes is for a single unit of non-Fed issued cryptocurrency, be it Bitcoin, Litecoin, Ethereum or Dogecoin, to legally exists in the market. This is exactly what we are seeing today. In California, it is even proposed to make the cryptocurrency a legal tender, meaning it will be — if passed as law — perfectly legal to pay workers, consumers or citizens with cryptocurrency.

To governments’ ears the existence of even one unit of cryptocurrency is like a loud crack of thunder, which explains why so many people are talking about how monetary policies would be impacted in the future.

Debate on Permissioned Blockchain

The only weakness of the 2021 BIS report is that it barely touched on the technical issues involved in blockchain. There is an ongoing debate on whether permissioned (i.e., private) blockchains should be counted as a genuine blockchains. This is directly relevant to CBDC, which is more likely to sit in a private blockchain. A private blockchain is still a “distributed secure database,” which is the nature of all blockchains. If both central bank and commercial banks following the hybrid, two-tier architecture maintain databases of their own on CBDC related transactions, they would form a distributed ledger.

Even limited redundancy, meaning a few entities keeping repeated and redundant ledgers of the same transactions, is better than a single centralized ledger. The Fed could form an alliance with centralized cryptocurrency exchanges (the most successful ones like Coinbase, Binance, Kraken, and Gemini), that would boost up security. Say the Fed asks Coinbase to accept and to deposit CBDC for citizens, and both Fed and Coinbase keep separate ledgers for these customers, that would be a good idea, given these exchanges’ more experience with digital money than ordinary banks. 

Permissioned blockchain like this will not be open to everyone in the society but can still implement the key security features commonly seen in a blockchain, like the hash function (more strictly cryptocurrency hash function), Merkle tree, digital signatures (public and private keys), Proof of Work (PoW) and the longest chain protocol. Ultimately it is up to the alliance to try and to decide how far into the existing blockchain technology is the best for them.

A more interesting discussion is in this lecture note from Stanford University, where the instructor talks about how we can have the best of two worlds: Nakamoto + BFT (Byzantine Fault Tolerance). The latter is like CBDC to allow a permissioned system of static participation, unlike Bitcoin as a permissionless system of dynamic participation. Again, this means institutional inclusiveness wins over exclusiveness.

The US History of Money

I thought I had said all the things I wanted to say but thanks to this Investopedia article and also this lecture note, I learned an important fact that money is not always the way we know it today. Before the Federal Reserve, the US central bank, came into the scene, “(m)oney issued by non-bank entities like merchants and municipal corporations proliferated throughout the U.S. monetary system. The exchange rates for each of these currencies varied, and many were frauds, not backed by enough gold reserves to justify their valuations. Bank runs and panics periodically convulsed through the U.S. economy.”

The US emerged successfully from those chaotic — but little known or long forgotten — days and came up with a central bank system. “Immediately after the Civil War, the National Currency Act of 1863 and the National Bank Act of 1864 helped set the grounding for a centralized and federal system of money.A uniform national banknote that was redeemable at face value in commercial centers across the country was issued. Further to this, the Federal Reserve’s creation in 1913 brought monetary and financial stability to the economy.”

This story reminds me of the words from one of the most famous novels in China: Stories of the Three Kingdoms (三国演义). The author summarized Chinese history with a tendance to see people uniting after a long period of fighting, and fighting after a long period of uniting (天下大势,分久必合,合久必分). Translating this line of thinking to the history of US currency, we may say the money started from being decentralized to centralized and now is poised to go back to decentralization, thanks to the co-existence of crypto, CBDC and blockchains.