It occurred to me when I started to notice more news about countries’ CBDC research or even early launches. Now even first world countries and economic unions such as US, UK and EU openly express their interest in CBDCs. I’ve never researched CBDC studies, so probably all things that I’ll discuss here were already discussed, but I’ll also impose them to Ethereum ecosystem, so it might be interesting for you.

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What is CBDC? CBDC (central bank digital currency) is a centralized payment system that is controlled by your country’s central bank. For its development central banks of different countries often reuse tech of existing cryptocurrency platforms, such as blockchain, elliptic curve cryptography, simple smart contracts that allow to assign purpose of payment, etc. Basically CBDC is PayPal or Visa but controlled by government rather than god knows who.

Why is it needed?
For government, it allows to easily track all criminal activities and facilitates tax collection.
For citizens, CBDC opens faster payments and usually less fees, because now you don’t have a bank or other intermediary structure that wants to get a profit, everything is unified.

Some people criticize CBDC because with it their finances are fully controlled and tracked by government. I mostly agree with this statement, however it’s worth noting that governments already do that by requesting information about certain accounts in banks, now it just becomes easier from bureaucratic point of view. Also, if we talk about democratic regimes, banks aren’t exploited to violate citizens rights, so I think CBDCs won’t be either.

Another advantage of CBDCs that mass media are talking about is simplifying the fight against corruption. When all transactions are in full view of governments’ anti-corruption agencies, it becomes really easy to find out if some contractor irrationally spent funds allocated from state budget. While I agree that it helps to fight corruption on low-level, local corruption, it does completely nothing for high, government-level corruption, which obviously accounts for the vast majority of misdirected funds.
Why? Well, if you’re a big executive guy, you can negotiate (read as “give a bribe“) with anti-corruption agency or put your people in place.

Here comes the main disadvantage of CBDCs - their privacy is reached by the total closedness and opacity of the system.

Ok, what does Ethereum have to do with it?

I think you already got me. What if we make CBDC an L2 on top of Ethereum? Now something like MetaMask or other crypto UX hell and then instant “it’s NGMI“ thought appeared in your head. To convince you, let me dream a little.

There is a Zcash-style Validium (or even a rollup if full danksharding throughput is enough) on top of some DA layer. Accounts are registered by ID, one per person and one per legal/government entity. It’s Zcash-style in the sense that there are private and public transactions protected by ZK cryptography. Individuals can send both transactions, legal and government entities (e.g companies) are forced to send and receive only public transactions by consensus. CBDC node is open-source and free to run. Projects that want to integrate CBDC can run their own nodes. Independent anti-corruption agencies can run their own nodes and check legal entities’ transactions for suspicious transfers and spendings. Emission is transparent. UTXO system can be used to assign transferred funds some sort of special code that indicates a payment purpose or spending rules (e.g government sends contractor 10 000 CBDC$ with purpose “budget for road construction“ that can only be spent on construction materials).

Government corruption

As in case of companies, we can also make state employees public.

Problem of using family members to hide bribes still exists in this system. However, in many countries state employees are forced to report about savings and property of all family members. I think a similar system could be used here. For example, we can make all family accounts public or restrict the receipt of funds not from companies/outside of work (in short, from private accounts).

Fair tenders

Did someone say smart contract?

We can use smart contracts for many things in state’s economy. For example, we can conduct fair self-executing tenders, where it’s impossible to bribe the right people to win the tender without any competition. Moreover, we can make use ZK cryptography to conduct tenders on private smart contracts, allowing us to use it for military contracts and other areas where confidentiality is required.

Because of a nature of Ethereum rollups, we aren’t restricted by Ethereum/EVM stack and can build basically any logic in our rollups, including fully functional CBDC platform on top of Ethereum L1. It means that possibilities are endless and thus building a CBDC on Ethereum isn’t really harder than another CashApp but located on central bank servers.

Fiatotokenomics

If we assume that CBDC in our ephemeral country is chosen as the main and only monetary system and put in place of cash, we can make emission fully transparent, which prevents government from hiding actual levels of inflation and where new money is going to.

More of that, we can, for example, inherit emission model from Ethereum, that is, print more money when people don’t spend it, and burn spare money when people spend it a lot. We can even stop printing money at all, but I’m not sure if it’s going to work, I’m not really an economist.

In other words, open and uncensored L2-CBDC prevents government from influencing the economy.

Yeah it sounds too good. Any disadvantages?

Of course.

The first one is that we still have to trust government to approve citizens’ IDs. It means that government agencies can create fake accounts. It can be prevented by adopting biometrical IDs but we’re really early with this one.

The second, simpler one, is that we have to make private transactions public for law enforcement agencies. It’s no secret that corruption is not the only crime that has to be tracked, for example, drug trafficking is mostly done by individuals, that is, all related transactions will be private. I’m not an expert in ZK cryptography but I think this problem can be solved by providing witnesses that are encrypted with LEA public keys along with transaction. Law enforcement agencies, in turn, can provide ZK proofs that this encrypted data is actually witness for this transaction when decrypted with their private keys.

Also, we must not forget that supervisory authority must be able to recover accounts, because phones are often stolen or broken and it’s not ok to lost your life savings because of this. We have to figure out how to prevent account recovery abuse.

What about corruption, it’s obvious that we cannot end it completely. There are still crypto, gold, cash and many other workarounds. However, I think that doesn’t mean we shouldn’t deal with it at all, and I see crypto-CBDCs as a very efficient thing for such purposes.

Conclusion

CBDCs are not so bad if implemented correctly. As a technology, CBDC is really helpful for people and national finances, but its closedness and reliance on trust to government authorities makes all of us question if it’s worth it. However, we can use Ethereum to fix CBDC and world finance in general.

Ethereum is the global unstoppable, unbreakable machine. It’s the most powerful world computer ran by independent people around the planet, and we must use it to make our countries’ economy and our finances more efficient, reliable and transparent. It’s time to use all these abstract technologies to make our everyday lives easier.

Unfortunately mirror does not have comments, but I’d like to hear your opinion and maybe some ideas about it. You can share it in comments to my posts with this article on reddit, twitter, etc.

Thank you for reading!