Bits: Programmable Gov’t Money

The pros and cons of CBDCs as China starts experimenting

While the US has struggled to make blockchain fit into existing rules, China’s government quickly took to blockchain as a competitive edge. They are live with a Central Bank Digital Currency (CBDC)-based app in the hands of over 100k people. They’ve also laid the necessary fintech foundation — inroads with powerful distribution points like neobanks and payment behemoths like AliPay and WeChat.

China’s CBDC experiments with new potential features of programmable money like an expiration date, which could prove powerful in government stimulus. Similarly, one could imagine more seamless earmarked fund distribution i.e. social benefits with far lower overhead. Programmability in government money should mean more specificity and fluidity in how policy becomes money in your pocket. Last year’s CARES act and US gov’t stimulus exposed major cracks in our public financial infrastructure, which could be solved by some of these features.

The competitiveness angle spans beyond China into international commerce. The digital yuan will likely have near zero transaction costs and latency, making it an incredibly frictionless way to transfer money across borders. These benefits harken back to the original vision for bitcoin “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution”

The flip side of these benefits is the loss of privacy. Programmable money could be used to automate fines and enforcement, especially when tied to other surveillance tactics like facial recognition cameras or social credit score. Issuers can limit and reclaim currency at any time, which fundamentally transforms property rights. Finally, the digital yuan will likely rely on a private registrar which obfuscates flows from international eyes, meaning sanctions or illegal activity would be impossible for other to monitor at will.

I continue to think CBDCs are one of the most important developments happening in crypto. CBDCs tap into the original goals and ethos of bitcoin, but also have the potential to scale off the massive existing financial system. As the Fed’s rhetoric becomes more open to CBDCs, China zooms into the future and Visa partners with USDC, I’m curious to see who will build the enabling technologies and guardrails for CBDCs. Moreover, how will the crypto ethos and early partners help shape the direction of central banks, such that we end up with more of the benefits and fewer of the cons?