It's clear that the UK's digital pound CBDC presents many challenges to the Bank and commercial banks. What is not so clear is how exactly to approach its adoption at a strategic level. A few are taking it on properly, such as the Digital Pound Foundation.
I'm going to show you how the only way to look at adoption which has any chance of resulting in success is by making a change of mind about finance, technology and CBDC systems generally. That is, we are dealing with something systemic. So we must look at it systemically from the top down. And abandon the old guard approach of piece meal changes driven by fear of an uncertain future and an understandably chaotic meddling state.
So, the remedy here is not technical per se. But a change of mind.
As I network in this arena I've been asking for all comers to open up the working groups to the possibility of this change of mind. It's not really a technology solution I'm proposing though the detail consists of that of course. It's a shift in the way something is thought about, systemically, publicly, collectively. The only real remaining challenge will manifest as resistance to that change of mind, whatever the technology ultimately chosen.
I'm not coming to you with anything radical. I am asking you to consider a systemic shift so yes, it does require a bold mind. You might expect I'm going to say it solves all the problems. It doesn't. But it does create an open door for you to push on revealing a pathway which makes all those problems that much easier to solve.
One of the big problems is how to deal with money laundering. The regulations in themselves which are there to attend to money laundering, we're told cost the nation 1% of UK GDP or about £23 billion in dead weight costs. And still the money laundering persists at a high scale of about £100 million a year. So the costs of mitigation are 23% of the total market size.
This is indeed a fantastic challenge for the country to solve, if, we insist on insisting to think like the old guard. If we can find the strength to cross the frontier, into the old guard's forbidden zone of opportunity and innovation then something important becomes possible, finally. There are no guarantees here. Even if you make the crossing you can still fail. Or we could just stay at home in total safety and to take our chances with the high costs of the old world.
OK so now I'm beginning to sound like a foolish dreamer. I'll take that moniker, and with honour. Please allow me to show you an example of this new world I dream about which is through that open door and on the horizon. In the end it's a change of mind anyone can make immediately.
Reprise: Money laundering is a big problem and its costing the nation enormously. Crime, evidently, pays a good salary, socialised by the people at a rate of £23 billion annually. Crime is testing us. So lets think about a way to make crime too costly, so that crime no longer pays. I'm going to tell you about mircopayments and their offspring nanopayments. Both are everyday financial transactions usually for small purchases, the kind you would often make with cash. Nanopayments are the same except they will typically be used by automated systems to make extremely small payments on Web3.0 such as paying for streaming services per video frame or automated payments for access to the best web sites. The old guard still thinking with the old mind often fear micropayments. They believe correctly but still with an old world mindset that micropayments will make the problem of money laundering that much worse. Because they have now become much harder to trace being a lot smaller, more frequent and easier to blend into an in indistinguishable masse. This view of the world is one which believes that systemic financial structures always have been and always will be 'account based'. And they are right to lack confidence because account based systems are inherently easy to commit crime on. The problem is the old guard cannot stop thinking about account based systems being the only way. Such as any electronic money, Ethereum, Bitcoin Core Lightning, R3 Corda, Quant and Ripple which are all fundamentally crippled by being account based. Not to mention privacy crippled because some of them store account and PII data on-chain! These are old world systems and cannot deliver a successful CBDC. Yes, they might be adopted for CBDC's. They won't be successful. And eventually we'll all be back at the table complaining about the levels of money laundering having escalated even further wondering how it got so bad.
Then what is the answer?
With the advent of a token based system such as is available with a token based DLT designed from the root for better privacy, with transparency for money laundering, all at the ultra high scale needed for a national cash system, it may come as a surprise for experts to see that its actually easier to follow and trace money laundering now it's happening on chain. Not only because its transparent for all to see. But because it's token based - the smallest token denomination is sovereign, immutable and cannot be blended. Just because millions of these small token payments are commingled, does not mean they're now impossibly blended. Transactions now being tokens are like individual grains of sand so cannot be blended like account based system transactions. Which are data indexes that get flipped from number to number between accounts blending the value. Yes, a foolish criminal can still mix tokens 'commixito'. But they are still just as visible individually and not blended impossibly as crime believes they are. Crime has a track record of not being that smart. Mixing tokens is a terrible mistake if you think thats hiding anything much like crime thought that Bitcoin was a sfe having for its proceeds because using cryptographic functions means transactions are encrypted and anonymous and censorship resistant. Yet they are not in the least bit.
So let us be smart and beat crime by changing our mind about the big picture by not focusing on the technology used. Its a change in the way we think about payment transactions from the root. Crime thinks the old way still too, lets stop following their thought lead. Let's make crime too expensive on chain by using tokens instead of accounts. What is more, if we're no longer using accounts we also lose the security and privacy challenges account based systems deliver too. We didn't have to do anything for this to happen. We simply had to *stop* doing something by changing our minds, which is free. Account based systems like ETH, BTC, R3 and Ripple re-introduce 'bugs' like a low quality software developer who never tests their code. And then we say there are now impossible challenges. Yet with a new way of thinking and a token based system the cost of the crime now exceeds the value of the assets. Suddenly fraud, crime, tax evasion, alimony evasion, money laundering etc have taken their lucrative business elsewhere. Bingo!
For the conspiracy theorists who rightly speak about how some bad state actors make up a significant part of the money laundering, there's magic potion to solve that too. Now all transaction are on chain, immutable and un-blendable, all crime, including government crime, can be followed and attended to. Sure, these authorities will take their 'business' elsewhere. But has there been any time in history where that has not been possible?
Micropayments make the tracing and following of money laundering inherently easier than the old world. Because they are token based(UTXOs) they can only be 'commingled'. They cannot be 'blended' indistinguishably. Each token can be traced and followed like all others. Its just a matter of scale. But, account based systems (ETH, L2, everything crypto, the stuff fintech is showing the Bank R3, Ripple etc) can be blended using accounts. Crime will still will pay here.
A shift in how we think about systems, to token based rather than account based should be where the focus and energy is placed rather then the tech, per se. The advantages are then allowed into the light and challenges become solvable for the very first time with a token based system. The excellent work of the Digital Pound Foundation is pointing out how account based CBDC systems are full of challenges or 'defects'. We're used to using accounts traditionally so granted, it's hard to 'remember how to see the future' here.
I'm asking to open up the digital pound working groups and all other nations' CBDC programs to the possibility of this change of mind. It's not really a technology solution I'm proposing. It's a shift in the way something is thought about, systemically. The only challenge we should expect to remain will be resistance to that change of mind. So pay attention to what will be a powerful force in resistance to your bold move.