 Our next topic actually is going to be discussed in more detail in week eight which is two weeks from now. We're currently in session six of the course but it's drawn a lot of attention and comments in the chat and on the forums. So it's a hot topic right now so I'm going to cover it a bit. And this topic is central bank digital currencies or CBDCs. What could be the challenges to central bank digital currencies? First a comment comes from Lewis and Lewis says according to a January 2019 report titled central banks and distributed ledger technology at least 40 central banks around the world that currently or soon will be researching and experimenting with central bank digital currency. What do you think are the challenges for this initiative? This is a great question and there are a number of answers in the forum that are rather interesting. So let's go and look at some of those answers. Dietmar says whatever central bank is going to do it won't be decentralized or sensor-persistent. Central banks are out of control. They don't want anything that they cannot control. It's a completely different pair of shoes. That's a great expression. Nadine says I think tether coins are for an example and those are all basically centralized. Lewis responds, thank you Nadine and Dietmar. However many countries are researching distributed ledger technologies for this to create a digital currency and maybe it needs some adjustment. So let's talk a bit more about this topic of central bank digital currencies. So first of all the vast majority of currencies in the world are digital currencies. The US dollar, the euro, yen are primarily digital currencies. Why do I say that? Because in most cases the amount of money that is in circulation in physical form, that means notes, paper notes, bank notes, coins that are in circulation in the economy, is usually less than 10% of the overall amount of money that is being used in the economy. So less than 10% is physical and 90% of it is digital. So aren't fiat currencies already digital? They are already digital. If 90% of your currency is digital then it's a digital currency. The difference is that the current technology that these digital currencies use is databases. So currently digital currencies use databases. You might call them if you like instead blockchain currencies, you could call them SQL currencies, SQL currencies. Because the digital currencies that we use today such as dollars, euros, yen, whatever are actually stored in the databases of both central banks and various other regional investment and retail banks that keep account ledgers of their customer's deposits and those account ledgers are stored in databases. They may be different kinds of databases. They may use a variety of different underlying technologies but effectively there are all some form of relational database which is absolutely centralized. They may be replicated in multiple places for backup purposes. They may be audited by a number of different organizations but fundamentally they are databases. Now these databases store the account value. If you have a checking account in a bank, that's not physical notes and coins of course, banks only have a small percentage of their total accounts available as cash withdrawals at any moment in time. It's a number in a database. If you have an investment account or a retirement account, it's a number in a database. So what are we talking about here when we talk about central bank digital currencies? Well primarily we're talking about marketing. This is about changing the conversation because fundamentally these are already digital currencies and what we're talking about is a technology refresh. A technology refresh whereby we replace relational databases or what's being suggested is replacing relational databases with distributed ledger technology. The architecture of this distributed ledger technology will still be centralized. It may be less centralized than the relational databases they're using today but it will still be centralized. So what does that mean? It means that you might have a federated consortium of multiple banks. You might have a number of central bank districts or groups. For example, many central banks have regional central banks here in the US. There are a number of central banks around the country that come together to make the Federal Reserve System. So there's the New York Fed, there's the Dallas Fed, etc. So all of these different Federal Reserve branches could be part of some kind of multi-sig federation or some other proof of consensus, proof of authority type distributed ledger technology. So is it centralized? Well in fact it's a bit less centralized than the current mechanism where each party controls their own relational database but in terms of the actual application of control it's still centralized. These central bank digital currencies will not be able to be open, public, borderless, neutral, censorship resistant, and immutable. So let's look at these characteristics. I've often repeated these characteristics as the foundational pillars if you like of an open public blockchain and what makes things like Bitcoin special. Open means that anyone can participate without authorization, without vetting, without asking for permission simply by downloading the appropriate software or writing the appropriate software in compliance with the rules and APIs. This is something you can do in Bitcoin. You don't need anyone's permission to bootstrap a node with any software you want as long as it follows the consensus rules. Open also means that anyone can initiate a transaction from anywhere in the system. Again that's something that happens with Bitcoin and other open public cryptocurrencies. Open is something that cannot, will not, ever happen with central bank digital currencies. So the reason that it cannot ever happen is because ultimately central banks need to control the participants of every transaction. It would violate every law we have today to do that with the central authority through central bank. Every participant in these transactions will be vetted and it will be unlikely that you as a consumer will be able to initiate a transaction in the ledgers of the central bank digital currency. That's something that likely only banks will be able to do. And that means that the accounts that you have that represent this currency are going to be custodial accounts held by banks that have the rights to do this. How is this different from SWIFT? It's not really that different. Again it's really a technology change rather than an architecture or control change. Borderless, these systems will not be borderless. Bitcoin and other open public cryptocurrencies are completely borderless. They operate everywhere in the world that you can get any kind of communication medium. Satellites, wireless, radio, internet, whatever. It doesn't matter. As long as you can transmit and receive information somehow and connect to at least one more node that's part of the network, you can operate regardless of physical, political, geographic borders. And therefore open public blockchains are borderless. Central bank digital currencies will not be borderless. They will be strictly restricted within the jurisdiction of a country. They may have bridges or gateways between countries just like SWIFT has today, but they won't be borderless. Neutral means that transactions are propagated regardless of the send recipient or purpose of the transaction. And nobody gets to a question who you are, where you're sending, why you're sending, and what you're using your money for. And open public blockchains are neutral in that way, just like net neutrality on the internet. The idea being that content is transmitted from one address to another on the internet and currency is transmitted from one address to the other on an open public block chain. And you don't have to tell what you're paying, why you're paying, who you're paying, or who you are. Of course, central bank digital currencies will not be neutral. They have to apply know-your-customer, anti-money laundering, and verification policies to make sure that you don't use currency for purposes that are not approved by the current political regime or a legal system of the country in which you reside, which is also one of the reasons they can't be borderless because they have to have a legal framework for that. And they will be censorship-resistant because of course some transaction types will not be allowed. You will have a situation where if you do a transaction with someone who is on a blacklist or you do a transaction for a purpose not permitted, for example, funding a political dissent in Hong Kong or in North Korea, that transaction will not be allowed by the central bank digital currency. And therefore, central bank digital currencies cannot be censorship-resistant. In fact, they will be heavily centered, and they can't be neutral. They also can't be immutable. And immutable is a characteristic that really derives from many of the others, but of course they can't be immutable because for the same reasons they can't be neutral and censorship-resistant. If for whatever reason a transaction gets through that is illegal, the central bank digital currency will be able to reverse that transaction, to undo that transaction, to block, freeze, seize, and reverse transactions. Of course they will just as they can in the current banking system. And therefore, central bank digital currencies will not be immutable. So they're not open, borderless, neutral, censorship-resistant or immutable. They're unlikely to be publicly auditable and verifiable, which means you will not be able to audit them because that would open every transaction to the scrutiny of everyone in the public. And we all know that governments love secrecy as much as they hate our privacy. So while all of us will be heavily surveilled for user systems like this, and we're talking about totalitarian financial surveillance, fascism of finance effectively, your government won't be monitored by you. That's not going to happen. So of course they won't be publicly auditable. And all of these are characteristics of open public cryptocurrencies. So do central bank digital currencies compete with open public cryptocurrencies? They don't. They don't because they fulfill a completely different purpose. And we've seen some of the same kind of concerns emerge with Libra and corporate cryptocurrencies or corporate digital currencies. From the moment that white paper was written, people immediately started looking at how this would compete with the other things that are available. And effectively, for all of the same reasons, corporate digital currencies cannot be any of the characteristics we have for open public cryptocurrencies. And therefore, what we're looking at is essentially a three-way competition for three different domains of use cases and applications. There's money of the people, by the people, and for the people that is open public cryptocurrencies that give freedom, independence, financial empowerment, sovereignty, and the ability for anyone to use them anywhere in the world anytime they want, for any purpose they want. And that's open public cryptocurrencies. They're corporate currencies that will be used to collect privacy information from you in order to sell it to advertisers and provide corporate sales, just like Facebook and other companies already do. But now they'll do it on all of your money too. And then there will be government currencies. Government currencies will be basically very little different from what they are today, perhaps slightly more decentralized than they were before, slightly less subject to the kinds of extreme corruption and lack of transparency than they were before, and perhaps a slight upgrade in the technology infrastructure. But architecturally, in terms of who has control and who has the power in the system, they'll be exactly the same as today's fiat currencies, and therefore they cannot serve any of the purposes that open public cryptocurrencies serve. So there we go. That's central bank digital currencies. We will be revisiting that topic in session eight.