merge 2022

CBDCs and their role in the world of Web3

One message rang clear in the Merge 2022 panel discussing CBDCs and their role in the Web3 world: The programmable potential of the currency could create significant innovation. 

This idea is quite a controversial one. Many are concerned about the issues this may bring, with naysayers preaching the possibility of a “surveillance state.” 

Keith Bear, a Fellow at the CCAF
Keith Bear, a Fellow at the CCAF

“Those risks certainly exist,” said Keith Bear, a Fellow at the CCAF. “The UK and the EU are both going through or have gone the case through the US through a major consultation exercise. And, this whole question about privacy, and to what extent the central bank has those powers, is one of the biggest topics raised.” 

“That is, undoubtedly, the policy restrictions around implementation and how the technology is implemented. It’s doubtful, I think, that a central bank in the western economies would want to have more insight into transaction activity or controls than they currently do through the existing Central Bank, money and commercial bank model.”

Despite these concerns, the programmability of the currency could be its greatest strength. 

Programmability could create unique applications

CBDCs, although currently under extensive investigation and consultation regarding their design, could be created to act and respond in previously unseen ways in the monetary system. 

“You almost can set timers on it, and conditions around the web, the interaction with the smart contracts, how you can release that money, where it goes,” said Victoria Thompson, Founder of Orora, a company exploring the application of the technology to financial exclusion.

“You can create rules around what the body can do, where it goes, and how it’s used. So if you think about equities and the future instruments that you could have around that around the release of shares, payments, all those things, you could create that with time locks, with the power of the smart contract, and how that will talk through APIs to the money.” 

“So if that happens, and then you can, you can create all of those flows. You can have automatic triage of the flow of finance on events. And when you think about that, in a future world where you have convergence with IoT, you convergence with real-world assets, digital assets, that can achieve some really powerful work. That’s what the programmable money enables.”

The programmability could drive innovation with the CBDC technology. Bear explained that a second layer could be developed on top of the currency itself. Much like the application layer of ethereum, this second layer could interact with the CBDC, using smart contracts to set rules for things like distribution. 

Within this, applications could be made to address societal issues more efficiently. 

“This is money that could deal with specific issues of poverty and inclusion,” said Thompson. “Think about food banks of the future. There’s no need to make people get on a bus to spend more money to get the things people have left behind. You can create money when you go shopping and make sure people can buy the things they need in the supermarket.” 

“You can create money that is mass funded and goes out to the people who need it and is intelligent, that has been identified. They can pre-load those wallets, and they can go and buy the things they need…It can also all be on an app on your phone, so you don’t have the shame of going to a food bank.”

“That’s what you do with intelligent money…That’s the opportunity.”

RELATED: ECB’s CBDC investigation breaks new ground

CBDCs could mean ‘Kodak moment for banks’

Part of the financial inclusion piece of retail CBDCs has already been partly addressed in Nigeria’s handling of the eNaira. To cater to the unbanked population, the central bank has commissioned the development of an app, allowing access to citizens through the use of a wallet in place of a bank account. 

“Fundamentally, that’s the model that’s there, the bank accounts, if you deposit money in it, the bank then uses that deposits and lend and then to do things with that money. And that’s how the whole model is developed,” said Thompson.  

“If you are a person who doesn’t fundamentally have the same needs, you’re not going to go to a bank, where you’re not going to have a mortgage, you’re not going to have these lending and those things, it’s probably not appropriate for you to have a traditional bank account and you may not even need it. And a wallet will suffice for what you need to do.”

For some, this capability presents the question of why a bank account will continue to be needed once a CBDC is launched. 

Victoria Thompson, Consultant Founder of Orora
Victoria Thompson, Founder of Orora

“I think you could unfold, in the product space, something that isn’t a traditional bank and think about that differently,” continued Thompson. “That’s what’s interesting; it takes it back to why we are all here in Web3, how that then looks and what the models are there.” 

“If there were a bank in that space, it would be very different. If you layer in programmable money and what the potential of that is in a Web3 lens, that’s really interesting. Then you can start to pull on the thread of traditional banking and the products and segments they have in a corporate and retail space.” 

“That allows you to reimagine things. And that’s what this is about. I think we are now allowing us with the technologies at a point of scale that you can pull apart those product segments.”

This could present some challenges to the future of banks, some even suggesting that this could be a “Kodak moment.” This references the failure of the company’s adjustment to evolving technology, eventually leading to its demise. 

“We’re talking about Web3 in this conference,” said Bear. “Web3 can be understood in several ways, but let’s say it’s all about replacing centralized rent takers with decentralized smart contract-led real-time data governance models implemented in tokens. So what does that mean for banks if you consider them centralized rent takers within the financial ecosystem?”

“One of the things that may mean is that the centralized databases that they hold on their customer information, order production, product information, transaction integration, all those things become decentralized public blockchain networks. If we take that forward, that means we’ll see this major outsourcing of what a conventional internal bank IT infrastructure looks like in a fully decentralized world.” 

He explained that while this is an extreme view that may never come to light, the first steps towards creating systems that offer similar functions to a bank, such as lending, are being approached in the DeFi world with stablecoins.

“I think it’s going to be fascinating to see whether there will be a question of a real “Kodak moment” and those that aren’t adopting and adapting really struggle to survive, or whether it’ll happen more gradually and we will see a slower migration. I think the jury’s out as to how that transition will play out.”


  • Isabelle Castro Margaroli

    Isabelle is a journalist for Fintech Nexus News and leads the Fintech Coffee Break podcast.

    Isabelle's interest in fintech comes from a yearning to understand society's rapid digitalization and its potential, a topic she has often addressed during her academic pursuits and journalistic career.