I recently co-hosted a Clubhouse event with Nandan Nilekani, and the well-known futurist and crypto enthusiast Balaji Srinivasan. He pointed out that a massive bull case for crypto to thrive, is the lack of state capacity to build similar protocols. In Balaji's own words...
What I think happens in the United States is because the US has no state capacity at the government level, the digital dollar will end up being effectively stablecoin issuance licenses granted to all the people who are able to ship stablecoins. So that's essentially like the Bank Charter for Fintechs and for crypto companies that comes all the way through. Because (the US) lacks the state capacity to actually do anything, they're just going to bless the private missions.
We see this play out in so many new blockchains. The attractiveness, creativity, and utility of Ethereum (ETH) is that it is programmable – you can build in contracts onto the blockchain with enforceability. As Balaji says in his inimitable style...
I do think that the internet is still where internationalism thrives, because even as various countries fight, the early trends that you can forecast out is that countries that don't trust each other's legal systems will still do deals all the time together on a smart contract and the Ethereum blockchain. And that's why people are doing joint investments in protocols online – they're investing in code, and they're investing through the internet.
But what if instead someone builds an open-source Central Bank Digital Currency that is similarly programmable, with proof-of-stake instead of proof-of-work, attached to a stablecoin (say SGDX in Singapore) that is fungible with electronic/bank SGD?
And what if this open source blockchain lets each country fork the code for their own use?
Conceptually, this would work much like iSpirt - the Indian group of developers that builds open source applications and releases them for use in by public and state entities – except that now you have a bunch of developers building code and forking code for each country to use. The proof-of-stake to run this blockchain could be given to given to major country banks and local iSpirt equivalents.
Once a Central Bank Digital Currency (CBDC) is up and running, parties could use the USDX stablecoin blockchain if they want to enter into a programmable contract that is enforceable in USD, and the SGDX stablecoin CBDC blockchain for contracts to be settled in SGD. Anyone wanting to exchange USDX for SGDX or INRX can do so on a separate central bank blockchain with cross-currency market making run by a consortium of global bulge-bracket banks, much like the current FX market. This person has now exchanged a financial position in USDX for one in SGDX on a separate blockchain. Transactions between SGDX and the underlying SGD currency run on the Singapore CBDC blockchain, allowing each central bank to monitor its own currency inflows and outflows.
Critics would argue that adoption of a centralised solution is is not easy. And you lose the abilty to innovate quickly. For instance, someone innovates on Ethereum in India (Polygon MATIC, created by the amazing JD Kanani and his team is a great example) and everyone on the ETH blockchain benefits. In the new open-source CBDC approach, the MATIC-like source code would only apply to the Indian fork of the core CBDC blockchain. There are clear advantages of working in a common global pool when users in each geography are very small. But just like in open source development — aren't improvements to the base code layer something that all CBDCs could adopt into their forks? For example, when a new version of Rails is released, companies can adopt the new version with new features or choose to keep their systems running on the older one. Level 2 blockchains could innovate to solve for specific industry needs, while the core validation and financial settlement in the local currency stablecoin sits on the CBDC.
Is "open-source" the cryptonite of blockchain's distributed ledger superpower?
The defining feature of the blockchain is in its distributed nature, which forces every major blockchain to be open source by default. But what if this defining feature is, in fact, also its original sin, its "cryptonite" – that prevents creation of tech monopolies and allows all the major innovation to be copied over. After all, every major tech innovation has open source equivalents that are cheaper to use (if a generation or two behind). Crypto is unusual where "open source" blockhains are more expensive to use than say, an Amazon Web Services (AWS) blockchain.
An open-source CBDC blockchain allows every nation, irrespective of the technological capability, focus and resources to use the modern plumbing of finance. And makes it much cheaper to do so than private monopolies like Ethereum. I'd love to hear why this isn't probable.