CBDC & Currency Bandwidth

CBDC is a fascinating topic. Central Bank Digital Currency is simply digital money but at times this feels perplexing.

Perplexing because money is mostly already digital and there are plenty of things to consider when creating a CBDC. When money is printed it’s because a computer said it was available to print and another computer sends instructions to something else that makes the physical personification of the money. A digit goes down in one computer and then that digit is manifested in a physical note where it can move around physically until it’s deposited somewhere else and that digit/dollar is digitally amended and is now owned by another entity. Since ledgering went into computers, one could really try to argue most money has been digital for quite a while.

There are exceptions to this overgeneralization though and they aren’t all related to ledgering.

Banking hours are windows we wait to open so computers can get permission

The elusive 8 to 5, closed on the weekends, closed on holidays, and sometimes something else. During that time, money for most of our lifetimes (at least in our bank account) has been unavailable. We’re all just stuck waiting for the next settlement window so the damn databases can get updated.

Money movement in these batch files is like moving big files around on floppy disks, then zip drives, then CDs, then hard drives and it only works 8 to 5. RTP and other realtime TransferTypes make that better but the money is always waiting to be interacted with but let’s be honest, if you’ve ever done ACH at scale you’ve probably had the pleasure of breaking up your files into some seemingly random 1-5mb file size so the risk of the upload not working goes down considerably. This begins to look a lot more like FTP’ing MP3s around than it does hardcore innovation. This is not a complaint, just meant to help share what an additional leapfrog that CBDCs could provide. If you think about where moving MP3s have gone in our lifetime and the innovations along the way enabled by better technology and better business models, it’s fun to think about what is going to happen with money as it becomes more and more truly digitally native.

Even with all the innovation around us, the market has continued to block off currency in the US until it complements banking hours. If anything, the state of banking and the associated interactions in fraud review, credit underwriting, or anything large volume have technology implemented that stops things so a human can decide to let it through or not and that creates unbelievable limitations in the overall bandwidth of the system.

Either way, banking hours as a technical issue constrains bandwidth of the currency.

CBDC could create near infinite bandwidth for value issued from a central bank

If we consider the CBDC opportunities in the context of bandwidth, it’s fun to think about what is possible. When you remove banking hours from the currency itself in its native form, the number of things (people, computers, companies) can do with the money and the number of times it can be interacted with increases orders of magnitude.

Consider the vast innovations and wealth creation we witnessed online as internet connectivity shifted from a 56.6kbps dial up connection (where downloading a MP3 was no longer an all day affair but still took some time) to a fiber connection (where I stream Donda while my kids watch Netflix and Spotify is streaming on the porch) over a ~30 year period.

Industries have been built on this shift of bandwidth.

Even though the US isn’t leading on CBDC, it’s a great time to learn from what the rest of the world is doing

Regardless of speed of adoption, it feels as though there are other shifts in addition to bandwidth which could be enabled by CBDC. For example, personal custodianship of a digital asset issued by the government you can interact with 24/7/365, without the mandate to keep it in a bank. Digital USD transactions don’t work without the banks, today.

That minor nuance gives companies the ability to hold their own corporate treasury anywhere in the world on a computer. It shifts the power dynamics from one having to hold large sums of money in a bank vs. being able to potentially hold it more securely on a personal basis depending of course, on the level of sophistication and starts to call into question all kinds of things.

What happens when the worlds most powerful and technologically advanced businesses start holding their own money and defining where in the world it sits? Will CBDC allow for that or will the protocols require a regulated custodian? We will all find out in time.

Regardless of the custodian question the resounding question in my head is… If you knew the bandwidth of money was going to change globally by many orders of magnitude in the coming years and our current views of money will be as different as our views of data were 30 years ago… What would you do with that information?