CBDCs are digital representations of traditional fiat currencies. They are often developed by central banks and used for Settlement, Payment and Store of value purposes. CBDC can be applied in a number of ways, including through smart contracts. A smart contract is a computer protocol that allows for the enforcement, management or negotiation of a contract. This could be used to manage the exchange of money, property, shares or anything of value. They could also be used to automate the execution of certain actions based on predetermined conditions.
Smart contracts are envisioned as enablers of many new and exciting scenarios, including implementing an entire business using the Decentralized Autonomous Organization (DAO). Personally, I am uncomfortable with the current smart contract implementations that can’t be validated and are untethered to existing contractual relationships implemented on paper by lawyers. This is not an impossible hurdle to overcome and the visions dancing in the heads of those that predict Web3 is as good as here are compelling.
As such, Sweden released a report that indicates it is preparing tests to determine the compatibility and value of a hypothetical E-Krona related to such smart contracts. The report also identifies conflicts between the nature of a blockchain related to consumer privacy and GDPR regulations:
“The ability to program or control transfers – such as triggering a payment when a contract is fulfilled, or giving pocket money that can not be spent on sweets – are cited as a potential benefit of central bank digital currency (CBDC), but Swedish officials want to probe that further.
“Concepts such as programmable money, smart money and smart payments are often said to be the future of payments, and this is used as an argument in favour of the new technology,” the central bank said in the report.
Though no decision has yet been taken about the design or issuance of an e-krona, in the next phase, “we want to test and explore how such solutions can be used to create new payment services, and why they would be more effective than more traditional technologies,” the central bank said.”
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group