Re-imagining Economics with Blockchains

Displaced by Central Banks. Blockchain's Identity Crisis.

September 14, 2021 John Fletcher and Ying Chan Season 1 Episode 1
Re-imagining Economics with Blockchains
Displaced by Central Banks. Blockchain's Identity Crisis.
Show Notes Transcript Chapter Markers

Even if a scientific or technological discovery is recognisably revolutionary, it does not mean that its killer application has also been discovered.

We discuss the identity crisis that public blockchains face as Central Bank Digital Currencies become a reality.

This is a Cambridge Cryptographic podcast. If you'd like to read the second part of our critique of the claimed killer applications of public blockchains, please check out our blog post, “Bitcoin is a Bulletproof Ball Gown” by visiting

[00:00] Ying: The following is a recording in our series, “Re-imagining Economics with Blockchains”, where Dr. John Fletcher and myself, Ying Chan, discuss the revelations we have uncovered at the intersection of decentralization and Central Bank Digital currencies, revealing a novel line of reasoning that public blockchains is a tool for sound monetary policy and a possible solution to debt crises.

[00:20] Ying: In this first episode entitled "Displaced by Central Banks. Blockchain's Identity Crisis". We give the argument that even if a scientific or technological discovery is recognizably revolutionary. It does not mean that it's killer application has also been discovered. In particular, we hone in on the identity crisis that public blockchain space has Central Bank Digital Currencies become a reality. 

[00:41] Ying: This is a Cambridge Cryptographic podcast and here is the conversation between Dr. John Fletcher and myself Ying Chan 

[00:49] Ying: To give some context, is this about the first blog or what's the key theme for this one? 

[00:53] John: Yeah, so hopefully this is going to be the first blog. It's really just a very high level introduction to sort of why there is a problem or why there is an outstanding issue which needs solving.

[01:03] John: At the moment, a lot of people are just charging ahead with this sort of Bitcoin blockchain technology, which they’re understandably very excited about. But the fact that it's an amazing invention doesn't necessarily mean that the applications being worked are the best ones or even viable at all.

[01:19] John: So I'll just give a bit of context about that first. So building on that point about whether the application is viable or not. I think that blockchain or Bitcoin was a profound invention. I think a lot of people recognize that and, I think it is indeed true, but it doesn't mean to say that it's necessarily a great investment opportunity or has lots of great and useful applications.

[01:42] John: The sort of classic example of that, I suppose, would be Einstein's theory of general relativity published in 1915. Which is really, kind of in a nutshell, it was the gravity is the result of space and time being bent by the presence of matter, which was recognized as an incredible insight, even at the time.

[01:58] John: And it was probably the greatest single contribution to physics in the 20th century. Yet it would be another 63 years before this discovery found his first practical application, which was GPS global positioning system. So this really shows that a great discovery doesn't necessarily mean it's going to be monetizable anytime soon.

[02:18] John: And it's pretty understandable that people get excited about it, but what is really needed on top of that great discovery is a solid, tangible killer application for this discovery. The kind of topic we’ll briefly discussed today is like, you know, what, if anything is the killer application for a public blockchain?

[02:35] John: Just because public blockchain is indeed an amazing thing, which I agree with, it doesn't mean to say it has a killer application necessarily. So a good way or maybe a good sort of analogy by which to understand this a little bit better is to give the example of a network of humans, if they're sort of networked together, plus some particular specialist equipment, you could have a hospital. And what is a hospital other than a network of humans with kind of various skills and organized in a particular way.

[03:01] John: And if you get another network, of another set of humans with slightly different skills, plus some equipment, you can have an army. But, these two structures, the hospital and the army, clearly are only superficially similar, like they're both networks of humans, clearly, with a bit of equipment, but nobody would describe an army as a sort of souped-up kind of next generation hospital.

[03:23] John: Clearly, even though an army possess various medical assets, maybe including hospitals , its clearly just an entirely different type of thing to a hospital. And, extending that analogy, a lot of people have come to the conclusion or at least kind of proposed, that a public blockchain like Bitcoin is something like a kind of next generation internet, because it's a load of computers networked together, doing a thing, and therefore it must be a bit like the internet, but obviously it's gotta be better cause otherwise, it wouldn't be marketable.

[03:54] John: So it's a sort of souped-up version of the internet. But actually this is completely unhealthy, it's as dissimilar from the internet as an army is from a hospital. Even though it might be a sort of subset of it, it's really not a helpful way to view it in my opinion. And to give a bit of context, how would we describe a public blockchain and how have people tried to describe it? I alluded to the fact that they tried to describe it as a sort of internet 2.0. But I'd say that the kind of thing that we're aiming for is something similar to the kind of well-known explanations of what is a computer or what is the internet?

[04:28] John: You know, people kind of have an intuitive feeling about this and people have formulated some pretty good ways of describing it. So for example, the computer; famously Steve jobs said it was a bicycle for the mind, which is a pretty cool description, which alludes to the fact that it's a programmable multi-tool.

[04:47] John: And it could be used in a dazzling array of applications, writing books, generating art and designing a new house or a new type of rocket engine. And doing all these things a lot more efficiently than would be possible without the use of a computer, crucially. And then, the internet, we know that when you network computers together, they can communicate with one another.

[05:08] John: And, one of the ways that people described the internet is any-to-any communication. So, whereas telephones previously allowed one-to-one communication via audio, and television permitted one-to-many communication of video, then the internet provides anyone with a computer, the ability to communicate or share an arbitrary format of information, sort of video or audio, or a number of other things, with as many other people as they like and vice versa.

[05:37] John: This is the kind of quality of explanation we want in terms of what is public blockchain. You can kind of give intuitive explanation like that. One interesting thing to note about those kinds of examples I gave, is that they really refer to descriptions of what these technologies do rather than what the technologies are. Which is kind of hardly surprising because a description of a computer, as, for example, a programmable machine for executing sequences arithmetic and logical operations, is not particularly interesting or useful to most people because people clearly want to know what does it do? And what does it do for them even more specifically. And so it's reasonable to assume that a description of the blockchain or Bitcoin in terms of its function is really what we're looking for rather than, it's just a load of blocks of transactions chained together by hashes.

[06:23] John: Like, nobody really cares about that. Like what the hell does it do? But weirdly enough, often you get this technical explanation, sort of unsolicited kind of technical detail when you ask people what it is for, presumably because they don't really know what's what it's for.

[06:36] John: So they try to explain how it works under the hood. With that kind of aside or that in mind, I'll mention a couple of things which people have posed when they've been asked the question, what does this sort of public blockchain do?

[06:47] John: The most famous examples of the public blockchains, the biggest two are Bitcoin and Ethereum and Ethereum is a little bit more general version of Bitcoin in that it can do more complicated contracts rather than just sending money to one person.

[07:01] John: If you want to pay them for something, it can send a certain amount of money, under certain conditions, at a particular time, if some kind of conditions hold and you can almost deploy and entire computer programs on it. So people can exchange different types of tokens.

[07:13] John: It needn’t just have one type of token. It's a more general programmable version of Bitcoin or at least it claims to be. And the people who've been describing their vision of this public blockchain as a kind of web 3 they’ve called it, so it's like the next generation of the internet, which is something I didn't really agree with. For Bitcoin, the white paper suggested the peer-to-peer electronic cash application. So this indeed is a sort of useful thing. People would like to make cash digital. And it's not really digital at the moment. People pay for things on their cards, et cetera, but that's just a bank balances being moved around.

[07:48] John: It's not really base money which is equivalent to the cash that you have in your pocket, the physical cash. If you send someone some physical cash, you don't have to share your name and address, and there's no kind of official record hidden somewhere, linking the transactions to your name, and this does have applications in light of privacy. There's a good book called the rise of surveillance capitalism, about people trying to steal all your data.

[08:10] John: And this is the reason why all the kind of websites and apps and services that you find on the internet tend to be quote on quote free. It's really because they're making money out of stealing your data, and linking it to a name and finding out things about you.

[08:24] John: And one of the reasons why this is so prevalent is because it's difficult to find an alternative business model. And one of the business models that’s suggested by this kind of web 3 application, particularly by Ethereum, is that okay if we have electronic cash, then we can pay for these services in electronic cash, and that's not necessarily linked to a name. It sort of has the kind of similar sort of privacy properties of physical cash. So they say, okay people can still have money to run websites and build apps and that kind of thing, but rather than monetizing it by taking your data, they can allow you to use the apps  privately and you can pay in electronic cash.

[08:59] John: So there's no link to your personal identity. So this is a cool, interesting application, but the problem is it needs to be re-evaluated it in the context of Central Bank Digital Currencies, which have become pretty popular recently and almost every country in the world in fact have said that they intend to deploy one or do some serious research into it and it's looking like it's going to happen. And so when you have a Central Bank Digital Currency, it's possible, easily possible to make it either completely anonymous or have high levels of privacy, you know, the technology exists.

[09:34] John: And the key example is this a precursor to Bitcoin, which didn't pan out, which had to be shut down, in the end, called DigiCash by David Chaum. They set up a server, where you're sending money back and forth between the users and it all goes through this central server.

[09:49] John: But the thing is about the way the server was designed is that the person who held the server couldn't see any identities, you couldn't see which quantities were going to which people. So it was completely private. But in the end, the government decided that they didn't like a competitor to their own cash, especially one that was completely private; they're probably worried about money laundering; and so they shut it down. But now, governments want to launch a CBDC. So why couldn't they just take David Chaum’s design? There's no reason why they couldn't and just run the server in the Central Bank or in the government. And it's a configurable level of privacy.

[10:21] John: It could be completely anonymous or it could be somewhere in between. And it is true that a government may not in practice be willing to offer sort of digital cash with complete anonymity of payments to the users. But if that is so then why would they permit anybody else to offer it? You're not gonna sort of let Ethereum offer anonymous payments if you're not willing to offer it for your own Central Bank Digital Currency.

[10:43] John: And so it's not really about what is possible and what isn't possible, technologically. And it's not even about, that people say they couldn't ban digital currency that couldn't just completely stop people using it. That's true. A few people could still use it, even if it was ruled unlawful in a particular jurisdiction, but for the vast majority of applications, in particular any kind of apps or websites which are run by businesses, which obviously all the biggest and the best ones are, it's kind of a big industrial enterprise writing these apps and providing these websites. They obviously wouldn't accept this kind of unlawful form of payment. They’d just accept the CBDC. The point is that like these proposed applications have to be re-evaluated to see if they still make sense in light of the fact that you can have a private anonymous Central Bank Digital Currency without using Bitcoin technology, you can just do it on a centralized server using David Chaum’s invention. The headline application for justifying Bitcoin or Ethereum are the next generation of the internet doesn't really hold up in the face of Central Bank Digital Currency, because a Central Bank Digital Currency plus the internet basically equals everything that they are claiming as unique to their vision. 

[11:56] John: So in conclusion, the Bitcoin is the next generation internet thing, it's a red herring and a wrong term and it turns out that the real killer application is quite unrelated. As I said, just because there's a load of computers networked together, it doesn't mean to say it's like the internet, it's a very superficial similarity with the internet.

[12:14] John: I do think that the computers, which host or run Bitcoin or something similar could also host the internet on the side. Its something that they could easily do. They’re sort of big computers with lots of memory and high bandwidth and all that kind of stuff. But it really comes back to the army hospital analogy. It's just a subset, it's something that an army could do as well, but it doesn't mean to say that the army is like a better hospital or anything like that. Any questions? 

[12:35] Ying: Yeah. So I guess this would be material for another blog, but what's your conjecture on why people have not landed on the killer application, and have focused so much on these applications which are not really unique in the light of CBDCs.

[12:51] John: Its a great question. So number one, they're very excited because they've recognized that the Bitcoin and the general public blockchain technology is a genuinely profound invention, which I agree with. But as the sort of general relativity example goes, it doesn't mean to say that the application has been discovered or even will be discovered any time soon.

[13:07] John: So there's a lot of enthusiasm because of the recognition that is a genuine, exciting theoretical breakthrough. There's also then the marketing thing. They're like, okay, why should we invest in this company? And I suppose people want to say you know how lucrative the internet was and how successful that all was, and now we've got a better version of it, which is quite a good way to link it to something that people already know. But unfortunately it's just not true. So there's this kind of like desire, willingness, really to want to believe that this is the next big internet and we’re all going to be as rich as Mark Zuckerberg and that sort of thing.

[13:40] John: And also, the application that we have discovered, the one that's kind of unrelated to the internet. It has some weird properties, which means that it's hidden in plain sight. But I think that probably would be the subject for the next blog post.

[13:53] John: And it is, yeah, I'm not really sure we can say much more than that, but basically it's been completely missed, as far as I can tell. 

[14:04] Ying: So what were your thoughts on other tokens, which aren’t trying to claim to be electronic cash, like the BAT token for the brave browser?

[14:12] John: Yeah. That's right. So, you know, just to give the background, this is going into the application of giving websites and people sort of like a different business model, other than showing targeted advertising all the time, and people are annoyed by advertising as well. They have this internet browser called Brave, which is their version of Google Chrome or Safari or whatever, that blocks all of the ads, but it gives the websites a different way to monetize by paying them in this Brave token, which I think is hosted on Ethereum.

[14:41] John: So, this is fine, like tokens have been a thing for a while. Go to the fairground, you can buy a certain number of tickets, so I think just having a token, which isn't really being used as cash, it’s just being used to buy a very specific service, is not something that governments really have any reason to kind of clamp down on. Another thing about that is that again, using the Brave browser, it would just work much better and much more simply, you don't even need a blockchain at all, you could just use it with the CBDC. So again, people will be able to make these sort of, anonymous or as anonymous as the government allows the CBDC to be, electronic cash payments. Sort of small micropayments to websites in exchange for them not being exposed to constant advertising. So that would again, would provide that sort of alternative business model for them.

[15:30] John: A good way to conceptualize it, is that any sort of claimed application for these public blockchains would have to be unique beyond current internet plus CBDC. The crypto people never stopped and said, okay, is what we've been doing for the last sort of 5 or 10 years, does it still make sense in the context of this electronic version of government cash, and really, as far as I can tell, none of the applications continued to make sense in that context.

[15:54] John: But this hasn't really sunk in yet. 

[15:56] Ying: Also, any killer application also has to be lawful in the eyes of the government. 

[16:01] John: Oh, yeah, absolutely. Otherwise it's just not going to be a big thing, you know, but then you have the biggest sort of tiny niche thing like people buying drugs on the internet or something like that.

[16:08] John: There's never going to be global adoption or commerce, unless it's sort of declared lawful by the government. And so this leads us into, a few tokens, like Zcash and Monero around at the moment, which really quite private, almost sort of anonymous means of payment.

[16:22] John: And in most countries they haven't been sort of outright banned yet. And there is a question of why. One reason is that the regulations haven't really caught up yet. You know, a lot of things haven't had laws applied to them.

[16:34] John: You really have to assume that any kind of token which exists at the moment, which turns out to be more private or more anonymous than whatever CBDC the government launches, will subsequently be declared unlawful in their country. If they've decided that it's not safe to have electronic cash which is more private than this or that, then by definition, they're not gonna allow these, these tokens to be used in their jurisdiction. So that's another reason. I mean, CBDC, has just sort of been kind of getting going, although it's already been launched in China, I think, and a couple of other countries, and many other sort of big nations are racing to catch up.

[17:12] John: And so that also gives an example as to why they haven't brought in this law for those other privacy coins yet because the CBDC is going to take a bit of debating how anonymous or private should it be allowed to be. Maybe people will be concerned if you have your name associated with it.

[17:26] John: Physical cash is quite private now, so can it just be, you know, similarly private to physical Ash. And once they’ve settle on that benchmark, which they're happy with, that balance between privacy and not facilitating crime, that will be the benchmark beyond which all the other coins are cutoff. So they have to sort of fix that first, then they can do the banning. The long and the short of it is that you can't say we need a public blockchains cause we want private coins and we don't believe that the government are going to give us an adequately private CBDC, because anything more private than that would just be banned. So they can use it to buy dope or something, but it's never going to be adopted. That benchmark is coming. And, that's probably the reason why they're hanging back on the bans for now.

[18:09] Ying: Interesting. The level of privacy is likely going to be a lot less private than what Monero or Zcash can offer right? Because complete censorship resistance is probably not our feature that they would be very excited about.

[18:23] John: Well, I guess, it's the balance between providing a tool that criminals can do business in. At the moment, obviously they all do business in physical cash because its far more anonymous than doing business in bank to bank transactions, but yet physical cash, still has existed for a very long time, despite the fact that all the criminals use it. And the reason is because it's been thought that in aggregate, when you balance everything up, the having physical cash solves more problems than it causes.

[18:48] John: Even though it does cause a lot of problems, it's sort of a net good. And so they're going to have to think of that balance again for CBDCs. It's more configurable so they can have almost any balance that they want. It would be very surprising if they permitted, which is technically possible, a completely anonymous currency, because it would be a sort of field day for criminals to transmit a currency sort of abroad. At the moment, at least physical cash, in certain quantities, it can be quite difficult to sort of move out of the country and all that sort of thing. So yeah, I would say maybe Switzerland will say we allow a CBDC which is like very, very private, or, you know, maybe not completely private, but the most private in the world. And I should imagine America will permit one which is somewhat less private because they are probably more worried about crime. So every nation will decide their own balance and I think that'll be the cut-off point. You're not allowed anything more private than that.

[19:38] John: That would be my guess, but we will see 

[19:40] Ying: So there's been talk of two types of CBDCs, which is the retail, which is basically electronic cash, where everyday people like you and I will hold onto some quantity of it. And there's also the wholesale version. Which is basically more of a replacement for the settlement systems that the central bank has for the commercial banks. So what happens to latter if it's not a retail one, but rather a wholesale one? 

[20:05] John: That might be what they do first because I just think it's a whole lot simpler problem because they don't have to worry about privacy because all of the entities will be named anyway. So there'll be no, I don't want to have the government see who I'm sending money to, like the government knows anyway. So that may be the sort of testing ground for it. It seems like though they might be trying to race ahead.

[20:25] John: Like you would have thought that if they were proceeding with caution, they would do that first and give it a few years and see how it goes. But I have a feeling they're trying to sort of accelerate the retail CBDC. 

[20:35] Ying: Yeah. That seems like what the China is going towards for their CBDC. 

[20:39] John: So it will be interesting.

[20:41] Ying: Thank you for listening to this recording in our series, “Reimagining Economics with Blockchains”. If you'd like to read the second part of our critique of the claimed killer applications of public blockchains, please check out our blog post, “Bitcoin is a Bulletproof Ball Gown” by visiting

Setting the context
Profound discoveries may not have obvious killer applications
Conflating blockchain as internet 2.0
Revolutionary tech. But what does it do?
Electronic cash. The proposed application of blockchains
Re-evaluating this application in light of CBDCs with configurable privacy
Current vision of blockchains does not hold up in face of CBDCs
Killer application is hidden in plain sight! Cliffhanger
What about tokens that aren't aiming to be cash?
Criteria for a killer application
How private will CBDCs be?
Wholesale vs retail CBDC