Canada’s CBDC Departure Risks Web3’s Interoperable Future

Lately, it seems like the government’s stance is evolving concerning Central Bank Digital Currencies (CBDCs). For instance, on September 23, Canada revealed its intention to move away from a retail-focused CBDC and instead emphasize broader payment solutions. This decision comes just after Australia made a similar shift towards a wholesale CBDC rather than a retail currency.

The choices made about Central Bank Digital Currency (CBDC) growth affect not just the residents and economic system of a single nation, but also carry significant repercussions for a broader issue in the Web3 community: the absence of compatibility between systems. This is a critical challenge that needs to be addressed.

Minding the interoperability gap

Central Bank Digital Currencies (CBDCs) are more than just digital versions of government-issued money; they encompass a vast network involving various users, purposes, technologies, data structures, and management systems. Additionally, they must be able to interact with foreign CBDCs and existing infrastructure. Implementing a fully operational CBDC is indeed a significant task, but it’s not unprecedented.

It’s clear that the world’s central banks understand the considerable challenge they face and have been pondering interoperability from the outset. In fact, establishing an interoperable digital currency system among central banks (CBDC) could be tougher than achieving interoperability in Web3. One application for CBDCs, international transactions, is a complex and intricate network of existing, independent domestic payment systems, compounded by difficulties in exchanging currencies across borders.

Indeed, central banks encounter significant limitations while crafting Central Bank Digital Currencies (CBDCs). They are under constant pressure to harmonize with existing traditional, modern, and future financial architectures. Apart from the apparent technical hurdles, CBDCs need to meet a variety of legal and regulatory standards. Does this scenario resonate with you?

These kinds of interoperability challenges have existed since Web3’s inception. Look no further than the two most prominent public blockchains: Bitcoin and Ethereum. On the surface, connecting these two networks seems obvious. Yet, the result of the industry’s best efforts is a collection of distinct stop-gap solutions, each requiring concessions in security, scalability, decentralization, or scope. As the CEO of the industry’s longest-running interoperability solution, Wanchain, I’ve witnessed all the progress we’ve made as an industry. Yet, I also recognize just how far we still are from true interoperability.

The widespread adoption of CBDCs provides a solution to the interoperability challenges holding back Web3. This is what makes Canada’s decision so significant – and frustrating. If too many governments abandon CBDCs, the CBDC landscape may end up looking like Web3 does today: a fractured ecosystem plagued by fragmented liquidity. With more than 100 L2s, 140+ active Layer 1s and countless private or consortium chains, the blockchain space already faces an existential threat. If we then add 75+ incompatible national CBDC networks… Let’s just say the outlook is bleak.

However, there might be a beneficial aspect. Those countries that continue to focus on Central Bank Digital Currencies (CBDCs) could gain more influence in deciding how these digital currencies interact with each other. This advantage, which could be transformative for smaller nations with supportive Web3 environments, may not overturn the current global order, but it provides a platform for countries to enhance their international status.

CBDCs: An Interoperability Blueprint

Unlike earlier forms of public blockchain systems, Central Bank Digital Currencies (CBDCs) can potentially be designed for seamless compatibility with other similar systems, or interoperability. Central banks possess several strategies for achieving this, some of which have already been experimented with in the Web3 environment.

A central bank digital currency (CBDC) could utilize common messaging systems, encryption methods, and data organization to align with the ongoing work in Web3 compatibility, where universal norms are being established. Intermediary transmitters would remain essential, but complexity would decrease. However, this method might present difficulties for nations that currently use standardized domestic interfaces.

As a crypto investor pondering the future landscape of Central Bank Digital Currencies (CBDCs), I’ve been considering the potential benefits of a unified platform approach. This setup would enable different jurisdictions to establish their own transaction limits and participant criteria. The International Monetary Fund proposed something similar back in 2023. However, the crux of the matter is deciding who should manage this platform. Relying on international powers with contentious reputations might create complications in a global context.

A possible alternative could be a versatile approach combining various components to tackle specific scenarios and cater to the distinct requirements of different regions.

Although the specific technical details are still under discussion, Central Bank Digital Currencies (CBDCs) may hold an advantage over current Web3 compatibility solutions due to their clean slate status. The design of CBDCs can learn from the challenges faced by public blockchains in making existing systems interoperable after deployment. This presents a unique opportunity for central banks and skilled developers to collaborate, potentially resolving long-standing interoperability issues for good.

Interoperability and the CBDC Debate

One significant challenge in creating Central Bank Digital Currencies (CBDCs) is the absence of seamless compatibility, which mirrors difficulties encountered when expanding Web3. As it stands now, this incompatibility could potentially hinder the widespread acceptance of both systems.

Yet, CBDCs have the potential to lay the groundwork for resolving these industry-wide interoperability challenges. To some, CBDCs elicit fears of pervasive government surveillance and control. To others, they are unnecessary in the age of stablecoins. But we should not ignore the contributions CBDCs can make for the long-term health of Web3 as a whole. It’s time for a unified and decentralized network of blockchains built on industry-wide interoperability standards.

Please be aware that the opinions shared in this article belong solely to the writer and may not align with the perspectives of CoinDesk, Inc., its proprietors, or associated entities.