In a recent interview, Charles Hoskinson, Founder and CEO of Input Output Global (“IOG”), the blockchain technology firm behind Cardano’s R&D, shared his thoughts on central bank digital currencies (CBDCs).

Here is how Binance Academy explains the concept of CBDCs:

A central bank digital currency (CBDC) is a digital form of fiat currency. As such, it’s established as money by government regulation. The approach to designing a CBDC will likely vary a lot based on the issuing country. Some implementations will likely be based on blockchain or some other type of distributed ledger technology (DLT), while others could likely be just a centralized database. The blockchain-based ones will use a token to represent the digital form of fiat currency…

While we could argue that CBDCs are inspired by cryptocurrencies such as Bitcoin, they are quite different. CBDCs are issued by a state and declared legal tender by a government…

From a technological standpoint, a CBDC is essentially a database run and controlled by the government (or possibly approved entities in the private sector). This is why a CBDC is a permissioned database, as only approved actors have the ability to transact on the network… As such, the centralized entity controlling the database also has the ability to prevent transactions from going through, revert transactions, ‘freeze’ funds, or blacklist addresses.” 

The IOG CEO’s comments about CBDCs were made on September 21 during an interview on an episode of YouTube series “Cheeky Crypto”.

According to a report by The Daily Hodl, Hoskinson said:

CBDCs… they’re not crypto. They can run on crypto rails and do these things, but I will never in my life support a system where we hand an unlimited monopoly to somebody at any moment to have total control over your entire financial autonomy and your economic access.

Just as an example of what could be done: Let’s just say there’s a country, and I’ll just say country, I won’t put a name on it. And there’s a civil war going on in that country between two ethnic groups. So it’s entirely possible when you have a CBDC that the majority party — the one that runs the government that’s oppressing the other group — can just say, ‘You know what, we’re just going to shut off all the money of everybody who’s of this ethnic minority. Just going to turn it off.’ They wake up, their wallets are empty.

In the same interview, Hoskinson talked about talked abut layer 2 (L2) scaling solution Hydra, which should launch in H1 2023:

So when you look at things like Mithril, Hydra, you know these are extensions of known concepts. Mithril is a threshold signature idea and they construct these proof certificates and then when you do transactions, they’re paired with proof certificates, and it gives you the inclusive accountability… it’s not a new idea. It’s like 10 years of talking about this stuff we just implemented. It’s a lot of hard cryptography to implement, but once it’s done, it’s done. And it’s more about how you distribute the certificates and build them.

Hydra Is everything Lightning wanted to be when it grows up… The hard part is the fact that Bitcoin is not programmable. So 95% of your effort is trying to figure out how do you get a model that’s not designed for this to work with this…

With the extended UTXO and Plutus, there’s enough there that you can build rich, isomorphic, state channels. So basically, you can take state and assets and you can batch and bundle them together and put them into a layer two solution and then you can use it for micro transactions, you can use it for a smart contracts…

But then you can build modules on top of it to do specific applications, like DEXes, voting, these sets of things, and in particular one area I’m very interested to use Hydra in 2023 is to reuse that technology for you to do all the stuff we’re doing right now with Catalyst and voting…

What if you could do it all off-chain in a layer two network that batches and bundles and then it creates an aggregate that you put on chain that’s a small data payload, but then you can verify at any given time that those votes were counted correctly. Well, that’s what Hydra does in a nutshell, and it can do it for a smart contract. It can do it for a payment. It can do it for an asset.

What we thought was really important is to treat Hydra like an applied research program. So what we did is we got a small team, we got DApp developers like SundaeSwap and others, and we said, ‘build it with us, so as we build, you integrate and we talk back and forth, and we de-risk parts of the protocol, and then we have a 3-4 week release cycle’.

So if you go to the Hydra’s GitHub repository, the entire release schedule is there on the project page. And you see the releases that we’ve done and the capabilities these release have, and we will work our way up over a reasonable period of time to a 1.0. That’s a good foundation for a DApp developer to take and integrate into their infrastructure for a lot of the off-chain stuff that they do.

Now, who will run that infrastructure? Well, the way we designed it, stake pool operators can and the developers themselves can and other people can and it just becomes another augmentation to Cardano. And what’s cool is [that] it’s a foundation for other protocols, like a tail protocol for micro transactions or a voting protocol or these types of things… And you kind of know that you get a lot of guarantees with this system.

So, it’s slow to start because you have to do a lot of applied research, but once that research is over and done, and you have a strong foundation, it’s easy for people to take it and build apps on top of it into other tools like Mithril that you have as you think about how do I build an ecosystem around this.