Ethereum co-founder Vitalik Buterin wants central bank digital currencies (CBDCs) and cryptocurrencies to get along.
On Twitter, Buterin posed the question whether CBDC transactions will be cryptographically provable—that is, if you can show using math that you made the transaction. If they are, it opens some interesting possibilities.
“Basically, if you can prove to the ethereum chain that you made a transaction inside a CBDC system, you can use that to build an automated smart contract dex,” Buterin told Decrypt. Smart contracts are automated pieces of code that run on the Ethereum blockchain and a DEX is a decentralized exchange, where cryptocurrencies are traded between people without a central bank or third party involved.
How crypto could work with fiat
This process would, Buterin explained, “make it easier for people to trade between fiat and crypto.”
Here’s how it would work. Let’s say two people agreed to pay each other but with different forms of money. One wants to send over some Ethereum in exchange for a fiat digital currency—such as China’s upcoming digital renminbi. The problem is, how do they make sure that the other person will pay up?
Simple: they create a smart contract. They design it so that, when one person makes one of the transactions, the other is automatically executed.
In order to make this happen, the Ethereum blockchain needs to be able to know that the fiat digital currency has been transferred. Bear in mind that the CBDC will be operating on a completely different and centralized system. But, as Buterin said, if the transaction can be cryptographically verified, then it will work.
It’s early days, but perhaps crypto and fiat won’t end up like oil and water.