Retail Central Bank Digital Currency, steps toward adoption.
Any retail Central Bank Digital Currency needs to emulate cash closely, eliminating just the physicality of cash, leaving most other features intact. This is the message from the ECB (European Central Bank) and the Digital Dollar Project on the first day of Consensus: Distributed.
Let us list the features of cash desirable in a CBDC:
- Cash transactions are truly anonymous, a retail CBDC needs to be as well
- At the point of disbursement, a commercial bank account is needed
- Once it leaves the commercial bank, it can be freely exchanged
- Cash does not have interest rates, neither positive nor negative
- Cash does not need technology, it can be exchanged without a connection to the internet
- KYC/AML needs to be enforced for amounts exceeding the lower legal limit
Yves Mersch, a board member of ECB, said that 80% of central banks in the world are exploring retail CBDC. Further he said that there was no demand for such a digital currency in the EU as a whole, cash is still the preferred method. The ECB has its mandate to protect the monetary system and serve its citizens. Technology is not to be used for technology’s sake.
In the interest of being ready, should the demand for a digital central bank currency arrive, the ECB wants to be prepared. They have a task force looking at the concepts in depth. This study reveals the challenges they face.
Yves Mersch went through several scenarios with CBDC, many of them involving direct accounts at the central bank. Most important of the central bank accounts would be the on the current banking sector and the generation of credit and the protection of the banking sector in times of monetary distress. Preventing digital runs, which could happen extremely fast and overwhelm the commercial banking sector. Especially if deposit cash could easily be turned into CBDC with a direct retail account at the central bank.
Another scenario Yves Mersch described is a two tiered system, one which was purely for payments and containing small amounts of money for day to day use, the other as a store of value, which has unattractive negative rates. This was setup as a preamble to a dismissal of the two tier system as a multiple exchange rate regime, which had been always shown to be inefficient, and unworkable. I agree, having CBDC behave differently in different settings could cause problems.
Further Yves Mersch dismissed a ledger as a requirement, since anonymity is needed and the use of a ledger is counter to that. All of this to say that retail CBDC would probably be distributed through commercial banks.
No design for retail CBDC is possible without a rock-solid wallet. I propose that a wallet could have a public side and a private side. The private wallet could be secured using zero-knowledge cryptography such that transactions are possible to another wallet without revealing the identity of the transmitter. This is one way to emulate cash.
I can think of a couple of suggestions, the first one is that ECB Accounts could be used purely for benefit payments, not to accept deposits. There would only be outgoing payments. Some form of federal account is needed for social security benefit payments as well as tax refunds. Stimulus payments, and other “QE to the people” could be also be done using this mechanism. Once paid, the digital cash could be moved into a private part of the wallet. This private wallet could be secured using Zero Knowledge Proofs, which run the ZCash system today, ensuring total anonymity. The disbursal of on demand CBDC can still be through banks, just like cash.
For the ECB and for any other area in control of a central bank, retail CBDC would require legislative backing to render it legal tender. If it is legal tender, then it has to be accepted as payment everywhere in the jurisdiction, it also has to work without a connection to the internet. These are must haves, in these respects retail CBDC will converge to the stated design of the DCEP (Digital Currency Electronic Payment) system that China is poised to roll out.
The beauty of CBDC is that there are no intermediaries between you and the central bank when it comes to cashing it in or using it, you have a claim on the lender of last resort. Bank deposits are subject to the good credit of the commercial bank that holds the deposit. In other words, it depends on an intermediary.
The digital dollar project, although very official sounding has no official standing. Founded by influential people, it has many such people in its advisory roster. Three founders were on the presentation in consensus: distributed. Afterwards there was a Q&A session.
David Treat from Accenture and the ex chairman and ex innovation head of the CFTC; Chris Giancarlo and David Corzine were the speakers.
Chris Giancarlo started by quoting Victor Hugo. “Nothing is more powerful than an idea whose time has come”. CBDC is the idea du jour. They were in full throated support of the public private partnerships that are the hallmark of the US that would execute the idea of retail CBDC. However, it is clear that without Fed support, and the support of the legislators this would not get far.
A little bird tells me that the Fed and the legislators are in support of this; but the tech is a heavy lift and needs to bring together many constituencies of our country together for this project to be implemented. A bullet proof wallet is important.
David Treat was all for the simplest implementation, a two tier system, with no direct FedAccounts, no interest. They all brought up the idea of programmability to enforce the Banking Secrecy Act for transfer amounts that exceed the legal limit and enforce KYC/AML. It was clear that in their vision dlt would be involved. Accenture has been gathering expertise working on multiple CBDC projects all around the world.
Chris Giancarlo said this would be an investment in the digital infrastructure of our country whose physical infrastructure is deteriorating. Daniel Gorfine mentioned that a whitepaper was in the works and would be released soon. A series of pilots have also been proposed.
Another theme was the preservation of the USD as a global reserve currency, which could be threatened by the rise of DCEP. As one of the stated aims of the Chinese government with DCEP through the belt and road initiative was to spread the gospel of yuan/renminbi. The seeming withdrawal of the US from the global compact could also give an opening to DCEP.
All three felt that the US as a democracy, a bulwark of the capitalist system and a place where the rule of law is important, will create a CDBC that fits our culture and could be adopted around the world. These days, at least some of these claims can seem to be suspect.
Nothwithstanding all this, CBDC is an idea whose time has come. Implementation will take a lot of hard work and investment; not just in attorneys and MBAs, but in a whole host of technologists, testers, evangelists, adopters and visionaries.
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