Drivers for CBDC and implications for architecture

Author, advisor and commentator um Consult Hyperion
22. Jul 2021

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Drivers for CBDC and implications for architecture

  1. Please copy and distribute 1 Central Bank Digital Currency: Drivers and Options Institute of International Monetary Research (IIMR) University of Buckingham (July 2021) David G.W. Birch Rev 6
  2. Please copy and distribute 2 Forbes contributor; Financial World columnist; Honorary President, European e-ID Assocation; Top 100 Most Influential People in Fintech 2021; Wired top 15 favourite source of business information; PR Daily top 10 Twitter account followed by innovators; Financial Brand top 10 influential voice in banking; Total Payments Europe’s most influential commentator on emerging payments; Emerging Payments Association contributor of the year 2018/19. David G.W. Birch In addition to board and advisory positions Author & advisor on digital financial services
  3. Please copy and distribute 3 Books 2020 digital financial services 2014 2017
  4. Please copy and distribute 4 CBDC is a Thing Political, economic, social and technological impact Digital cash is coming But will it be private or public? How will it work? And why does that matter? What does it mean? Interesting scenarios…
  5. Please copy and distribute 5 Why? The Six Key Drivers for Central Bank Digital Currency
  6. CC BY-SA 4.0 David G.W. Birch (2021) 6 Drivers for Digital Currency Six Key Drivers (derived from ECB, Bank of England and other reports.) Sovereignty Internal impact of electronic cash Monetary policy Control and regulation. Money supply. Influence External impact of of electronic cash Projection of values. Reputation. Cashlessness Decline in the use of physical cash Social policy. Financial Inclusion. Cost savings. Provision of viable alternatives. Sustainability Ecological footprint Minimise impact of currency. production, distribution and circulation. Minimise the impact of digital alternatives. Resilience Risk mitigation Law enforcement. Security. Privacy. Offline (device to device) use. Innovation New products and services APIs. Programmability. Competition. Reduced cost of intermediation.
  7. CC BY-SA 4.0 David G.W. Birch (2021) 7 Sovereignty Monetary Policy and Control eCA D Privacy Play eEUR Challenger Currency eCNY Belt and Road eUSD The Global Reserve Diem BTC eAU D Regional ?
  8. CC BY-SA 4.0 David G.W. Birch (2021) 8 Personal access to central bank money A safe alternative to commercial bank money that could trigger bank runs Wallet holdings could be limited to a maximum of €3000 (ECB) or otherwise restricted Safe and secure money for everyone
  9. CC BY-SA 4.0 David G.W. Birch (2021) 9 Influence “If America is smart, it will wake up and start competing for dominance in digital payments” Historian Niall Ferguson writing in The Sunday Times. Whether you think it might be a good thing or not, the dollar’s dominance gives America the ability to use the international payments system as an arm of its foreign policy, a power that many countries find, as Ferguson writes, “increasingly irksome”.
  10. CC BY-SA 4.0 David G.W. Birch (2021) 1 0 Increasing trade and prosperity Raina makes a living from predominantly foreign visitors Raina has a digital wallet on her phone to take Australian dollars from tourists The ability to use domestic currency internationally without remitters or f/x
  11. CC BY-SA 4.0 David G.W. Birch (2021) 1 1 Cashlessness Make cashlessness happen the right way, don’t allow cashlessness to just happen Crime Seigniorage Loss Tax Evasion Foreign Exchange Transaction Reporting Universal Service Money Laundering Cashlessness Domain Regulation Criminal Activity Money Supply Social Policy Control and Regulation
  12. CC BY-SA 4.0 David G.W. Birch (2021) 1 2 Inclusive and efficient Emma is in the gig economy, does not like banks (and their charges) Emma has access to a digital currency wallet that sweeps to a no-fee saving account Unbanked is not the problem and banks are not the solution
  13. CC BY-SA 4.0 David G.W. Birch (2021) 1 3 Resilience
  14. CC BY-SA 4.0 David G.W. Birch (2021) 1 4 A reliable alternative to cards and bank transfers Robert is fed up with trying to take cards when can’t get a signal and it still mad he couldn’t buy supplies when the bank debit network was down Robert has a digital currency wallet integrated into a simple accounts package No need to include personal information in transactions
  15. CC BY-SA 4.0 David G.W. Birch (2021) 1 5 Sustainability UK: Cash Industry Environment Charter Mr. Musk! A more diverse payments ecosystem
  16. CC BY-SA 4.0 David G.W. Birch (2021) 1 6 Instant, near-zero marginal cost “cash” Steve writes a popular sports newsletter and wants to charge $1 per download Steve has a digital currency wallet to take micropayments Removing the need for intermediaries
  17. CC BY-SA 4.0 David G.W. Birch (2021) 1 7 Innovation …is to create ”money Lego” …to crossover with “defi” …for new products and services …that I cannot imagine! The real long-term benefit of CBDC
  18. CC BY-SA 4.0 David G.W. Birch (2021) 1 8 New services My friend Claire is trying to buy a puppy and is fed up with being scammed Claire uses an escrow service that auto- holds and releases funds Using API/”smart contract” services
  19. CC BY-SA 4.0 David G.W. Birch (2021) 1 9 Innovation vs. Cost Saving Smart Money Central Bank Digital Currency as Platform Dumb Money Central Bank Digital Currency as a Post-Functional Artefact Money is an application Money as an API Money that has a memory Money that can make decisions about you A dynamic property of communities Money is bits Money is standalone Money that substitutes for memory Money that you can make decisions about A static creation of the state
  20. CC BY-SA 4.0 David G.W. Birch (2021) 2 0 How? The “space race” for electronic cash
  21. CC BY-SA 4.0 David G.W. Birch (2021) 2 1 Digital Money Electronic Money Electronic Cash Multiple Operators Hardware Software Centralised Decentralised Non-fungible Fungible Private Public An Operator Tokens Accounts How do you stop double-spending? Nature with qubits The Currency Cold War @dgwbirch barclaycoin before Satoshi after Satoshi in accounts value is a claim on private debt in wallets with chips how do you manage the system? with clouds value is a claim on central bank how do you maintain integrity? with chains
  22. CC BY-SA 4.0 David G.W. Birch (2021) 2 2 What are the Real Options? Mobile-Centric • Options for regulated but on-bank providers • Diem as an electronic money institution • Similar to central bank centralized system Cash Substitute • Device to device (person to person) without central control • Limits on “purse” holdings • Could be inclusive Smart Money • APIs for money • “Smart” “contracts” • The potential for innovation If we exclude a “public Venmo” Clouds The cheapest and simplest way to run an electronic cash system Chips Tamper-resistant hardware is not free but it is efficient Chains A shared security infrastructure with flexible characteristics
  23. CC BY-SA 4.0 David G.W. Birch (2021) 2 3 Everything Old is New Again Visa’s OPS (December 2020)
  24. CC BY-SA 4.0 David G.W. Birch (2021) 2 4 Bank of England (March 2020)
  25. CC BY-SA 4.0 David G.W. Birch (2021) 2 5 Strawman: Two Tier with Tamper-Resistant Hardware with chips with clouds with chains @dgwbirch The Glass Bank Manage the Transactions Manage the Wallets CRUD
  26. Please copy and distribute 2 6 When? The new “Cold War” has already started
  27. CC BY-SA 4.0 David G.W. Birch (2021) 2 7 Before Babylon, Beyond Bitcoin (2017) Private Money New Money? Public Money Commercial Bank Money Company Money Community Money Cryptography Money Central Bank Money •Wholesale •Retail digital cash
  28. CC BY-SA 4.0 David G.W. Birch (2021) 2 8 Facebucks Mark Zuckerberg told the audience at F8 in 2019 that sending money should be as easy as sending a photo. WhatsApp is already testing this with a million people in India and the feedback so far has been great.
  29. CC BY-SA 4.0 David G.W. Birch (2021) 2 9 Diem • “Stablecoin” • Dollar first • Still await a variety of approvals • But… who wouldn’t use it? If Libra becomes successful “it would instantly become systemic and will have to be subject to the highest standards of regulation”. Mark Carney, Governor of the Bank of England (2019).
  30. CC BY-SA 4.0 David G.W. Birch (2021) 3 0 Cash Isn’t the only thing in a Wallet “an additional goal of the [Libra] association is to develop and promote an open identity standard. We believe that a decentralized and portable digital identity is a prerequisite to financial inclusion and competition”
  31. CC BY-SA 4.0 David G.W. Birch (2021) 3 1 PBOC Deputy governor Fan Yifei told an audience at Sibos 2020 (5th October 2020) that until “late August” the bank had processed 3.1276 million transactions. The total value of theses add up RMB 1.1 billion ($162 million). More than 6,700 pilot use cases have been implemented for the CBDC. An aggregate of 113,300 personal digital wallets and 8,859 corporate digital wallets have been opened.
  32. CC BY-SA 4.0 David G.W. Birch (2021) 3 2 A Reaction? PBOC has been working on CBDC for seven years 2014 CBDC Research Group 2015 Reports and Prototype 2016 Committed to issue CBDC 2017 Digital Currency Research Institute 2021 Red Packet drops 2020 Testing in four cities, commitment to 2022 Winter Olympics 2019 Decided on Two-Tier, created online course, hired staff 2018 Private sector co-operation, Shenzhen Fintech Co. Ltd “it is an irresistible trend that paper money will be replaced by new products and new technologies… digital currency should be issued by the central bank (my emphasis)… plans to gradually phase out paper money”. Governor of PBoC, Zhou Xiaochuan (2016). China will adopt the “two tier” approach, noting that to offset the shock to the current banking system imposed by an independent digital currency system they will incorporate digital currency wallet attributes into the existing commercial bank account system “so that electronic currency and digital currency are managed under the same account” Yao Qian, PBOC technology department (2017).
  33. CC BY-SA 4.0 David G.W. Birch (2021) 3 3 Currency, Competition and Choice DC/EP can be used “without an internet connection would also allow transactions to continue in situations in which communications have broken down, such as an earthquake”. This would seem to mean that the system (as Mondex did) will allow offline transactions. If so, this would be truly radical. “even Libra can’t do this”. Mu Changchun, deputy director of PBoC’s payments department (October 2019). DC/EP will be available through banks but also in Alipay and Tencent wallets Distribution through China and along the belt-and-road! Including wearables and powered cards
  34. CC BY-SA 4.0 David G.W. Birch (2021) 3 4 CBDC Launch in China May 2020 Offline device-to-device As the PBOC say, “even Libra cannot do this” and they are correct. Live And with no blockchain in sight. This is not a “cryptocurrency” nor is it based on one. Bank wallet Can withdraw and deposit digital Yuan from/to account
  35. Please copy and distribute 3 5 Contact David G.W. Birch @dgwbirch