CBDC Roundup

Anonymous Digital Dollars?

The Electronic Currency and Secure Hardware Act (ECASH) has been introduced in the US Congress by Stephen Lynch, a Massachusetts Democrat and chair of the House Task Force on Financial Technology.

The bill directs the US Treasury Department to conduct a pilot program for a version of digital dollars that work just like cash in that they would be stored on hardware, not in bank accounts. These digital dollars would work without an internet connection and would have all the anonymity of cash.

The original vision for cryptocurrencies such as Bitcoin was that the distributed ledger technology and accounts tied to cryptographic wallet addresses would keep transactions anonymous. In reality, storing transactions on public databases allowed law enforcement agencies to connect those transactions and wallets to the people making and owning them.

The design of CBDCs being discussed today will also be traceable, hence the ECASH bill introduced to Congress.

CBDCs and Financial Inclusion

The Bank for International Settlements (BIS) has written a paper based on interviews with nine central banks at various stages of exploring retail CBDCs and financial inclusion – the Central Bank of The Bahamas, Bank of Canada, People’s Bank of China, Eastern Caribbean Central Bank, Bank of Ghana, Bank Negara Malaysia, Bangko Sentral ng Pilipinas, National Bank of Ukraine and Central Bank of Uruguay.

Amongst other conclusions, the paper identified barriers and specific design factors that might increase inclusion.

Common barriers amongst the nine central banks were:

Geographic barriers related to vast territories and remote locations.
Institutional and regulatory factors, such as a lack of public goods like identity credentials, as well as informality and a lack of consumer protection.
Economic and market structure issues, including limited competition, inefficiency in the financial sector and a lack of profitability of serving excluded groups.
Characteristics of vulnerability, such as barriers by age, gender, income or disability status like visual and hearing impairments.
Lack of education and financial literacy.
Low trust in existing financial services.

For the central banks who see potential for CBDCs to enhance financial inclusion there were several specific design objectives addressing specific financial inclusion barriers.

Promoting innovation in the two-tiered payment system through architectures involving private sector retail services (as in existing systems), including new (non-bank) actors, and revisiting rules on authorised access.
Offering a robust and low-cost public sector technological basis and novel interfaces.
CBDCs can be designed as a public sector-led basis for private sector innovation. This may include providing low-cost CBDC payment services with fees set by the central bank. CBDCs may use open application programming interfaces to share data with appropriate safeguards, such as separating transaction and personal data. CBDCs could support technological solutions with offline functionality (ie. when mobile connectivity or even electricity are unavailable).
Facilitating enrolment and education on CBDC through simplified due diligence processes to enrol individuals and micro- enterprises, remote registration or electronic know your customer (e-KYC), integration with national digital ID systems, merchant acceptance of CBDC, enabling access to special groups with limitations and giving users control of their data to support the building of a financial record.
Integrating CBDC with existing payment instruments like credit transfers, payment cards and mobile money. This requires interoperability with other cross-border CBDC systems and with government payment and collection streams.

EC Consultation Draws 10,000 Responses

The European Commission’s (EC)consultation has now received over 10,000 public comments in its call for evidence regarding a digital euro. The consultation opened on 4 April 2022 and closes on 14 June.

A targeted consultation is going on in parallel to collect information from industry specialists, rather than the public, focusing on the establishment and regulation of a digital euro, for example, users’ needs and expectations, a digital euro’s role for the EU’s retail payments and digital economy, the application of money laundering rules, privacy and data protection aspects and international payments.

Riksbank Phase 2 Report Published

Sweden’s Riksbank has issued its phase 2 CBDC report. The report records a number of conclusions such as:

Working with Handelsbanken and Tietoevry to test whether a CBDC e-krona could be integrated into the bank’s internal systems. It concluded that they could, which means people can exchange e-krona with money held in their bank accounts and vice versa.
The Riksbank also found that transactions can be made offline with e-krona, although they identified risks of theft and illegal activity that needs more thought and work.
The e-krona approach creates a transaction history and this raises potential privacy issues around this data. It will do further work to see if there are GDPR issues that need resolving.
The Riksbank regards the e-krona as an electronic form of cash.

In phase 3 the Riksbank wants to explore how an e-krona might deliver the promised benefits of smart payments/smart money/ programmable money, ie. the ability to programme or control transfers. It gave the examples of triggering a payment when a contract is fulfilled or giving pocket money that cannot be spent on sweets. This work will also look at why such functionality is better than other options.

Ethereum Looks to Move to Proof of Stake

Ethereum, one of the major cryptocurrencies, is looking to change from ‘proof of work’ to maintain a time-ordered ledger of transactions, to a ‘proof of stake‘.

The reason given is the enormous power requirement needed to solve the mathematical problem underlying the coin. Ethereum uses 113 terawatt-hours per year, as much as the Netherlands. Bitcoin is said to use even more.

Mining brings a host of other problems including the cost of the computer servers needed, the time it takes to carry out a transaction, averaging 15 transactions per second, and that this can’t be scaled up.

This transition to proof of stake is due in the first half of 2022, but then this was first said six years ago. Although proof of stake uses 99% less energy than proof of work and has the potential to reach 100,000 transactions per second, building the necessary model is complex. Proof of stake does away with miners and replaces them with ‘validators’. Instead of investing in energy-intensive computer farms, you invest in the native coins of the system.