How to issue a central bank digital currency
snb.ch
snb.ch
"..blinding is done by the customers, who blind their coins before transmitting them to the central bank for signature."
"..to be sure that the coin has not been copied and already redeemed by another payee (i.e., has not been “double-spent”), the merchant must deposit the coin so that the central bank can check the coin against a file of redeemed coins."
The paper claims that the CBDC is proposes is "a genuine digital bearer instrument" but to my mind, "a genuine digital bearer instrument" should not be entirely reliant on a centralized trusted third party.
Several years ago, we (the Zcash team) came up with a proposal for a wholesale CBDC for use by commercial banks, that has strong privacy protections (based on the zero-knowledge proofs-based protocol that underpins Zcash) that would prevent other CBDC users from being able to observe transaction details or balances, while allowing the central bank to monitor activity on the CBDC ledger. It's designed to sit alongside and provide a decentralized alternative/backup to existing RTGS systems (which would have been useful during the FedWire outage yesterday!). Several major central banks showed enough interest to sit through the presentation but nobody was interested in doing a proof-of-concept or a pilot. ¯\_(ツ)_/¯
You can see a diagram outlining how it would work here: https://twitter.com/JackGavigan/status/1364669769639690246
Changing the currency system just because the old one wasn’t broken enough is not a good idea.
It’s like email or git: requires a central server to work, but is a decentralized system because everyone can set up their own git/email server.
I partially like that this approach (despite being written by an e-cash greybeard) does away with a distributed ledger (ie why bother when it's a central bank) but I cannot get away from the basic idea that distributed ledgers are going to be a fundamental and transformative tech in the years to come.
Throwing that baby out with the bath water seems an architectural optimisation too early.
China's DCEP seems more likely to win
Like you say, when the central bank is managing it you have already done away with "trustless" since the central bank itself is the trusted party. At that point, why bother with blockchains and the like. Just have the central bank manage a big database and be done with it.
And "audit" not as in "spend millions on an auditing firm to do it for you", but audit as in "independently verify it yourself on your own computer".
Having a cryptographically verified history of everything my government is spending on would be cool, but due to the nature of the distributed ledger it would require private citizens be put under the same microscope. At least with the alternative of one central bank controlling one central database, there's some degree of restriction to personal information (I'd imagine the bank wouldn't let any average Joe request ledger data on their neighbor just for fun, but public interests would be fair game).
Simply knowing how many reserves the bank holds gives you no indication whatsoever of its solvency.
People are silent about it because Tether pumps their bags, sadly.
There are no smart contracts in those systems though, and I guess it will take a long time to implement that - if ever. And without smart contracts you can have no tokens, DeFi and whatnot.
The money in your bank account exists only as a liability of the bank. It is just a number in the bank's database. And each bank has their own database. So transferring money from bank A to bank B means that bank B must agree to take on the liability, in exchange for something else.
Most of the time, the illusion of a global ledger is maintained, but it can break down when the system is under stress (e.g. financial crisis of 2008). Introducing a CBDC would fix this, and would make money work the way we already think it works.
If you worry about the stability of interbank lending and solvency of banks, you resolve that with legal requirements around lending and reserves, not introducing a new optional form of m0
Scenario 5 in this whitepaper hints that the ECB is considering a CBDC for this reason nonetheless. (Some other reasons are also given in the other scenarios.) They also talk about how a CBDC would be competition for commercial bank money, so the consequences indeed do need to be carefully considered.
https://www.ecb.europa.eu/pub/pdf/other/Report_on_a_digital_...
Yes, this is how money works and is created today through fractional reserve lending. This has the tremendous advantage of being able to finance economic growth on credit, with a corresponding inflation risk that needs to be managed. That's a feature not a bug.
Are there any easy way for a merchant to accept gold payment nowadays, and have it registered in their bookkeeping - like a debit account but for gold, not $? Alternatively, a debit card where I deposit gold to my bank, and it is sold when I withdraw cash with the card from the ATM?
What would it take you to change your mind on this? To be frank and brutal, is this a religious kind of belief where no observation , no evidence, no argument can change your mind, or a scientific kind of belief where there are ways to change your mind - even if implausible?
Epistemologically, logical arguments from 1st principle I think are of highest value, and evidence or observation after that, and both support the claim that centrally planned economies create worse outcomes, be it for cars like Trabant vs BMW or currency like $ and €.
I welcome you to convince me, and that curious quest for truth is what brings many of us onto the internet. It may sound high and mighty but is sincere. This is my 2nd language so apologies for the lack of finesse.
Since “nomen est omen”, let’s define.
“Price” is in a free market where demand and supply meet. For labour, for cars, for chewing gum, and so much more.
When there is a lot of demand, rising prices are a signal to produce and be rewarded. Those who successfully do so will be rich, and want to invest their money in the most efficient way possible. This leads them to finding others who want to satisfy demand, invest in them, and there is a virtuous cycle. This effect is simple, but very important. Don’t take it lightly - it has given even the poor what kings could only dream of a few hundred years ago. We don’t live in a perfect Eden, but we have risen far.
It is also good, if ethics are universal, because it contains no coercion, violent force, or other such evils.
Currency is one thing of many traded. It has a price relative to other currencies, but also to bananas, chewing gum, cars, labour, etc. What to use as currency, and the price of currency, would in a free market be set by supply and demand. The price and object of currency would therefore reflect the wisdom of the crowd, rather than committee.
Central bank currency requires a state to use its police and military to force people to trade in it, rather than the currency they themselves prefer. Central bank currency allows the state to print infinite amounts of money, like in Weimar, or since 2008 with QE infinity. When you create money, the value of every salary is effectively lowered. The state first and the banks second get to deal with the new money, while it’s still valued as before it’s printed. With this you can fund wars, and bribe the population for votes with welfare programs that create addiction to the state.
Central banking was Marx’s 5th point in his communist manifesto - “Centralisation of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly.”. Another notable point in the communist manifesto was state run public schools rather than freedom in education.
So just like central planning of the car economy in east Germany led to worse driving and long lines for East Germans, central planning of currency leads to worse economic outcome for most people. See for example how income from capital vs income from labour diverged in America after 1971, as in the link above. Labourers got majorly screwed, while growth in efficiency continued (I.e value of capital) to climb.
I invite you to either from first principles or evidence show that supply and demand is better determined by the state or a semi-state organisation, preferably with a good argument for why a central planning committee will be more efficient and virtuous than free decentralised people trying to satisfy the demand of others best they can, and I promise to accept reason. It’s worthwhile to recall that philo means love and sophy means wisdom/reason.
Many of these ideas I’ve learned from the books of Austrian philosopher/economist von Mises. His books are on Amazon but also available as pdf, html, and ePub here https://mises.org/library/human-action-0
Let me start by saying that I kind of admire the logical coherence and beauty of the framework built from the basic building blocks of utility maximizing (rational) agents, free trade and market equilibrium. It is actually very hard to argue against the framework within the framework itself, the logical purity of the model is quite beautiful indeed. And absolutely yes, free trade has been one of the huge welfare drivers of the last centuries. Another one, in my opinion, is democracy and worker's unions, but that is a side note to this particular discussion.
But (of course there is a but...), what comes to monetary policy, I'd like to ask you to consider one of the basic premises I mentioned above, namely market equilibrium. I would argue that even if in the long term the macroeconomy may be somewhat equilibrium seeking, in the short term it is quite obvious that the unconstrained macroeconomy is a complex system with different feedback loops and time constants causing a pretty much chaotic behaviour[1]. And without any exogenous controls in place, even these short term fluctuations can become large enough to cause havoc in the society. These fluctuations can be observed in macro level in the business cycles (even if the central banks and governments do their best to smooth them!), and even in micro level in repeatable experiments[2]
So, if you allow economy in your model to be complex and not just perfectly equilibrium seeking, you pretty much must have some exogenous control to keep the economy even remotely stable. Unfortunately that exogenous control by definition means that somehow actions of some agents in the economy must be artificially either restricted or fostered, even if that flies on the face of the moral principle of individual freedom. And central banks are important tools in this exogenous control via money supply.
[1] https://en.wikipedia.org/wiki/Complex_system [2] https://en.wikipedia.org/wiki/Beer_distribution_game
Central planning in this context means that the state by using its police and army will hinder free people from trying to satisfy market demand as expressed by price.
Instead a committee appointed by politicians would decide what should be produced and at what price it should be sold.
That a company plans the best they can to satisfy demand is not what we mean when we say _central_ planning
Are they though? Which goods and services can I buy where the price is set in crypto cash, rather than translated to crypto cash?
Ultimately those EURs are being converted to USDs because the producers of those American products are taxed in USDs.
EDIT: 20s Googling: "(2013) Bitcoin instability over the past few months has prompted CryptoLocker's masterminds to reduce the ransom to 1 BTC, 0.5 BTC, and then to where it is currently: 0.3 BTC."
But still, the asking price for the "service" is in Bitcoin as peteretep was asking. They could've asked an amount in US$ payable in Bitcoin, but the price is given in BTC.
I would argue, the change of price is "just" reflecting the deflation of bitcoin, which from my point-of-view is not terribly different to other price-adjustments across currencies. E.g. Apple increasing the prices in their App Store in UK£ due to its depreciation (https://www.theguardian.com/technology/2017/jan/17/apple-ios...)
Assuming you overlook any suspicious behaviour, that is.
Also, why would they wait until it becomes a thing? It's clearly just getting bigger so might as well do something before it actually becomes a "real" competitor.
(tbf to the paper, apart from the sentence highlighted by the OP it's pretty level-headed about actually existent crypto)
If you look at the actual motivations of the Central Banks in making Cbdcs, it's doubtful they will need anything more technoligically complex than what credit card companies already have.
I doubt it will be a block chain. I doubt it will deal with private/public keys as a main means of authentication.
This.
If a central bank can’t make amendments the ledger, there’s no way they’ll adopt it.
Sure, we have these metal and paper represenatations too, but they aren't the majority use-case any more.
Cash is a specific form of money. There is no such thing as digital cash (or maybe, all digital money is "digital cash"). Digital money on the other hand is all around us. I can't remember the last time I paid for something with cash. But I spend digital money every day. I get paid with digital money each month, I sit on the couch and spend digital money on Amazon, and I routinely tap my iPhone to use Apple Pay to spend digital money in shops. It's just moving bits around a database.
Reading between the lines of what Central Bankers mean is that they want national accounts (i.e. wallets) and using crypto/blockchain/whatever as justification. The reason being that Central Banks have unleashed interventions that 20 years ago were unfathomable. And yet, deflation is everywhere and money velocity barely has a pulse. The transmission mechanisms for monetary policy are broken...well, CB'ers broke them. So now they are looking elsewhere. Direct payments are the final frontier, and it's a lot easier to do by giving everyone an account with the CB (i.e. "wallet") and just print money there.
TL;DR - money is already digital, what central banks really want is centralized accounts that they can helicopter money into
That is not a matter of centralised accounts, but policy. Central banks could just as well have mailed a check, but they are simply not allowed to.
> The reason being that Central Banks have unleashed interventions that 20 years ago were unfathomable. And yet, deflation is everywhere and money velocity barely has a pulse
Because they are tasked with monetary stability, and they used the only interventions they were allowed to. And that was challenged at court. It would have been the governments job to drive the economy up, because quite evidently, it was not a lack of credit-lines which staled it. But up until recently there was no political will to do so.
Sorry, I don't see how that could be the case: Either you need congressional approval, or you don't.
And how is the technical implementation of money transfer going to have an impact on that?
I think this structurally has less resistance than writing physical checks. What's the point of designing and implementing that system if they aren't going to be allowed to use it.
Nothing that follows in this paragraph depends on the pre-condition of having a digital currency wallet.
> I think this structurally has less resistance than writing physical checks.
That may be, but I find it hard to judge. I am skeptical if the decision to shell out a couple of billions depends on physical checks or not. You could also argue the reverse, a check works better for advertisement for the governing party. People get something physical that is worth something.
> What's the point of designing and implementing that system if they aren't going to be allowed to use it.
There are other use-cases. Direct depositing stimulative is one possibility, but from my point-of-view hardly a game-changer. Direct withdrawal/devaluation on the other hand...
The main motivation I see though is more to compete with PayPal/Visa/MasterCard/Apple Pay/Google Pay..., and all the classic banks. The motivation is not to lose relevance, and if designed correctly, I can opt out of monetising my buyers history & private information.
The amount being invested does not translate into any bearing on reality.
I don't think it's the main motive, the central bank could send money directly on my bank account if they felt like it.
As I said previously :
> Digital currencies allow for full tracking of every transactions and are a privacy nightmare.
> They allow applying negative interest rate on everybody and they would facilitate neverending hyperinflation (no need to print new bills at great expense).
> Hence they can't coexist with cash so say goodbye to cash.
> I don't like where we're going.
It's a policy tool, not a technology. They could set up a cbdc with minim effort technologically. The problem would be getting the congressional approval to use it the way they want to use it.
Wish I could upvote this post more times.
Bingo. Central bankers have wanted direct access to consumers for decades. Policy makers resisted. Cryptocurrencies are a political tool for disabling that opposition.