Central Bank Digital Currency – US Senate Testimony of Dr. Neha Narula [pdf]
banking.senate.gov
banking.senate.gov
> A CBDC which is in some part run by the central bank does not necessarily require the central bank to have visibility into fine-grained transaction data. Legitimate public policy goals relating to combating criminal activity can be fulfilled while preserving the privacy of the public and preventing a central bank being drawn into the commercial surveillance models which are now prevalent in the private sector.
It sounds like they're prioritizing a system that uses cryptography to ensure a zero-trust and plausible deniability environment similar to cash. For the US, I think this is the right path for their government. They need to be able to easily transfer monetary assets to foreign agents or governments without anyone snooping in on them. Even the possibility of a back door would mean that one of their enemies could see where resources are being allocated internationally, which would be a vulnerability.
This would also promote use of the currency among others in low trust environments, which is part of why the US dollar has such significant international hegemony in comparison to something like the Yuan/Digital Yuan. No third world government wants to be in the position where the Chinese can see how they're spending their funds and immediately freeze them based on this oversight.
1) Cryptocurrencies are mined decentrally. In this case, who will mine and how?
2) Crypto blockchains are secure by having many distributed miners. In this case, how will the blockchain be decentrally secured? (And if it will not be decentrally secured, then will it simply be a central database?)
Thanks.
Is the justification in the paper and I’m just missing it?
> Some purport that a CBDC must be built on distributed ledger technology; this is putting the cart before the horse.
> Architecture 7 is proposed by some blockchain advocates; they suggest that a central bank issue digital currency on an existing blockchain system. This might be a smart contract platform like Ethereum or a permissioned blockchain like Facebook’s Diem. Under this type of architecture, a central bank could control issuance of the digital currency, but would give up all other control to the governance of the underlying blockchain. For example, the participants in the blockchain network might decide to reverse a transaction, as happened in Ethereum after one of its smart contracts, the DAO, was hacked. Ethereum developers, miners, and community members cooperated to reverse the hack and restore funds.15 It is extremely unlikely any central bank would want to put this level of control in the hands of blockchain operators. Blockchain networks are open and accessible and have high levels of innovation, though there has not necessarily been a concerted effort to add features to support financial inclusion.
> Architecture 4 is deemed “two-tier” CBDC in that it is expected that the CBDC will only be accessible through commercial banks.11 This implies that a user will need to obtain an account with a commercial bank in order to receive and transact in the CBDC. This design is appealing because it preserves the current structure in electronic payments, but at the same time, it is unclear how this design alone will help promote financial inclusion in the US because it does not appear to address the main reasons why the unbanked do not use banks.
> All of these architectures need to be carefully evaluated for their potential to improve financial inclusion, risks and complexity of implementation, monetary and economic implications, and the potential to affect the cost of credit and financial stability.
In a world where Tether didn't have mass adoption, I can see why you might oppose it. But Tether and other stablecoins already exist and are widely used. DeFi already trivially interacts with fiat prices. We also know that Tether poses a serious, potentially systematic risk. The Fed could put it out of business overnight just by deploying a simple ERC20 token tracker.
The federal government need not deploy a crypto token in order to kill Tether. They will simply regulate it out of existence. It is clear this is the path we're on from Yellen's statements and the nomination of Gary Gensler to the SEC (who previously taught about cryptocurrency systems at MIT) [1]. Globally, China is cracking down hard, and Europe seems to be preparing to do so. None of this should be unexpected to an educated scholar of history and nation state mechanics.
> It is important to note that a CBDC might not be the only way to address some of these problems; for example, in the US we might improve financial inclusion by requiring commercial banks to provide free, no-minimum accounts to users [2] [3], or by limiting or eliminating fees, as these were some of the reasons listed when the US unbanked were asked why they don’t have bank accounts.
So, instant payments are coming in the next 18 months [3] (it is actively in testing currently with a handful of participants), and free accounts for everyone is a stroke of legislative pen. What's blockchain solving?
[1] https://www.youtube.com/watch?v=EH6vE97qIP4 (MIT 15.S12 Blockchain and Money, Fall 2018, Instructor: Prof. Gary Gensler)
[2] https://www.congress.gov/bill/116th-congress/senate-bill/357... (Banking for All)
[3] https://www.federalreserve.gov/paymentsystems/fednow_faq.htm (FedNow Instant Payment system, 2023 GA)
That said, the idea of trusting a central bank that is completely unaccountable to the public or even to the Government is crazy to me.
Similarly, we've seen last 12 years there's more than one way to skin a cat - issue "money" at the fed level - than just printing. They invented at least 3 mechanisms since.
That being said, it's not entire clear to me how current tokens/coins solve that conundrum without losing some major desirable/necessary "macro" features and flexibility.
Just how poisonous? Well, what have you heard about presidents Carter and Reagan?
Not necessarily. Permissionless access, composability and public data are still useful which is not possible in regulated environments.
If I am the Central Bank of Hyrule and I point out to you three million rupees and you see them, you're confident in today's money supply, have no idea whether I'm about to mint another hundred million tomorrow. Your trust (or lack of trust) that I won't do so directly influences the value of rupees, that is, the exchange rate between rupees and other currencies (USD, ETH, whatever) or the purchasing power of rupees. If I do mint piles of rupees, the value of the rupee will crash, and it doesn't matter that you saw three million yesterday - they're not worth as much as they were.
If you know that I am unable to mint more rupees, then I'm not acting as a traditional central bank, I've just created an actual cryptocurrency like Bitcoin or something with a fixed supply.
Trustlessness is, no doubt, a "hard" problem solved by crypto. But, just because something is theoretically trivial doesn't mean that it is in practice. Could you architect a "distributed database with more ceremony?" Sure. Will they? Maybe not.
I realize this is offensive to fans of bitcoin/crypto's technical achievement and monetary ideals, but that doesn't mean it's not operative.
You don't need a PC to run a word processor. That said, if you wanted to build a dedicated word processor, you would probably use or modify a pre existing PC architecture.
Blockchain will still solve the problem of currency losing value by unlimited printing.
You should be thinking about what problems will retail banking and payment processors be solving. An easy to use CBDC will render many of them unnecessary.
Tangentially, its strange to me that people believe that imaginary money (fiat) should always maintain the same amount of value, when it's an economic tool and not a store of value. The entire point of devaluing a currency is to encourage investment in productive assets while stoking consumption.
Stablecoins aren't an improvement over rows in a database held by a trusted and regulated entity and messages moving between queues for value transfer, but it'll take time for the hype train to run out of steam. I assume boredom will take hold once the ramps are heavily regulated, private wallets are outlawed, there's no more money to be made speculating and pumping/dumping shit coins, etc.
The only way to prevent being diluted is to not hold fiat and end up in a situation where it is held only by government beneficiaries, i.e. that the government is inflating to pay people affected by inflation. Then their ability to inflate is de facto obliterated.
It's like using PC architecture to power a calculator. Sure, it's not technically necessary. In practice, if you want to build yourself a calculator, you might use it just because it's there.
^not an expert. could be wrong. my attempt at a synopsis.
From Matt Levine's Money Stuff article yesterday (Tether heading):
> Here is the website [1] for the JPMorgan Prime Money Market Fund. If you click on the tab labeled “portfolio,” you can see what the fund owns. The first item alphabetically is $50 million face amount of asset-backed commercial paper issued by Alpine Securitization Corp. and maturing on Oct. 12. Its CUSIP — its official security identifier — is 02089XMG9. There are certificates of deposit at big banks, repurchase agreements, even a little bit of non-financial commercial paper. The fund lends some money to LVMH Moet Hennessy Louis Vuitton and Toyota Motor Finance (Netherlands) BV. You can see exactly how much (both face amount and market value), and when it matures, and the CUSIP for each holding.
> JPMorgan is not on the bleeding edge of transparency here or anything; this is just how money market funds work. You disclose your holdings.
> Here is an incredible interview [2] that the chief technology officer and general counsel of Tether did yesterday with CNBC’s Deirdre Bosa. Tether is a stablecoin that we have talked about around here because it was sued by the New York attorney general for lying about its reserves, and because it subsequently disclosed its reserves in a format that satisfied basically no one. Tether now says that its reserves consist mostly of commercial paper, which apparently makes it one of the largest commercial paper holders in the world. There is a fun game among financial journalists and other interested observers who try to find anyone who has actually traded commercial paper with Tether, or any of its actual holdings. The game is hard! As far as I know, no one has ever won it, or even scored a point; I have never seen anyone publicly identify a security that Tether holds or a counterparty that has traded commercial paper with it.
> Bosa, who had two Tether executives on her show, sensibly asked them about it several times, but you can’t win the game that easily! “We don’t disclose our commercial partners, so that is quite important,” says CTO Paolo Ardoino at around the 5-minute mark. “Given our portfolio composition in commercial paper, we believe that it is quite important to respect the privacy of the banking partners that we work with.” That’s not a thing! That’s not a thing at all! Every money-market fund just lists all of its holdings, by size and issuer and CUSIP! Tether has broken new ground in the concept of commercial-paper privacy rights! But, why?
> Everything in this interview melted my brain. Another favorite came at around the 13-minute mark, when GC Stuart Hoegner says “we maintain cash, for example, that is many multiples above our single biggest redemption thus far, as well as above our biggest 24-hour period of redemptions,” which is … not … that … much? (Banks, for instance, are generally required to have “high-quality liquid assets” sufficient for “a 30 calendar day liquidity stress scenario.”) There is more here, including a promise that audited financials are “only months away.” I do not watch a lot of 32-minute business-television interviews but I found this one riveting.
[1] https://am.jpmorgan.com/us/en/asset-management/adv/products/...
The reason tether, the coin, initially took off, was that exchanges (including 2 bit upstarts with no financial or technical chops using off the shelf software) needed a way to transfer funds between them. They could, in theory, have driven trucks of cash between each others offices without regulation, but that's not feasible. They could have transferred regular cryptocurrencies like bitcoin, but that creates an exchange risk that they can't handle. Hence Tether.
In practice, real USD were not up to this task. It's possible that "the task" itself is the problem.
If exchanges were established, bigger, more trustworthy and capable companies... they'd probably trust each other and clear transactions weekly or something.
The reality of modern business banking is that it works, effectively, on a whitelist basis. They don't just let a totally new business category open an account transacting millions per day just because they don't know of anything illegal.
I take your point that these are, under the hood, regulatory... but that doesn't really change that much.
We could reverse the questions. Why would an exchange prefer to hold tether than USD?
I fully agree with you on Tether, the company. I also agree that it has gone way past exchanges. That said, it is true that working within the normal financial system is extremely difficult for anything new, with big needs for financial services.
The core of the issue here is that the legislative system and particularly the tax code assumes that the government has final say on who gets what money. With that fundamental perspective there is 0 advantage to a decentralised database over a centralised database. A decentralised database just makes it more difficult for the government to give/take/move money.
The Bitcoin people generally don't trust the fed and they have, strictly speaking, ended up in a much better position to participate in the economy.
Some people here seem think that "guns and laws" will be able to stop them (and other forms and cryptocurrencies in general) from participating in the economy, esp without describing how that will actually work in practice (or without acknowledgement how "guns and laws" have largely failed in practice for the past ~13 years wrt to proliferation of cryptocurrencies esp compared to some of its predecessors in the 90's that were quickly stomped out)…
Without a substantial benefit that advances the Federal Reserve's core mission, there would seem to be no reason to do it. "Why not?" is one approach, and a perfectly valid one! It's perhaps often not how central banks approach decisions though.
Regulation and criminal penalties is sufficient for dealing with the frauds of the world. The answer to Madoff wasn’t “outcompete him” it was jail.
>The Fed will never run on blockchain, imagine someone guessing the private key.
This is not a worry, if they lost a key they could just rollback to a previous good state and replace with a new token. This happens frequently on ethereum.
Fear of losing control in future. For example Ethereum presently seems to be quite secure based on the potential reward of an attack vs the assets that might be deployed to attack Ethereum. But if a Fed-backed stablecoin relies on Ethereum, then a very expensive attack on Ethereum could become more attractive to an adversary. And how about the risk of an accidental coding error by Ethereum developers in a future update?
Fear of lending legitimacy to other cryptocurrencies and tokens. Their values would explode if the Fed issued an ERC-20 token on the Ethereum blockchain
It is a really bad idea from a privacy perspective. Physcial cash is better, the fact that bitcoiners like this idea means they aren't really for privacy and stuff like that.
Also blockchain has many design flaws including that they can be attacked and there is only 'rough' consensus about the order of transactions. It is a no good terrible idea.
What happens if a proverbial Soros messes starts exchanging these at massive rates? Does the Fed need to start printing USD (or stablecoin) to meet the demand? Parity is a hard problem. That's why we abandoned fixed exchange rate currency systems, for the most part.
Also, if Tether is anything to go by, demand for stablecoins is sky high already. The day the Fed decides to issue Fedcoin, demand could be trillions. The Fed would be receiving
^I could be totally off. Haven't thought about this much. Please don't bite me.
In order to produce a token on a given blockchain as a central government, you’re by implication saying that the blockchain itself is legitimate. In the case of Ethereum this would be disastrous.
As an example - What happens if people start putting this Fed-backed token into solidity contracts? You can’t wave it away from court and say “this is funny money and has no legal standing” if someone raises a dispute when you (the government) issued the token.
You likewise can’t start treating Ethereum contracts as legally valid because they are utterly unfit for that purpose for literally innumerable reasons.
High fees:- How much do merchants/consumer pay today? I am not sure if transacting a digital currency is going to be free.
Limit access:- How does the current system limit access? As a merchant I can easily signup with thousands of payment providers.
Not evolved fast enough:- I agree with this but from where we were say 20 years ago I would say they have evolved a fair bit.
There's no reason for something like this to be a cryptocurrency is the problem, because the central bank literally has the power to issue new currency as it sees fit.
Wouldn't this be closer to offering Federal Reserve clearing accounts to regular citizens as a service?
Most money in developed economies is not actually physically existent currency - it is already digital, the question is whether you can access the banking services as a participant.
In the case of Central Banks, the issue is that it is not possible to bank through them as a regular consumer. This is, very much, an issue which should be solved: basic banking services access is a big problem for low income people.
But it's not remotely clear why the concept of "digital currency" starts to get involved at all: this is an identical situation to regular banking and online payments, nothing is fundamentally different - the entity involved is already literally the arbitrator and source of truth of how much currency exists.
#2 Yes, most money is digital. But most of that money is NOT central bank money. Imagine you 'have' $500k in the form of digital money. How much of that will you still have if your bank goes bust?
#3 Yes, this can be solved in a different way (as it has been in the UK).
#4 Regular banking and online payments are built on legacy payment rails. Transactions between customers of different banks are slow or expensive or both.
A CDBC does not need to use distributed ledger technology. Depending on your objectives, it could be 'just a database'. But that's the point: people are still trying to work out what those objectives are. Perhaps privacy and anonymity is an objective. Perhaps the opposite (all transactions can be tracked back to an individual) is an objective. Those objectives (and competitive forces) will determine how a CDBC is implemented.
"the entity involved is already literally the arbitrator and source of truth of how much currency exists"
Yes, but it might simultaneously want to increase transparency. How do you know the central bank is truthfully reporting M1? Could a distributed ledger help?
15th USENIX Symposium on Networked Systems Design and Implementation (NSDI 18) . 2018.
You don't call yourself anything. You either have a PhD, or you don't. It's not conditional on having ideas others agree on or being 100% correct.
"My name is Neha Narula and I am the Director of the Digital Currency Initiative at the Massachusetts Institute of Technology. We are a research group based within the MIT Media Lab focusing on cryptocurrency and digital currency design and implementation, addressing challenges in security, scalability, and privacy. I have taught five graduate cryptocurrency courses across departments at MIT and during the course of my PhD work I conducted research in MIT’s Computer Science and Artificial Intelligence Laboratory on databases and distributed systems."