This article is the collection of my thoughts on the trade off points that I picked up in the table that John Kiff and Rob Durscki published in their article Central Bank Digital Currency Implementation Trade-Offs (Version 2) . These are all good points that John and Rob collected and I want to contribute to this CBDC discussion with my thoughts in the subject. I recommend that you also read John and Rob's article (referenced above) so you have the right context.
Having been instrumental in the actual design of 2 retail and 1 wholesale solution and coming from a background of developing and operating IT systems as CIO of very large companies, I look at some of these points from another angle, leading to different thoughts in my head. I have also been active in protecting privacy (or at least attempting to) for over a decade, so I may be a bit biased in that direction.
The challenge we face with CBDCs is that technical solutions can deliver anything we fear or anything we dream of. This range of options of course makes it very difficult to talk about a CBDC solution in general.
As a reader, you can easily side with Ron DeSantis on Big Brother's Digital Dollar and be correct, as the arguments advanced cannot be effectively countered by anything the US Fed has published so far. These arguments also can be transposed easily and without concern to the current digital pound (UK) or digital euro (EU) CBDC projects. Not all US proposals are as absolute as the above (although the exceptions are few so far), and I really like the latest proposal by Tom Emmer , which aims to outlaw CBDCs "unless they protect innovation and the development of any future digital cash that maintains the privacy protections of cash".
I will now go through the first category of John's motivations, and provide my thoughts on the downsides and risks of each of them. I will come back to categories 2 - 4 at a later point with another article.
1.1 Motivation: Universal low-cost digital payments
Downside/Risk: Disintermediation/Infrastructure Management
The disintermediated parties may be Visa, Mastercard and Paypal. It would be obvious that they would suffer most from a free digital payment system. That could incentivise them to become price competitive. Is that really a downside or risk if such oligopolies get disintermediated a little?
Why is infrastructure management a risk? The same risk exists with high cost digital payments in my opinion. Even with low cost payments, having good redundant infrastructure should not be an issue and even low margins will easily allow for a good quality set-up.
1.2 Motivation: Safety/Convenience
Downside/Risk: Merchant Integration Failure/Transaction Caps/User perception of spending control
QR codes offer convenience and easy merchant integration without integration risk at low cost. Alipay and WeChat Pay have shown the way.
The holding and transaction caps can become a big pain, and many other benefits need to be added to overcome the pain in such a case. That is a purely political, and self-inflicted problem, and not a technical limitation.
End-user perception is key, so the question is ‘can the central bank prove to the users that there is no need for worry?’. What is good enough? A solemn promise or a mathematical proof?
It is also worth mentioning (against popular belief) that more privacy actually leads to more security. Not collected data cannot be stolen, sold nor used against you.
1.3 Motivation: Risk-free store of value (zero counterparty risk)
Downside/Risk: Commercial bank money is nearly risk free as insured
Insured commercial bank money is (nearly) as good as central bank money as long as you are not too rich (and exceed the insured limit). Here I would add a remark that goes together with point 1.6: If the wallet can store your money and it can do 2-sided offline payments, the offline store of value is high risk (as it is mathematically impossible to be secure) and it is an interesting question who in the end carries the liability for that.
1.4 Motivation: Privacy (central bank or government have no access to transaction details)
Downside/Risk: Commercial bank money is nearly risk free as insured
This phrasing (central bank or governments) reflects the UK or EU ideas, and it is possibly just trying to 'fake' privacy for the citizens. Either there is privacy (real, good hard privacy that cannot be rolled back) in the complete CBDC ecosystem or there is no privacy. Claiming that there is privacy (from the central bank), because the commercial bank or the payment service provider (who have all the data) only transmit 80% of that data to the central bank is at least misleading and is not going to work. People aren’t stupid enough to eat that, in my opinion. Does it really make a difference if hackers steal the personal data, or the local NSA equivalent collects it, from one (the bank) or the other (the central bank)?
The same resistance will hit the UK and the EU CBDC projects that has hit the US project. See the actions of presidential candidates De Santis, Kennedy, Gabbard,… on CBDC, going from discrediting to outlawing. The latest and smartest contribution so far (from Tom Emmer, see reference above) seems to be one reflexion level deeper – stating that a CBDC must be a digital equivalent of cash. For anyone concerned about mass surveillance, this is a ray of sunshine. Such solutions actually exist and some ensure real hard privacy for the spender and at the same time, end all black markets, tax evasion and illegal activities.
1.5 Motivation: Censorship resistance (no possibility of spending controls by central bank or government)
Downside/Risk: Purpose driven money no longer possible
I believe it is not that simple. None of us would likely want a solution, where a big brother can just turn off our access to the money we own. On the other hand, I am less worried, than the ECB for example, about an additional version of money (like the COVID assistance) that can only be spend on food, restaurants and hotels.
Here again, solutions exist that cannot prevent me from spending the money I have in my wallet (the way I like it and the same as with my physical wallet) and that also (in parallel) could introduce programmable money or vouchers for purpose driven spending (these vouchers could only be usable for food, for example). These things are not mutually exclusive. And after the first use on the allowed purchase, the money would become unrestricted thereafter.
1.6 Motivation: Ability to transfer funds when offline
Downside/Risk: Double spending / Limit efforts to prevent money laundering, terrorism financing and tax evasion
As mentioned in point 1.3, if we consider 2-sided offline (both customer and merchant are offline), then this is a high risk undertaking for a central bank, as it is impossible to secure such transactions 100% (as you theoretically can do for online systems, which then still get hacked). Hence such a 2-sided offline system is guaranteed insecure, and that unfavourable starting point should be kept in mind, when such solutions are decided and launched by central banks, to prevent bad surprises later on.
1.7 Motivation: Reduce the cost and expand the addressable market of basic financial services through disintermediation and fintech enablement.
Downside/Risk: Oversimplifying ops process / adding new Fintech risks
I believe there is a long way of simplifying and disintermediating available to us, before we run the risk of oversimplifying processes in the payments space, and I do not understand where new Fintechs would bring new credit, liquidity and counterparty risks. The Fintechs would provide new technology to the central bank, so we may have a technology risk and cryptographic risks, but I do not see any of the others, with the central bank being owner and possibly operator of the CBDC.
I hope this article provides some additional food for thought. I will respond to the other categories with a second article in the coming days. Glad to hear your opinions on these points in the comments.
