Drivers for CBDC and implications for architecture

Please copy and distribute
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Central Bank Digital Currency: Drivers and Options
Institute of International Monetary Research (IIMR)
University of Buckingham (July 2021)
David G.W. Birch
www.dgwbirch.com
Rev 6

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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
www.dgwbirch.com

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Books
2020
thecurrencycoldwar.com
digital financial services
2014
identityisthenewmoney.com
2017
beforebabylonbeyondbitcoin.com

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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…

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Why?
The Six Key Drivers for
Central Bank Digital Currency

CC BY-SA 4.0
David G.W. Birch (2021)
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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.

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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
?

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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

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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”.

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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

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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

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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

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Resilience

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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

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Sustainability
UK: Cash Industry Environment Charter Mr. Musk!
A more diverse payments ecosystem

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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

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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

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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

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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

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How?
The “space race” for electronic cash

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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

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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

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Everything Old is New Again
Visa’s OPS (December 2020)

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Bank of England (March 2020)

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Strawman: Two Tier with Tamper-Resistant Hardware
with chips
with clouds
with chains
@dgwbirch
The Glass Bank
Manage the Transactions
Manage the Wallets CRUD

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When?
The new “Cold War” has already started

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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

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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.

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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).

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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”

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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.

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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).

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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

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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

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Contact
David G.W. Birch
dgwbirch.com
@dgwbirch
Identityisthenewmoney.com
beforebabylonbeyondbitcoin.com
thecurrencycoldwar.com
willrobotsneedpassports.com

Drivers for CBDC and implications for architecture

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