Subject: eCurrency Newsletter - April 2020

Newsletter  |  April 2020

Dear Friends,
COVID-19 heightens the age-long concern of the hygiene risk of cash. The U.S. Federal Reserve increased the minimum holding period to ten from five days for bills coming from overseas. Banks in China were ordered to disinfect cash before issuing it to the public. The Bank of Korea is putting currency notes through a high-heat process before releasing them for circulation. ‘There will be more outbreaks. That is not a maybe,’ said Alanna Shaikh, the global health consultant.

A long term alternative to physical cash now looks even more appealing, and people place more trust on central banks than payments service providers, commercial banks, credit card companies and technology companies to issue digital currency as reported by OMFIF in March.

Arrival of CBDC is imminent. The sequel to the BIS survey on CBDC found that 80% of central banks (up from 70%) are engaging in some sort of work. The March BIS Quarterly Review paper cited 17 retail CBDC projects or reports published before 19 February As examples of the latest efforts, the 2020. As examples of the latest efforts, the Bank of Canada is implementing an initiative to build, as a contingency, the capability to issue a cash-like CBDC to the public, should the need ever arise. 

Central banks are also working together. The Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Sveriges Riksbank, Swiss National Bank and Bank for International Settlements have created a group to share experiences, asses use cases, design choices, share knowledge on technologies on CBDC. The appointment of the heads of the BIS Innovation Hub in Singapore and Switzerland in February will facilitate common approaches and accelerate tangible outputs. 

Answers to economic, functional and technical design choices are solidifying and converging. A number of common views on the principles and characteristics can be observed in the recent statements and reports from the Bank of Canada, Bank of England and BIS.

‘xxxxxxxxxx’, said John Kiff of IMF in Dialogue with Movers and Shakers.
  
eCurrency is pleased to synthesize the latest developments and share its perspectives in this issue of eCurrency Newsletter for you below. eCurrency wishes you and your family good health. It is a challenging time for the world, yet the world gets better after each challenge.

Miles Au Yeung
Chief Markets Officer

THREE INVESTIGATIONS

Three papers evaluating the various CBDC design and implementation questions and options were published in February and March.
The Technology of Retail Central Bank Digital Currency 
Quarterly Review paper by BIS in March
Technology Approach for a CBDC
Staff Analytical Note by the Bank of Canada in February 
Central Bank Digital Currency Opportunities Challenges and Design Discussion Paper by the Bank of England in March

These and several other banks have issued analyses in the past about the definitions, drivers, objectives, principles and design considerations of CBDC. These three papers represent the latest maturing thinking, and explore the approaches to contract CBDC as a basis for further discussion and research, rather than proposals or decisions for a CBDC.  The tables below highlight where the three papers converge, supplement and offer different implementation choices along three categories of CBDC requirements.


Cash-like property, role of central banks

Three ways of recognizing the claim of CBDC: 
·      CBDC is a claim on central bank. Intermediaries or central bank onboard (KYC). Central bank handles retail payments
·      CBDC is a claim on central bank. Intermediaries onboard (KYC) and handle retail payments. Central bank periodically records retail balances
·      CBDC is a claim on central bank but is only available to intermediaries. Intermediaries issue ICBDC, fully backed by CBDC, onboard and handle retail payments
A claim in Canadian dollars against the Bank of Canada
Three possible business models: 
·      the Bank provides the entire system
·      the Bank only issues and redeems the digital currency, with third parties providing all end-user services
·      a mixed model in which the Bank supplies a minimal viable service (supporting public-policy goals) that can be supplemented with value-added services from third parties for end-users (e.g., targeted to small businesses)
Layered platform: 
·      Interfaces between system components, e.g. core vs consumer devices
·      Extendable to new use cases
·      Third parties to build on top of the core
Integrate with Interac Real-Time Rail, existing networks or a new network
A CBDC would be electronic form of central bank money available to households and businesses
Denominated in pounds sterling
The Bank must have exclusive control of the creation (issuance) of new CBDC
The Bank provides the ‘core ledger’ with minimum necessary functionality for CBDC payments. Payment Interface Providers could connect to provide customer‐facing CBDC payment services and build ‘overlay services’
Whatever degree of duplication and decentralisation is used, the Bank would need to retain overall control of the CBDC network

Resilient, robust operations

Neither a conventional nor DTL system has clear cut advantage. Ongoing assessment of DLT-based proofs-of-concept tend to be negative:
·      Conventional databases achieve resilience by storing data over multiple physical nodes controlled by one authority
·      DLT consensus mechanism leads to low transaction throughput and could not be used for direct legal claim
·      DLT outsources to external validators the authority to adjust claims on the central bank balance sheet
The case for a blockchain is not clear as the BOC would be a trusted party
The current state of computer and software engineering would allow for a highly resilient CBDC system
High security standards could be achieved
Transaction rates of around 1,000 payments per second are achievable
A contingent CBDC system using cloud computing could be developed without incurring inordinate capital costs 
The point in time of settlement in a purchase and sale of a CBDC using commercial bank money would depend on the national clearing and settlement system
CBDC could be built using more conventional centralised technology
The use of duplication of data and process across multiple services in different locations would be an essential part of ensuring resilience and availability 
Use of cryptography can enhance security. High security around the storage of private keys and a mechanism to ‘freeze’ and reissue CBDC where the corresponding private key has been lost would be required
The ability to change and upgrade the specific cryptographic techniques used by the system over time is required
A DLT decentralised approach may enhance resilience and availability, but could have a negative impact on aspects such as performance, privacy and security
Core ledger would have the minimum necessary functionality to reduce possible flaws and attach survey, and to allow PIT to build useful overlay services
Programmable money using smart contracts can be implemented over a variety of types of ledger, including centralised databases, as an additional ‘module’

Accessibility and privacy

Token or account-based access:
·      Account-based requires strong identities impairing universal access
·      Token-based ensures universal access and offers good privacy, allows to interface with communication protocols
·      Token-based needs additional safeguard against losing funds and AML/CFT
Both should preserve privacy by default where no information of the payee is revealed to the payer
Prefer not to frame the scope of a CBDC in terms of accounts and tokens
Provide access points for cash-to-CBDC purchases and redemption for non-bank users
New cryptographic techniques may allow the Bank to satisfy the need for privacy as well as controlled disclosure
Both account‐based systems and token‐based systems can be configured with various identity solutions, ranging from fully anonymous to pseudonymous and to a fully transparent, identifiable solution
In an account‐based system, the accounts of the payer and payee need to be debited and credited by the operator(s) of the ledger
In a token‐based system, in order to prevent double‐spending, ownership of tokens needs to be recorded in a ledger, which will need to be updated to reflect any changes in ownership


eCurrency™
Copyright © 2020


Share this email
LikeTwitterForward
LinkedIn
GooglePlus
You may unsubscribe or change your contact details at any time.