Architectural design of institutional digital currencies

Transcript

have been issued by government or or Kings but it can also have been privately issued for instance banknotes in most for most of the time have been privately issued the other option you have is to pay with a credit or debit card credit or debit card for you look a bit the same because you're just paying the money to the vendor but from a legal perspective and how its structure it's absolutely different the credit or debit card is just ordering the bank to give the funds to the vendor in on your behalf

money that you the banks already owes you or that will know that you will know how to the bank right so if it's a credit card you creating and you create it and know you OBE and money to the bank and this money is being sent to the coffee so that are the two different options and that that you might have just to get back on on the beginning of banknotes and how that exactly works these physical aspects a good example is the beginning of the 18th century the first banknotes were being issued by banks in the United Kingdom and this is a story of a man

that was called Crawford and I wanted to pay a friend by sending via mail some banknotes to pay him for whatever reason got stolen and the banknotes got stolen and never reach his friend and ended up at the Bank of Scotland so Crawford when went to trial because he was smart enough to have taken the number of the banknotes as you can see is quite obviously displayed and to know that it was his banknotes I had been stolen and that we're now at the Bank of Scotland so he was saying these banknotes that have been stolen from me I would like to get them back and what decided the judge is

in the end that's it it couldn't happen because if you had to follow the trail of the banknotes you could never be sure that you've been paid at the moment you're paid so you need to be confident that when you get bank notes this this is fully you getting paid and that's how current Lee works every kind of cash so basically you can summarize it but it was the first time where judges decided that probably not the first time but they decided that the Weaver possess the cash at some point is the owner of the cash which is absolutely the opposite of the banks and the bank accounts so to summarize the position for cash

determined with the owner for the bank is the bound ledger that decides which earner of a new cash that's on it the cash is issued and published by the central bank so it used to be private institutions also run currently its central bank that prints the the cash the bank accounts the money that's on it is issued by the commercial bank itself the transfer of cash instantaneous at the moment you give it you transferred it and a transfer in the bank account will always take at least a few minutes and probably days and another way to some to see it is also to say that the cash is better so it's Weaver has the cash is easier

when the bank account is nominative so you have a name in front of each phone and so you can know the phone at some point so currently the plan is to use some of the properties of digital cash in the digital world because at the moment we have only on the digital form the bank accounts and on the physical form the cash so obviously you've heard about Bitcoin that was the plan and it's not absolutely a detail that in the title he was presented as a so it was exactly designed with this

comparison in mind and to say that I create an instrument that allowed me to pay instantaneously that we're very the bearer so in that case the private keys easy owner of the of the cash so it's easier for me to settle a transaction because I know that at the moment I got paid I got paid and there is no intermediary and and more complicated process currently many institutions are considering how they could build on that ID and try to provide some of the properties of the cash to the digital world when push for this is currently the fact that many of modern economies getting more digital eyes in general

having more access to Internet but it's not necessarily fully correlated with the fact of having a more cash less Society so some some countries still have a wide spread of the internet and still keep a lot of cash in in their day to day payments one of the most advanced example of deposits and we're going to talk again about did Sweden that is slowly removing most of the East cash and most payment is going cashless so there is a need to switch from the cash as it has also costs to handle the cash to to keep the cash physically and and

protect it to ensure the fact that you all have cash and so this need to move forward another interest of these and why there is this plan is also that central bank are interested in controlling exactly the amount of money that is in circulation as I mentioned before the cash is directly issued by the central bank the money do you have in your bank account is not directly issued by the central bank so you have some control over it indirectly but they are interested in being about better control the amount of cash in circulation another element is also more geopolitical one why there is this this debate and competition is that currently most of the international trade

happening in dollars most of the reserves in central banks are dollars and there is a wheel from many countries to move beyond the law one reason is what's called the militarization of the laws has been used in the recent years for sanctions since 9/11 but also since the end of the deal with Iran so and with Russia also since the invasion of Crimea so there are many countries know that are under sanction and are looking for for alternative meaning of payment than the Laos because usually the sanction a try if you're using the law in your transaction so this is a map that has been designed by

the writen by the Bank of International Settlements presenting the different options of forms of cash that could happen in the world so on the left you see you have the cash as it exists today so it's widely accessible it's issued by the central bank it's p2p so I can exchange cash with somebody else but it's not digital and the main to project that are being right and worked on at the moment our central bank digital currencies on on the retail level and we also level the ID is generally is to provide some sort of cash that is

digital issued by the central bank peer-to-peer and so if they're widely accessible that's the retail central bank digital currency or wall sell so it's gonna be only between institution to have some pot of cash that's gonna have those properties another one is also so digital currency but also you have private institution that are looking into creating also some sort of digital cash some example of this so equal not that the project of the bank of Sweden I mentioned before these are private settlement coins I'm gonna get

back on this later Bitcoin and types of project so this flower has been proposed in 2017 so it's been quite a time that institutions are looking into it it's not absolutely new yes so what are the key challenges that are facing this institution trying to create a form of digital cash first convenience so any form of cash needs to be easy to use by users you need to be understandable and cash has the property of being really physical and more easy to understand for everybody so it's a huge challenge

that's going to happen in the following years if this kind of project our role dot is to be able to design it in a way that people understand it so they don't get also fraud it in uniform because they can perfectly understand what happens when they are transacting and so on so really on Bitcoin you have many frauds by tricking the interface and and so on so if you imagine that the public at large were to use it that will complicate things the second key challenge and that's often overlooked by institution looking into that is adoption and I insist on it because at the moment for payments I've mentioned so you have cash and bank accounts but if you look worldwide you have a very different landscape

depending of every region so there is no path that's clear from moving from one technology to the next one it depends of population what are they used to what they want to use and one example of that is this is within European Union on the left you have grease on the right you have and if you know the countries and so in blue you have the cash then you have cards in yellow and then in orange you have all that form of payment and so as you can see even just only within European Union we have a very different landscape in terms of how much cash is used versus all the form of payments the same goes if we look at other new form

of digital money one is mobile tenants so you know mobile tenant is the ability using your mobile phone even have to be a smartphone to have some credits with your with your telecom provider and to be able to send some some currency and the same if you look at different regions there are very different landscape in terms of how much mobile money is used and how much it has been used recently especially looking at international payments so remittance is usually a family that sends back that's in a more developed country and send back money to the family and so depending on the region it's more or less use we could look at many graphic with the same ID if we look at China and

has adopted mobile payments but through an app so it's under the min of payment also so if we look at every option on the table we could look at one region which widely adopted and others well it didn't catch on at all so that's question adoption another one is privacy of course if we are to create a large digital coin we we want to be sure that there is some privacy so privacy means different things of course in more crypto sphere we are aware of the risk of governments but they're also competitive privacy for instance in the

sense that a bank might not want to other banks to know what are the current position in different assets crime so that's bear stealing some gas to get intoxicated with it because if we move to digital cash of course a new type of crime that are going to be easier we already have that with Bitcoin and so that might increase some certain type of crime there are two branch in this one is I would say individual crime so people stealing your money in some form like a scan or somebody accessing your computer to get your keys so that one

problem apparently currently on cash there it's quite low actually so if you if you look at the amount of payment in a country and how much cash has been stolen it's really if we were to move to digital with that increase the second branch of crime related to a digital cash would be of course money laundering terrorist financing and all this this is more a question of scale so if it were only allowed for small transaction it wouldn't change much the current landscape but if we had a digital cache that would allow to move large amount of money without being traced we would have a larger problem so I know that in the cryptos fair we are more conscious about

the risk of the government but this is also a risk that has to be taken into account when we design in institutional digital currency then technical risk so technical risk is of course the risk of failure the risk of not being available and and that's huge because if all the payments happen with the digital system it needs to be perfectly reliable but also by Jupiter risk I think about just the operational costs and that's not a detail because if central banks are considering creating this kind of system it would be really happy to design and control a whole system they are not really happy with the idea of having to

operate a large payment system at the scale of the country most central bank are not equipped and don't have the resources to to exactly do that so a key question is who is going to be bearing this operational cost and responsibility and being up having to unload it day to day so a few elements on design based on this so first the basic element is how the value is guaranteed of your cash so if it's a private private digital currency the basic idea is to have a reserve so that's how Titor works and all those stable coins you have you put

some money aside and that represents your your-your-your value so then value can be transferred peer-to-peer or via an intermediary doesn't matter but then the values always guaranteed by a central actor that has a reserve of course if it's issued directly by the central bank that changes everything because then the digital coin that you exchanging is directly the value has a value that this contraband font on zipped web another element of design that separated is the question of intermediaries so I mentioned the risk of crime the technical risk and it's most likely that whatever is a design there going to be some intermediary especially for

compliance purposes for instance checking the identity that Weaver is gonna be using this currency so you're gonna have people who are gonna have so for instance taking the money to set it aside but also taking identities and checking them and they're gonna be responsible every time people transact to identify what are the different users on the systems and so yes so then if we look more broadly that was the two kind of legal elements and now if we combine them one of the system that is being discussed at the moment is called inter bank's digital currency or in literature uses also as both sell digital currency the idea is to have a digital currency

that's going to be only between the banks and financial institutions and as a private just gonna have a regular bank accounts with with your institution so for you it doesn't change too much but it's gonna change a lot of transfer between banks at the moment they have huge costs when they are transferring and exchanging assets because actually they don't trust each other - and they don't trust much the commercial bank issued so that's and that's a cost in front space but for the end-user it's not gonna change so much because you're gonna still have a bank account and your your assets are going to be controlled by by your bank that's

gonna be the one knowing how much you you you own a variant of this is called settlement digital currency we saw it in the flour on the lower part so the settlement is currency is basically the same the difference is it is privately issued by a private bank and that there are few projects like this one is called utility settlement project with this perspective another idea from this is to do a retail central digital retail digital currency here it

would be different because the value would still be guaranteed for instance by the central bank but then you would be directly about to exchange it peer-to-peer so that's the part we could get most excited about when we are interested in existing because you wouldn't have the intermediary of the risk of a system like dye for instance for guaranteeing the value of your stable going you know the the value is guaranteed by the central bank so you can add every time at any time redeem it and get it but at the same time you have a system on which you can build and have a full ecosystem being built so that that correspond the most at what most of the crypto system is working but another

design that's actually getting more popular among some ceramics is mostly the idea of a central bank accounts so sometimes the discuss if there would be later at the central bank level but I don't really see much the point the in the end it will be every user would have be identified by their name so it would still be nominative not not being bearer remember the distinction and you could have intermediaries that just manage your identity but then it will be the central bank that managed the line for each person so you would have something that's closer to cash because it's issued by the central bank and you're guaranteed you're gonna receive it but

you still have an intermediary that's going to be managing most of the operational costs of using this currency so that's the design of the GP Morgan coin so it's basically a settlement coin so as we discussed before it's just coined as issued by the bank that would be used between banks to settle some some some transfers I'm not sure it's really exactly that he has been at some point but so that was one of the ID but there are many project competing with the same kind of a a second type of project is Libra of course you've heard of it it's

typically so it's at a retail level so from what I understood is the user would still be able to manage but there would be intermediaries so that are handling your identity and controlling access to the system so it's still a digital currency you you still have a token issued that you have or you don't have but you you have intermediaries also in the loop and of course for guaranteeing the value it will be a reserve and if you've heard since a few weeks there has been discussion that they wouldn't use a panel of currencies but use only one currency for one token so to make it easier for most most users but also for

regulatory compliance it's easier to have just pegged one to one than to create a new basket and then if we look at Sweden so that's the adoption of cash in Sweden Sweden is in blue here and you see how low it has gone in in the usage of cash they are working on projects called okona and so that's the first version of ikana and so that's interesting because I think they have moved between a few years from one design to the other the other one the first design was typically what I was talking about with having a ledger between the participants apartments are banks so if in the end they are like intermediaries of the of

the payment system but if we still have been a currency that's been issued by the central bank and that you can have a digital wallet and transfer and and so on so that was a first iteration but the sick iteration that's so they have published to report report one report to is actually a totally different IDE and basically you have the users in the yen an interface and just one equal on a platform so it's gotta be one central system that manage all the the coins and then you have external systems for the companies for clearing organization payment service providers so all the services and intermediaries are

considered like an and external system to the main the main transfer that are gonna be happening at this level so if you look back at the designs we are exactly in this case you have one system managed by the central bank and then you have intermediaries helping with the system there is no more the idea of a ledger that's managed between the participants so it's interesting because they have been thinking about that and and they came up with design after a few years of working on it so it might be a sign of other project come if we look back at what could be done using technology that are more familiar to us

more blockchain related technologies currently we have the choice between different platforms so we could look at and have see the interest of having different consciousness algorithm different clients and so on so that's if we were to look at other initial design for instance of ikana and what would be the option available for them currently when they are studying this kind of platform their main focus is actually how we can combine privacy and an ability because of course you want to have privacy for users I said before for protecting the privacy of the user but also for competitive reasons but at the

same time you want to have audit ability to be sure that you able to detect if there is a money laundering or other related crime so that's why there has been a report recently by the Bank of Japan and the Europeans donc comparing different techniques to to protect privacy and what are the interests and robots so they classify privacy enhancing techniques at how they call it in report in three categories one is segregating so segregating the idea that you not gonna show what information is on your ledger so segregating could be like for instance payment channels because the information

is not shared on the blockchain or called a IP layer fabric where you have like different channels depending on the participants the other category of privacy enhancing technique they consider is hiding so hiding would be using cryptography mainly to hide the transaction I'm not sure that crime prevention section is not actually also a form of segregation but we could debate that and the third part is called unlinking anakena saying you have a blockchain is mostly public but you could break the links between a transaction so you're not able from the outside to know which person has been what for instance more Nero is using a lot of technique ready to this and they

are trying to consider which one are still editable so from the point of view of you would have some regulator in the loop that wants to be able to know when when they need to and so they considered here the solution that are more suitable of course a solution segregating like all epilator fabric you can still access to the information at some in some place and and considering it on the other side assertion that let's relate to that so that's thank you for listening yes yes thank you for this presentation

I've it's a two question fourth what is the difference between digits and tokens and the second one which is following some already asking it what is difference from what is done since decades because the second question what is different the difference is to have the properties of cash so for instance one of the property of cash is to be an instant settlements at the moment and transfer you cash there is no ongoing process I gave you cash you have the

money when I send you money through wire that is actually gonna be hours or days before the transaction is fully settled it's a problem for two individual but it's even more problem between banks because when they are buying for instance a large amount of shares they want to be sure before they give away the share that they have the cash and so having some sort of digital cash that allows them to be sure had at the certain second that they have the cash that's a great asset for for them then for the first question on the true what you meant by digits exactly compared to tokens but so you basically saying just because two goes together so you're basically saying that you have a problem of

settlements which for me is a concern of digitalization rather than auction or mutual ledger and what I was referring to digits versus tokens that's the the difference for the token is a digit but it's particular digits in the field we are it the transferable digits I mean it's a digit that if you have it you can transfer it and from what I understand you don't have a prime of transferability Prime that remand identification and which what you need is a centralized system that a distributed assemble centralized system with proper settlement and clearing mechanism yes so to be here at

the moment using is to distinguish on one side token based instruments and that's really did what I started with to say it's a bearer instrument so Weaver has the token at some point he is considered the owner unless it's clear that there has been there have been stolen but that that would be the first the other option they are considering is icon base so it would be nominative you could still have kyc they would know which user is using an account and person liberalise going to that but still being a bearer instrument so you would know who is the owner of particular wallets but then Weaver has it at some point is considered the true owner unless there is really a permit and we have to get back okay happy to

discuss about that but descriptions yeah yes thank you for the talk actually I was wondering you didn't mention one of the main reason why we should great occurrences is probably the the program the program mobility right yes so would you say that are they thinking about this when they try to implement all the central bank's when they try to implement the district currency are they them today at this in mind do they want to just solve the current situation or improve it modern really

changed something no they had that in mind that's definitely I'm not sure it's their priority so the question of monetary policy are more relevant the question of who's gonna be the players that are part spinning new system for basic transfers is more relevant but as I mentioned at the moment of saying if we had a ledger that would be accessible to most users and but shall being guaranteed by the central bank I feel that's the place well you will have the most innovation if it's centrally control it could work too but they will have to be really rigorous in providing the right IP eyes and the rights easiness to go to it's part of the reasoning but I'm not sure

it's the first priority if that uncertainty and I just have another question when you mentioned like for example if the central bank directly issue between citizens the currency and then we don't really need retail I mean commercial banks right yeah so how would you I mean in this case that would be the most I guess useful and descriptive but how do you see the commercial bank accepted would they kind of convert and maybe run some nodes or or like how how would you see the scenario yes III think that that would be actually quite desirable to have a competition because currently it's quite early Kapali that

if you want a bank account and some thoughts of Germany you have to go through one of the few banks you have whatever in your country I think that's one of the part that would bring the most value but also that explains why it's gonna be slow and difficult to do the idea would be that banks will have to reposition themselves so they would have to provide better additional services they will still have the function of investments so we would have to figure out how to get the basic funds but it doesn't make sense at the moment to explain that the banks are investing in the economy and choosing where they should be invest on one side yeah wait can you just continue this outside I guess we have to cut it short sure so the idea would be to separate

one thing is the cash you need and actually the cash you need is not in the scope of the banks and what are the really function we need a band for the question but as it's a transformation it's going to be slow and a long process thank you