The ongoing rise of cashless payments share has raised questions about the future of cash. Should central banks become providers of a digital, electronic version of cash? And if the answer is yes, what form should this central bank-backed digital currency take and how would the public use it? As Christine Lagarde, Former Managing Director of IMF, put it in her speech in Singapore on November 14th, 2018 –
“Beyond regulation, should the state remain an active player in the market for money? Should it fill the void left by the retreat of cash?
Let me be more specific: should central banks issue a new digital form of money? A state-backed token, or perhaps an account held directly at the central bank, available to people and firms for retail payments? True, your deposits in commercial banks are already digital. But a digital currency would be a liability of the state, like cash today, not of a private firm.
This is not science fiction. Various central banks around the world are seriously considering these ideas, including Canada, China, Sweden, and Uruguay. They are embracing change and new thinking—as indeed is the IMF…”
A lot of research effort is currently focused on the analysis of CBDC (Central Bank-issued Digital Currency) and their potential to achieve the goals of financial inclusion, consumer protection (as dominant payment networks have the natural tendency to evolve in monopolies), security and privacy (as a public payment network will have publicly regulated access to payment data). CBDC can be a stabilizing factor supporting political and monetary sovereignty, providing protection against systemic risks, lowering greatly the payment costs for all economic actors and providing precious economic data to central bank experts that can be used to guide monetary policy.
The different scenarios of implementing CBDC offer vast degrees of freedom in implementing specific features. Regardless of the scenario CBDC can be designed to be much more cost-efficient than physical cash or card payment technology. As an example of the technological options available central banks can decide for or against using distributed ledger technology, while DLT can provide anonymity, it can also facilitate criminal activity, increase costs and make transactions non-instantaneous.
With the general tendency of moving away from physical cash and moving towards cash-less societies the focus is shifting from the theoretical discussions to the evaluation of different approaches to building the next generation of digital payment systems. As technological leaders in the field of digital payments it is our responsibility to support and lead the design efforts of these solutions and support central banks and national governments in their efforts to bridge the gap and translate economic and political objectives into workable solutions and practical and affordable roadmaps for bringing their national payment systems to the next level. Our mission is to provide central banks with all needed resources to design and full technical support to prototype Central bank-backed digital currency payment systems.
Introduction and Assumptions
Our work on digital currencies has been driven by a vision to promote neutral, widely accessible, instantaneous, easy-to-use, free or near-free universal payment system. In our analysis and design work we have operated under several assumptions listed below. We assume that a digital currency design should be conveniently accessible to all economic actors including people not having access to personal computers, smartphones or mobile internet with explicit effort on making it an alternative preferable to cash. We assume that it will be either publicly owned or under public control in order to ensure that payment data is handled in a transparent and regulated way. We assume that transaction settlement should be instantaneous or near instantaneous. We assume that a digital payment system wille be seamlessly integrated with online payments, utility payments, direct debit, retail payments and will allow easy flow to and from bank accounts in commercial banks.
Centralized Transaction Datawarehouse
There are clear advantages on utilizing a centralized register under public control for settlement of digital currency transactions. It will lead to very low operational costs for the payment system, it will provide finality of settlement, it will provide excellent performance, it will put all transaction data under public control allowing access to data to be effectively regulated.
The clear success of contactless card transactions indicates that there is clear preference in consumers for electronic payment methods allowing simple, fast and easy payment execution. Therefore, the best candidates to enable peer-to-peer payment features will be standard wide-spread non-proprietary technology for contactless communication like NFC or Bluetooth.
Any universal digital currency payment system will be under constant pressure from criminal attempts to compromise it. It is essential to mitigate the risk for a criminal actor getting access to the electronic records. We can suggest different approaches to make a centralized payment system resilient to unauthorized access including a unique patented approach based on digital banknotes.
Personal access to a digital currency payment system cannot rely on any combination of two-factor authentication as there is accumulated evidence that such payment systems are vulnerable to fraud and technical hacking. It is also impossible to guarantee payment security on a smartphone environment where other user applications are freely downloaded and executed.
We believe that using a personal payment device is the right approach to address the goals for achieving highest possible levels of security while also keeping the focus on financial inclusion. A personal payment device allows for three-factor identification built-in by design.
Zero or Close-to-Zero Transaction Costs
Centralized transaction execution based on SMS or simple mobile data transaction messages will result in drastically reduced operational costs of the entire payment system. It is entirely feasible that a medium to large country can be serviced by a single data processing center. It is a viable option that such system can be supported by public funding providing a universal access to central bank-guaranteed payment services to all members of society.
A personal payment device with access to free or near-free payment services addresses several of the key factors limiting the access to banking services – access to bank branches, avoiding bank account related fees and solving personal identification issues.
A three-factor authentication personal payment device is a good vehicle to providing electronic administrative services to the most economically vulnerable members of society providing government an instantaneous, easy and cost-effective way to disburse social welfare and other benefits.
Controlling Digital Currency Money Supply
A digital payment system should provide central banks with convenient mechanism for a tight control of the digital currency money supply. It may be desirable that the process of issuing digital currency money is like the one for issuing cash. Central banks should also have a mechanism for urgent or targeted increase in the digital currency money supply in the circumstances of systemic risk.
Traceability and Auditability
A design based on centralized register can be utilized to build transaction traceability and auditability features. For example, it would allow for:
- Restoring funds in a payment device e-wallet in the case of loss or technology failure
- Tracing transactions as means for law-enforcement (fraud control, money-laundering, tax oversight)
- Partial or full freeze of assets implementing court order or for other lawful reason
- Issuing customers of proof of payment
Impossible to Counterfeit and Misappropriate
A centralized account-based CBDC payment system would result in the digital currency being impossible to counterfeit. It will also make it impossible for another user to execute transactions using digital currency owned by another user.
24/7 Availability and Near Instantaneous Transaction Execution
Based on standard state-of-the-art technologies it is entirely feasible to offer 24/7 availability and near instantaneous transaction execution through a variety of connectivity channels. These features are essential for a variety of use-cases including retail commerce, peer-to-peer payments, micro-payments, etc.
Payment Device as a Service Platform
We strongly advise that the payment device design should utilize a layered security approach where applications are not allowed access to device IDs, smart card data and cryptographic keys stored on protected memory chips on the device. Also, a dedicated payment device would allow control to be exerted on the user application functionality loaded on the device solving one of the biggest security concerns related to using smartphones for payment. However, there will still be a great opportunity to leverage the payment device role and develop user applications using the payment device functionality through a set of APIs. This will give a chance to banks, financial institutions or payment operators to develop custom applications adding more value for customers and addressing future customer needs.