So you want a CBDC: how will you do it?
 

by Andreas Park


Based on:
Central Bank Digital Loonie: Canadian Cash for a New Global Economy
(Model X Competition Final Report)
by Veneris, Park, Long and Puri, 2021
 

Workshop on Future of Money, Paris , June 2022

Design of a Digital Loonie

  • Bank of Canada: extensive research on CBDCs in particular on wholesale CBDCs (Project Jasper)
     
  • June 2020: Model X Competition
    • Invite several dozen universities to compete to develop a CBDC design proposal
    • Targeted business school & engineering/CS to collaborate
    • Specific focus on blockchain research background
       
  • Three winning teams were invited to submit full CBDC design proposal in early 2021.

Background

BoC will consider issuing CBDC if:

  • cash becomes unusable, and/or
  • an alternative digital money starts taking over

The BoC Contingency Plan

What does this mean in practice?

  • cash unusable
    • only commercial digital payment solutions remain
    • ability to pay = public good \(\to\) BoC needs to build a public alternative
    • Philosophy:
      • digital payments without a commercially interested third party
      • protection of citizen's privacy
    • \(\Rightarrow\) new, digital payment rail
  • alternative digital money
    • possible scenarios
      • a foreign public money, e.g. digital USD, e-CNY
      • a private money on a private infrastructure
      • a private money on a public infrastructure
        (aka stablecoin on a blockchain)
    • \(\Rightarrow\) a ​new digital infrastructure

Our Design of a Digital 

CBDC = infrastructure that covers all scenarios 

  • works as a new payments rail and
  • has broader use cases: common resource for general value transfers

Our Approach and Thinking

Driving view

  • do not repeat the feet-dragging of the "Payments Modernization Initiative" (ongoing since pre-2012)
     

 Required Components 

  • multi-entry onboarding & KYC
  • AML compliant transactions
  • connection to legacy infrastructure & autonomous setup
     

Features & Goals

  • privacy protection
  • no direct interaction with customers/digital-only
  • innovation & competition in payments
  • competitive product
  • universal access

Synopsis of our CBDL proposal 

​Phase 1:

  • Centralized platform
  • e-KYC through existing resources
  • Fully controlled by the BoC via new payments entity

​Phase 2:

  • Expansion to enterprise-level blockchain \(\to\) common resource
  • Open APIs, programmable, open source
  • Phase 2 open to FIs as validators and FinTechs

​Other Key CBDL Proposal Features

  • Detailed architecture for offline CBDL
  • AML/CFT compliant
  • Regulatory guidance
  • Cost-effective

user obtains wallet 

registers wallet address via e-KYC

  • authenticator adds the public key to whitelist
  • mapping person \(\leftrightarrow\) wallet stays with authenticator

 transactions processing among whitelisted wallets quasi-anonymously

Phase 1: e-Know-Your-Customer

LVTS/
Lynx

consumers can initiate EFTs from chequing account at commercial bank to CBDL wallet at NB

existing payments system facilitates transfers to CBDL system 

NB has reserve account at BoC to link with commercial banks

NB handles all
CBDL payments

How our system fits with the legacy system

issues transaction instructions

  • signs transaction
  • sends authentication request
  • sends transaction instructions

checks

  • signature
  • whitelist
  • balance

(   )

(   )

initiates wallet transfer

record keeping and AML/CFT processing

Phase 1: Anatomy of CBDL Transfer

Phase 2: DLT

overnight house- keeping

*

service example: internal payment-reward system

service example: small business bookkeeping

NB transitions into a validator node

a

b

c

d

e

f

g

blockchain network with validators and nodes

Any concerns?

  • Disintermediation: 
    • BoC report 2020-15 (Garcia, Lands, Liu and Slive)
    • Minor concern but Banks' financing costs will increase
    • payments income will decline
       
  • Privacy: Payments are central to anything we do - how much privacy do grant?
    • Great restraint \(\to\) privacy by design? Wire-tapping-like hurdles? or
    • Ongoing monitoring/surveillance? \(\to\) affects user uptake
       
  • Ongoing technological innovation:  Will a public sector solution be suitable for private sector innovation?
    • Canada's bad track record of public sector tech innovation (IBM-Phoenix, Ontario e-Health)
    • what are genuine use cases vs. bureaucratic, arbitrary design 

Summary

build a new infrastructure based on solid foundation:

  • use open source, versatile language
  • use easy access, scalable and expandable system 

avoid building by committee and just do it:

  • Kickstart with a simple solution that use existing resources
  • enable private sector innovation

Law allows the BoC to do it, but an open, broad discussion is critical.

@financeUTM

andreas.park@rotman.utoronto.ca

slides.com/ap248

sites.google.com/site/parkandreas/

youtube.com/user/andreaspark2812/

CBDC: Future of Money?

By Andreas Park

CBDC: Future of Money?

Presentation for a Canada and the Digitalization of Money , August 2021

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