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The Right Way To Issue Central Bank Digital Currencies

Gregory Yates • 13 April 2021
Blog in group Crypto Lounge
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How A Central Bank Could Do So

Several dozen central banks around the world have been exploring issuing digital currencies because they see certain benefits these currencies can provide – and also because they see a need to offer a response to the burgeoning interest in privately created digital currencies. Without specifying whether a central bank should create a digital currency, in an April webcast Thomas Moser and Professor Christian Grothoff offered their views on how a central bank could do so. The webcast was sponsored by the Central Bank Digital Currency Think Tank (CBDCTT.com) founded by Jamiel Sheikh, an Adjunct Professor at Columbia Business School in New York.

Moser is an alternate member of the governing board at the Swiss National Bank and a former Executive Director at the International Monetary Fund. Grothoff is a professor at Bern University of Applied Sciences. In their online presentation, which is based on a paper they wrote together with David Chaum, they put forward a CBDC approach that is “token based,” “centrally issued,” and as efficient as “real-time gross settlement systems currently operated by central banks.”

Moser said the token-based model is designed to function “as closely as possible to cash.” The token carries information regarding its value, but no information regarding the people involved. Their approach does not utilize distributed ledger technology. The digital currency is not held in a bank. Rather, it would be held in “your digital wallet on your computer, and under your control.” Because it is locally held, however, he pointed out, “if you lose your computer, it’s gone.” This model offers “guaranteed privacy to the payer,” Moser said, but although it offers substantial protection against “privacy risk,” nonetheless, “it is in compliance with anti-money laundering laws.”

The CBDC would be issued by a central bank, “just like cash,” and it would be obtained from banks, Moser said, adding, “It is “easy to make your own money,” but “It is not easy to get people to accept it.” Central bank involvement would give its CBDC a leg up over other digital offerings.

The model proposed by Moser and Grothoff would rely on existing settlement mechanisms. However, they said their approach represents “a step forward” from existing electronic cash mechanisms relying on computer software.

Discussions about digital currencies inevitably raise questions about inflation. Moser said that in assessing the impact of this new form of money, the extent to which the model functions like cash limits its impact on the banking system and on monetary policy. This design would essentially replicate physical cash rather than expand bank deposits. As a result, it would have “no impact on monetary policy,” he said.            

Grothoff went on to describe the technology underpinning this digital currency. He emphasized that the cryptography “is not new” and is “very conservative.” He added that the system offers scalability while incurring only modest operating costs. In their working paper, Moser and Grothoff indicated that the GNU Taler, an open source system developed by Grothoff, is an example of a platform for running a CBDC. Shiekh emphasized that “blockchain is not necessarily a requirement for CBDCs” in this approach.

In response to a question, Moser emphasized that the Swiss National Bank has “no plans to issue a retail CBDC,” but he acknowledged that the bank is “examining a wholesale CBDC.” According to Moser, the Swiss central banks sees limited benefit in issuing a retail CBDC because “there are already a number of means of making payments.”

The presentation by Moser and Grothoff took place as China said it was moving forward on the development of its own CBDC. It is expected to have a digital yuan circulating alongside bills and coins. In recent months, more than 100,000 people in China have downloaded a mobile phone app from the central bank enabling them to spend small amounts of digital cash with various merchants, including Chinese outposts of Starbucks and McDonalds.

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