Abstract
Since its inception in 2008, cryptocurrencies are gaining adoption globally. Even though its utility may vary, the primary purpose of cryptocurrencies is to provide some form of payment (or medium of exchange) in the digital world. As more use cases arise from the industry, cryptocurrencies and blockchain are no longer a niche topic. Educational institutions are introducing it into their curriculum, and governments are talking about it in parliament. In particular, governments are keen to determine if the underlying technologies can form the fundamentals to issue a Central Bank issued Digital Currency (CBDC). Will these forms of currency become the “New Money”? This paper sets out to explore the utility of cryptocurrencies and CBDC, their implications on the economy and the government’s ability to use monetary policy. We examine and compare the approaches to CBDCs suggested by various governments.
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Notes
- 1.
Bitcoin is anonymous by design such that owners’ identities are unknown to other network users unless they choose to reveal it. However, the patterns of usage or other information may reveal the identity through modern tracing using AI algorithms or via links with third parties.
- 2.
Token Economy refers to the system of incentives based on cryptocurrencies that reinforce and build desirable behaviours the in blockchain ecosystem.
- 3.
An economic system in which assets or services are shared between private individuals, either free or for a fee, typically by means of the Internet.
- 4.
As of February 2020, around 5000 of such cryptocurrencies exist.
- 5.
Dash is an open-source cryptocurrency forked from the Bitcoin protocol and also a decentralized autonomous organization (DAO) run by a subset of its users, which are called “masternodes”. Other privacy coins are Zcash (ZEC), Zcoin (XZC), Monero (XMR), TeleCoin (TELE), Incognito (PRV) and PivX(PIVX).
- 6.
The internet is inherently asynchronous in the sense that there is no global clock and each nodes may receive messages that carries transactions’ information in different sequence. This has been a major research topic in the area of distributed network involving network engineering and fault tolerance.
- 7.
Safety means that the consensus must never achieve agreement on a state of the ledger when nodes have not actually agreed on that given state to ensure the integrity of the ledger.
- 8.
Liveness means that consensus cannot stall, even in case of a tie, the consensus algorithm must always make progress
- 9.
According to Szabo (2017), “Social scalability is about the ways and extents to which participants can think about and respond to institutions and fellow participants as the variety and numbers of participants in those institutions or relationships grow. It’s about human limitations, not about technological limitations or physical resource constraints. One way to estimate the social scalability of an institutional technology is by the number of people who can beneficially participate in the institution. Another way to estimate social scalability is by the extra benefits and harms an institution bestows or imposes on participants, before, for cognitive or behavioral reasons, the expected costs and other harms of participating in an institution grow faster than its benefits”.
- 10.
What sets enterprise blockchains apart from public blockchains is the permission required to participate in the network and interact with it. Unlike Open Blockchain, a node must be specifically permissioned to join the Permissioned Enterprise Blockchain.
- 11.
Includes Initial Crypto-Token Offering (ICO), Initial Exchange Offering (IEO), Security Token Offering (STO), Initial Mining Offering (IMO).
- 12.
DAICO is a word association between the Decentralized Autonomous Organization (DAO) and the Initial Coin Offerings (ICO). A DAICO puts in place more stringent management rules and constraints for ICO projects to avoid certain risks for investors.
- 13.
In the crypto economy, volatility and stability can be measured using a benchmark based on highly traded cryptocurrencies such as bitcoin and ether, rather than fiat currencies.
- 14.
Libra White Paper retrieved from https://libra.org/en-US/white-paper/.
- 15.
A white paper in cryptocurrency is a document which includes an outline of a problem that the project is seeking to solve, the solution to that problem as well as a detailed description of their product, its architecture and its interaction with users.
- 16.
A wholesale payment system is a funds transfer system through which large-value and high-priority funds transfers are made between participants in the system for their own account or on behalf of their customers. (BIS 2003).
- 17.
A retail payment system is a funds transfer system which handles a large volume of payments of relatively low value in such forms as cheques, credit transfers, direct debits, ATM and EFTPOS (Electronic Funds Transfer at Point of Sale) transactions (BIS 2003).
- 18.
BIS (2018) defines CBDC as a new form of central bank money. That is, a central bank liability, denominated in an existing unit of account, which serves both as a medium of exchange and a store of value.
- 19.
The details of different phases are given in Appendix 2.
- 20.
Thailand’s Project Inthanon is named after Thailand’s highest mountain. The second phase involves the tokenization of bonds and the project targets coupon payments, interbank trading, bond redemption, and interbank repos (short term collateralized lending between banks). In the third phase, the Bank of Thailand explores interoperability with legal systems and other platforms, including cross-border transactions.
- 21.
In cryptocurrencies, an unspent transaction output is an abstraction of electronic money with a ledger that can only append entries. Each UTXO represents a chain of ownership implemented as a chain of Digital Signatures where the owner signs a message transferring ownership of their UTXO to the receiver’s Public Key. Public Key Infrastructure (PKI) is a set of requirements that allow (among other things) the creation of digital signatures. Through PKI, each digital signature transaction includes a pair of keys: a private key and a public key. Digital signature is used in Bitcoin to provide a proof that one owns the private key without having to reveal it (so proves that one is authorized to spend the associated funds).
- 22.
In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of its parts is indistinguishable from another part. Commodities, shares, options and dollar notes are examples of fungible goods while diamonds, land, or a cow are not fungible because each of them has unique qualities that add or subtract value.
- 23.
The principles seek to right-size regulations to be fit for purpose; for both traditional as well as new business models, according to the risks the activity poses.
- 24.
Secret sharing is a cryptography algorithm where a ledger, in this case the secret, is copied multiple times and then each copy is divided into parts, giving each participant its own unique part of a copy. To reconstruct the original ledger, a minimum number of parts is required and so no single node can have knowledge of the whole ledger.
- 25.
In cryptography, a zero-knowledge proof or zero-knowledge protocol is a method by which one party (the prover) can prove to another party (the verifier) that they know the value of X in the ledger, without conveying any information apart from the fact that they know that X exist.
- 26.
Secure multi-party computation is also known as secure computation, multi-party computation (MPC), or privacy-preserving computation). The cryptogrphy protects participant’s privacy from each other and creating methods for parties to jointly compute a function over their inputs while keeping those inputs private. Beyond the traditional cryptographic tasks of ensuring security and integrity of communication or storage and the malicious elements, this sub-field of cryptography protects participants’ privacy from each other. For a need-to-know-basis interbank system, this is one vaiable solution.
- 27.
- 28.
- 29.
Klein et al. (2020) discussed about the digital Euro and the role of DLT for CBDC.
- 30.
The material in this section is entirely drawn from Long (2019) with the authors’ inputs.
- 31.
A retail payment system is a funds transfer system which handles a large volume of payments of relatively low value in such forms as cheques, credit transfers, direct debits, ATM and EFTPOS (Electronic Funds Transfer at Point of Sale) transactions BIS (2003).
- 32.
- 33.
- 34.
- 35.
- 36.
BIS to set up Innovation Hub for central banks.
- 37.
Zhou Xiaochuan’s (2009) speech on 23 March 2009.
- 38.
- 39.
- 40.
The Instrument in Support of Trade Exchanges (INSTEX) is a European special-purpose vehicle (SPV) established in January 2019.
- 41.
- 42.
Polkadot and Cosmos are predicated on the thesis that the future will have multiple blockchains that need to interoperate with each other rather than individual blockchains existing in isolation. https://polkadot.network/ and https://cosmos.network/.
- 43.
- 44.
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Acknowledgements
We thank our SUSS research fellow Cheryl Wang Yu and research assistant Pranav Pandya for the invaluable background research that went into this paper.
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Appendices
Appendix 1: The Timeline of Chinese Study of the CBDC
Date | Content | Source |
|---|---|---|
Central Policy Statement 中央政策声明 | ||
2014 | 央行就成立了发行法定数字货币的专门研究小组,论证央行发行法定数字货币的可行性 The central bank set up a specialized research group to issue and demonstrate the feasibility of the central bank digital currency | 中国人民银行 People’s Bank of China |
October 2016 | 《中国区块链技术和应用发展白皮书(2016)》 China Blockchain Technology and Application Development White Paper (2016) | 中国工信部 China Ministry of Industry and Information Technology |
December 2016 | 国务院印发《”十三五”国家信息化规划》,首次将区块链技术列入国家级信息化规划内容 The State Council issued the “13th Five-Year Plan” National Information Action Plan, and for the first time included blockchain technology in the national informatization plan | 中国国务院 State Council of China |
January 2017 | 中国人民银行正式成立数字货币研究所 The People’s Bank of China officially established the Digital Currency Research Institute | 中国人民银行 People’s Bank of China |
June 2017 | 中国人民银行引发了《中国金融业信息技术‘十三五’发展规划》:积极推进区块链、人工智能等新技术应用研究 The People’s Bank of China has initiated the “13th Five-Year Plan” for the development of information technology in China’s financial industry: actively promoting the application of new technologies such as blockchain and artificial intelligence | 中国人民银行 People’s Bank of China |
September 2017 | 国内数字货币交易所被勒令关停,对加密货币持禁止态度;监管当局决定关闭中国境内虚拟货币交易所 Domestic digital currency exchanges ordered to shut down and cryptocurrencies banned; Regulators then decided to close virtual currency exchanges in China | 中国人民银行、中央网信办、工业和信息化部、工商总局、银监会、证监会、保监会 People’s Bank of China, Central Cyberspace Office, Ministry of Industry and Information Technology, General Administration of Industry and Commerce, China Banking Regulatory Commission, Securities Regulatory Commission, Insurance Regulatory Commission |
August 2018 | 官方出台《关于防范以“虚拟货币”“区块链”名义进行非法集资的风险提示》 The official released of the “Reminder on Preventing Risks of Illegal Fundraising in the Name of ‘Virtual Currency’ and ‘Blockchain’” | 银保监会、中央网信办、公安部、人民银行、市场监管总局 Banking and Insurance Regulatory Commission, Central Cyberspace Office, Ministry of Public Security, People’s Bank of China, General Administration of Market Supervision |
January 2019 | 官方出台《区块链信息服务管理规定》以明确责任、规避安全风险,2019年2月15日实施 Officially issued “Regulations on the Management of Blockchain Information Services” to clarify responsibilities and avoid security risks, which would be implemented on 15 February 2019 | 国家互联网信息办公室 Cyberspace Administration of China |
March 2019 | 《关于发布第一批境内区块链信息服务备案编号的公告》 First batch of licensed blockchain service providers was released (197 licences) | 国家互联网信息办公室 Cyberspace Administration of China |
August 2019 | 央行将推进中国法定数字货币研发归入2019年下半年八项重点工作之一;央行有关负责人在公开场合表示正在进行数字货币系统开发,“数字人民币时代”即将到来;央行出台《金融科技(FinTech)发展规划(2019–2021年)》 The central bank decided to promote the development of China’s legal digital currency as one of the eight key tasks in the second half of 2019; relevant officials of the central bank stated in public that the digital currency system development was underway, and the “digital yuan era” was to be launched—FinTech Development Plan (2019–2021) | 中国人民银行 People’s Bank of China |
September 2019 | 中国人民银行行长易纲表示数字货币研究目前取得了积极进展,但数字货币推出目前没有时间表 People’s Bank of China Governor Yi Gang said that digital currency research had made positive progress, but there was no timetable for the launch of digital currency | 中国人民银行 People’s Bank of China |
October 2019 | 《关于发布第二批境内区块链信息服务备案编号的公告》 Second batch of licensed blockchain service providers was released (309 licences) | 国家互联网信息办公室 Cyberspace Administration of China |
October 2019 | 中共中央政治局就区块链技术发展现状和趋势进行第十八次集体学习,习近平强调区块链技术的作用 The Political Bureau of the Central Committee of the Communist Party of China conducted the 18th group-study lesson on the current status and trends of blockchain technology. President Xi Jinping emphasized the role of blockchain technology | 中共中央政治局、中共中央总书记 Political Bureau of the CPC Central Committee, General Secretary of the CPC Central Committee |
October 2019 | 第十三届全国人民代表大会常务委员会通过了《中华人民共和国密码法》 The Standing Committee of the 13th National People’s Congress passed the “Cryptography Law of the People’s Republic of China” | 中央委员会 Central Committee |
November 2019 | 《中国产业结构调整指南目录》拟稿中加入的加密货币挖矿(包括比特币挖矿)已移除,从2020年起将其从要禁止的行业清单中删除 Cryptocurrency mining (including bitcoin mining) added to the draft “Guide to the Catalog of China’s Industrial Structure Adjustment” and will be removed from the list of industries to be banned from 2020 | 中国国家发展和改革委员会(发改委) National Development and Reform Commission (NDRC) of China |
December 2019 | 深交所发布深证区块链50指数 Shenzhen Stock Exchange released the Shenzhen Stock Exchange 50 Index | 深圳证券交易所、深圳证券信息有限公司 Shenzhen Stock Exchange, Shenzhen Securities Information Co., Ltd. |
January 2020 | 央行、国务院等多个部门机构公布了11则促进区块链与各领域结合的政策信息 The central bank, the State Council and other departments announced information on 11 policies to promote the integration of blockchain and various fields | 中国人民银行、国务院、银保监会、交通运输部、国家外汇管理局、广电总局、司法部等 People’s Bank of China, State Council, Banking Insurance Regulatory Commission, Ministry of Transport, State Administration of Foreign Exchange, State Administration of Radio, Film and Television, Ministry of Justice, etc. |
February 2020 | 央行发布、多家机构参与的《金融分布式账本技术安全规范》 “Technical Security Specifications for Financial Distributed Ledgers” issued by the central bank and involving multiple institutions | 中国人民银行;由中国人民银行数字货币研究所负责起草,由中国人民银行科技司、中国工商银行、中国农业银行、中国银行、中国建设银行和国家开发银行等20余家机构参与 Drafted by the People’s Bank of China Digital Currency Research Institute, with the participation of more than 20 institutions including the Science and Technology Department of the People’s Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank and China Development Bank |
April 2020 | 《关于发布第三批境内区块链信息服务备案编号的公告》 Third batch of licenced blockchain service providers was released (224 licences) | 国家互联网信息办公室 Cyberspace Administration of China |
Important Reports on Central Bank Digital Currency | ||
2016 | 《中国金融》I专题:央行数字货币研究与探讨 “China Finance” Special Topic: Research and Discussion on Digital Currency of Central Bank | 《中国金融》、巴比特网站 China Finance, 8BTC Website |
2019 | 中国研发央行数字货币这五年 Five years of China’s central bank digital currency R&D | 《环球》 Global Times |
2020 | 央行数字货币已开始内测;法定数字货币专利助力我国数字金融发展 The start of China’s DC/EP piloting; Patents related to CBDC would aid the development of digital finance in China | 新华社 Xinhua News |
Local Government | ||
February 2020 | 全国已有22个省(自治区、直辖市)将区块链写入2020年政府工作报告;更多地方政府有关区块链政策信息 22 provinces (autonomous regions, municipalities) included blockchain in the 2020 government progress report; more local government information on blockchain policy. | Various |
April 2020 | 北京已开始使用区块链技术进行行政审批 Beijing’s administrative approval process driven by blockchain technology | 国家互联网信息办公室 Cyberspace Administration of China |
Corporate Development | ||
February 2020 | 互联网巨头和传统金融机构均开始涉足金融科技 Internet giants and traditional financial institutions are both getting involved in fintech | Various |
Appendix 2: MAS Timeline of Project Ubin, Digital Bank Licenses and Payment Services Act
Date | Phase | Source and content |
|---|---|---|
Initiated: 16 November 2016 Concluded: 9 March 2017 | Phase 1: Tokenized SGD | https://www.mas.gov.sg/schemes-and-initiatives/Project-Ubin https://www.mas.gov.sg/-/media/MAS/ProjectUbin/Project-Ubin–SGD-on-Distributed-Ledger.pdf MAS announced on 16 November 2016 that it would partner with R3 and a consortium of financial institutions on a proof-of-concept project to experiment with interbank payments using Blockchain technology |
Initiated: 5 October 2017 Concluded: 11 November 2017 | Phase 2: Re-imaging RTGS | MAS and The Association of Banks in Singapore (ABS) successfully developed a software prototype of three different models for decentralized interbank payment and settlements with liquidity savings mechanisms |
Initiated: 24 August 2018 | Phase 3: Delivery versus Payment (DvP) | MAS and Singapore Exchange (SGX) announced on 24 August 2018 that it was collaborating to develop Delivery versus Payment (DvP) capabilities for settlement of tokenized assets across different blockchain platforms This would allow financial institutions and corporate investors to carry out simultaneous exchange and final settlement of tokenized digital currencies and securities assets, improving operational efficiency and reducing settlement risks. Three companies, Anquan, Deloitte and Nasdaq were appointed as technology partners for this project. They would leverage the open-source software developed and made publicly available in Project Ubin Phase 2 The successful conclusion of the DvP project was announced on 11 November 2018. The project demonstrated that DvP settlement finality, interledger interoperability and investor protection could be achieved through specific solutions designed and built on blockchain technology |
Phase 4: Cross-border Payment versus Payment (PvP) | The Bank of Canada (BoC), Bank of England (BoE) and the Monetary Authority of Singapore (MAS) jointly published a report on 15 November 2018 which assessed alternative models that could enhance cross-border payments and settlements. The report examined existing challenges and considered alternative models that could in time result in improvements in speed, cost and transparency for users The report, cross-border interbank payments and settlements: Emerging opportunities for digital transformation, provided an initial framework for the global financial community to assess cross-border payments and settlements in greater depth. Specifically, it discussed how a variety of payment models could be implemented, from both a technical and non-technical perspective. MAS and BoC subsequently linked up their respective experimental domestic payment networks, namely Project Jasper and Project Ubin, and announced on 2 May 2019 a successful experiment on cross-border and cross-currency payments using central bank digital currencies. MAS and BoC jointly published a report, Jasper-Ubin Design Paper: Enabling Cross-Border High-Value Transfer using DLT, which proposed different design options for cross-border settlement systems | |
Phase 5: Enabling Board Ecosystem Collaboration | MAS announced on 11 November 2019 the successful development of a blockchain-based prototype that enabled payments to be carried out in different currencies on the same network The prototype network, developed by MAS in collaboration with J.P. Morgan and Temasek, had the potential to improve cost efficiencies for businesses. The payments network would provide interfaces for other blockchain networks to connect and integrate seamlessly, and would also offer additional features to support use cases such as Delivery versus Payment (DvP) settlement with private exchanges, conditional payments and escrow for trade, as well as payment commitments for trade finance The network was currently undergoing industry testing to determine its ability to integrate with commercial blockchain applications. Beyond technical experimentation, this phase of Project Ubin sought to determine the commercial viability and value of the blockchain-based payments network The project report would be published in early 2020. The report would describe the blockchain use cases that would benefit from a blockchain-based payments network, and set out additional features that the network could provide. In addition, the technical specifications for the connectivity interfaces that were developed will also be released for public access under Apache License Version 2.0 | |
7 January 2020 | Digital Bank Licences | https://www.mas.gov.sg/regulation/Banking/digital-bank-licence https://www.mas.gov.sg/regulation/payments/application-for-a-payment-service-provider-licence MAS announced on 7 Jan 2020 that it received 21 applications for digital bank licences as at the close of application on 31 December 2019. This comprised seven applications for the digital full bank (DFB) licences, and 14 applications for the digital wholesale bank (DWB) licences. Applicants included e-commerce firms, technology and telecommunications companies, FinTechs (such as crowdfunding platforms and payment services providers) and financial institutions. The majority of applicants were consortiums, with entities seeking to combine their individual strengths to enhance the digital bank’s value proposition This was in response to its announcement on 28 June 2019 that it would issue up to two digital full bank (DFB) licences and three digital wholesale bank (DWB) licences. These new digital banks were in addition to any digital banks that Singapore banking groups may already establish under MAS’ existing internet banking framework The digital bank licences would allow entities, including non-bank players, to conduct digital banking businesses in Singapore. These new digital bank licences marked the new chapter in Singapore’s banking liberalization journey, and ensured that Singapore’s banking sector continues to be resilient, competitive and vibrant. A DFB would be allowed to take deposits from and provide banking services to retail and non-retail customer segments. A DWB would be allowed to take deposits from and provide banking services to SMEs and other non-retail customer segments. |
28 January 2020 | Payment Services Act | https://www.mas.gov.sg/news/media-releases/2020/payment-services-act-comes-into-force https://www.mas.gov.sg/regulation/acts/payment-services-act On 28 Jan 2020, MAS announced the commencement of the Payment Services Act (PS Act). The new PS Act would enhance the regulatory framework for payment services in Singapore, strengthen consumer protection and promote confidence in the use of e-payments. It was a forward-looking and flexible framework for the regulation of payment systems and payment service providers in Singapore. It was to provide regulatory certainty and consumer safeguards while encouraging innovation and growth of payment services and FinTech |
Appendix 3: Other Notable International Initiatives, Research and Recommendations
European Central Bank | Digital Base Money: an assessment from the ECB’s perspective | https://www.ecb.europa.eu/press/key/date/2017/html/sp170116.en.html Digital Base Money: an assessment from the ECB’s perspective Speech by Yves Mersch, Member of the Executive Board of ECB, at the Farewell ceremony for Pentti Hakkarainen, Deputy Governor of Suomen Pankki—Finlands Bank, Helsinki, 16 January 2017 |
ADBI | Money and Central Bank Digital Currency | https://www.adb.org/sites/default/files/publication/485856/adbi-wp922.pdf This paper gave an overview of the concepts and features of central bank money and private sector money and focused on the actual performance of these types of money in selected advanced and emerging economies. In addition, digital coins (crypto-assets), such as bitcoin, were newly emerged private sector money. Much attention was given to digital coins because the underlying distributed ledger technology (DLT) could enable a decentralized verification process while maintaining features similar to cash |
IMF | Designing Central Bank Digital Currencies | This was a technical paper on the optimal design of a central bank digital currency (CBDC) where CBDC could be designed with attributes similar to cash or deposits, and can be interest-bearing. It argued that the optimal CBDC design would trade-off bank intermediation against the social value of maintaining diverse payment instruments. When network effects mattered, an interest-bearing CBDC would alleviate the central bank’s trade-off |
IMF | Central Bank Digital Currencies: 4 Questions and Answers | https://blogs.imf.org/2019/12/12/central-bank-digital-currencies-4-questions-and-answers/ This blog discussed the role of the IMF and addressed the issues of financial stability, legal foundation and regulation |
Financial Stability Board | Addressing the regulatory, supervisory and oversight challenges raised by “global stablecoin” arrangements: Consultative Document | This consultation set out 10 high-level recommendations to address the regulatory, supervisory and oversight challenges raised by “global stablecoin” arrangements |
Federal Reserve System | Update on Digital Currencies, Stablecoins and the Challenges Ahead | https://www.federalreserve.gov/newsevents/speech/brainard20191218a.htm Governor Lael Brainard speech on the Monetary Policy, Technology, and Globalization Panel at “Monetary Policy: The Challenges Ahead”, an ECB Colloquium Held in Honour of Benoît Coeuré, Frankfurt, Germany 18 December 2019 |
Federal Reserve System | The Digitalization of Payments and Currency: Some Issues for Consideration | https://www.federalreserve.gov/newsevents/speech/brainard20200205a.htm Governor Lael Brainard At the Symposium on the Future of Payments, Stanford, California 5 February 2020 |
US Congress | The draft legislation “Keep Big Tech Out Of Finance Act” | A proposed bill to prohibit large platform utilities from being a financial institution or being affiliated with a person that is a financial institution, and for other purposes. It was proposed on 15 July 2019 by the Democratic majority of the House Financial Services Committee targeting Libra |
US Congress | A draft bill titled “Stablecoins Are Securities Act”. | https://financialservices.house.gov/uploadedfiles/bills-116pih-ssa.pdf To establish the treatment of managed stablecoins under the securities laws, and for other purposes. It was proposed on 18 Oct. 2019. This legislation was meant to regulate stablecoins, a cryptocurrency that would work as a non-volatile, stable source of value, under the familiar Securities Act of 1933 |
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Chuen, D.L.K., Teo, E. (2021). The New Money: The Utility of Cryptocurrencies and the Need for a New Monetary Policy. In: Kaili, E., Psarrakis, D. (eds) Disintermediation Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-65781-9_7
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