Security Notes: With CBDCs, Be Very Careful Indeed

Digital-money technology is irresistible, and its impact is going to be much more profound than we can imagine. Money—an entity of transactable value formed by faith, not by per se value— may be seen as the mother of all inventions. It allows inventors to invent rather than get bogged down growing their own food and tailoring their own clothes.

By upgrading money into cyberspace, we are re-inventing it. We are opening the door for yet unimagined social impact. For that reason, this prospect should be treated with caution and with care.

To switch the basis of a national currency to a digital framework is a very big step, with unforeseen consequences. Yet, just about every central bank in the world is at some stage of development of a digital national coin. Remarkably, the cryptographic constructs being considered are not only narrow but also vulnerable to quantum computers and artificial intelligence.

Digital currency vanishes if its cryptographic foundation is breached. Such a catastrophe has no parallel in pre-digital money. The prevailing cryptographic building blocks don’t come with any proof that they are good for the purpose they serve. The rationale for their deployment is that no one published a breach procedure. And why would they? We are dangerously impressed with our technology, and we ignore the history of surprise catastrophes: both nature and our adversaries are smarter than we expect them to be.

But there’s more than security. We should be alert to the range of capabilities and the scope of limitations.  A national digital money framework, once set in place, will be hard to modify, let alone replace. A Central Bank Digital Currency is a complex system with lots of moving pieces. Mistakes in its construction will reflect on the national economy and on international disposition.

It is, therefore, advisable to gain experience through a series of small steps. This can be done by switching from a plan to build a CBDC to a plan to build a CBDC Platform, a regulatory framework into which private and commercial entities can be fitted, allowing each to offer private digital money backed by the national currency as it stands today. Banks and other entities with regulatory compliance will compete on a range of digital-money solutions, and let the marketplace sort things out.

All the amazing capabilities we’ve already identified for digital money can be implemented through private digital coins backed by the national currency. Security, convenience, versatility, universality—all these can be practiced and field-tested in a competitive climate.

The idea of a CBDC platform is to write a comprehensive body of terms, requirements, and qualifications for commercial digital tokens backed by the national currency, and add to them and modify them as experience accumulates. In parallel, central banks will build a national monitoring capability, compliance-enforcement capability, and lessons-learned activities, to manage commercial offerings, unleash the creativity of the public sector, and allow a winning protocol to bubble up.

Governments have come to realize that a national digital coin will give authorities unprecedented power over the citizenry, exposing their wealth and tracking all payments in and out of every wallet. Taxation will take place automatically and accurately. But more alluring will be the government power to financially choke every individual or firm, since government computers will be the custodian of our money. Governments are thrilled by this level of control. They are going about it despite the specter of a ticking cryptographic catastrophe.

Even if a central bank insists on CBDC, why not first test-run it through private enterprise trading with digital claim checks for national money?

—Gideon Samid gideon@bitmint.com