2024-05-30

We're going to have a conversation about CBDCs and specifically and whether and how it is possible to create a government currency that doesn't fulfill the dystopian but plausible prophecies associated with the term CBDC.

We have a wide variety of disciplines here - tech, policy, business, and law. Before we get started, -- oh first a good word from my mentor Michael Casey.

Welcome everyone. Thank you so much for being here. Those of you who get up early to be here at 8am and solve the biggest problems in the world are the people that we love. You self-select, too. Thank you all. I hope you are enjoying the Consensus experience and you're in capable hands with my mentor, Marc Hochstein.

Chatham house rules: you are allowed to talk about what is said here, but you cannot attribute who said what. Participants are free to use the information received but neither the identity nor the affiliations of the speakers nor that of any other participant may be revealed. The ideas are fair game, but who said it is not unless you get their explicit permission.

Agenda today: I am going to ask for a brief opening remarks and then I will prompt the roundtable discussions with 3 questions for the group. Adilah will be facilitating. There will be a Google Doc to take notes.

Anders intro

Anders at Radius and MIT DCI advisor. He previously worked on Project Hamilton at the Boston Fed.

I'm very excited about this topic. I hope for us to come to some interesting connections here. As mentioned, I'm Anders and I work at the MIT Media Lab as a senior research advisor and also as mentioned at Radius where we are scaling the EVM into millions of transactions per second.

A few brief comments to get us started.

Money requires a very healthy network effect. Any implementation of money, digital or not, must appeal enough to the society that has it to get that healthy network effect or it loses its moneyness if it doesn't have that effect. There is a key tension that digital money must address: the balance between the user's need for privacy and society's need to limit harmful activity. I chose those words very carefully. The user's need for privacy, not desire. Society needs to limit, but not eliminate, harmful activity. The word "activity"-- not limit harmful users, but limit harmful activity.

The key tension that digital money must address is the balance between the user's need for privacy and society's need to limit harmful activity. In liberal democracy, there is an upheld right to privacy. Personal privacy seems at odds with the methods used to limit harmful activity.

How is this balance struck with money initially? Cash uses the size and the weight of the highest denomination. To pay $100 million, I have to deliver 220 pounds of cash in duffel bags and someone is going to notice that. That is a friction that physical cash uses to dissuade harmful activity.

With the arrival of ACH in the 1970s, digital money was invented. So how do we deal with harmful activity with that? Well, we KYC all the users. Why do we do that? That's the only thing we can do! It's the only thing that the technology could support at the time.

Fast forward five decades, what has changed? There's fast, cheap, always on, always connected computers, and effectively the entire field of cryptography was developed.

If we were to design money today, should it be a faster version of what we designed 50 years ago? Or is the design space so vast that a far more nuanced approach is warranted? I hope that is what we discuss today.

Let me talk about the same thing in a different light first. Traditional finance has deep experience with operating digital money system while combatting things that society deems unacceptable. The law exists. Regulations have been created and refined over decades. The name of the game is compliance and how do we comply with those things. In the cryptocurrency industry, there is deep technical experience that is genuinely new and has vast potential. But their goal is complete privacy no matter what, and that is misguided too. KYC should not be forced everywhere, and crypto shouldn't stick its head in the sand and say absolute privacy.

Cryptography presents lots of opportunities for a nuanced balance between the user's need for privacy and society's need to limit harmful activity. Crypto has to understand the issues that society has with harmful activity and start proposing balanced solutions.

As an industry, we have not done that. You can't point to a set of projects that present differing nuanced approaches to handle this and set dials. We don't even agree there are dials to set. Fast, cheap, always connected computers plus a quantum leap in cryptography over the past 50 years has given us a broad set of tools to balance the needs of individuals with the needs of society.

"The balance between the user's need for privacy and society's need to limit harmful activity"

Questions

  1. Define the principles for an optimal model that preserves CBDC user privacy while protecting the financial system from bad actors.

  2. What cryptographic or other technological solutions should be deployed to achieve true privacy while preserving the integrity of the monetary system?

  3. What steps should the crypto community take to achieve a CBDC model with these optimal properties?

Question 1

  1. Define the principles for an optimal model that preserves CBDC user privacy while protecting the financial system from bad actors.

Risk weighting

Our central digital currency was the first one in the modern era to be created. There were accounts at the central bank. The onboarding was simple. It was retail not wholesale. Having an account was your human right. Anyone with a national identity card could have an account at the central bank. There were a few onboarding steps they had to go through. Connecting with their national identity was a loss of privacy right there. There was a centralized ledger so everything was on the record. Now central banks are known for being very high security standards and safeguarding privacy and we never had any data leaks or hacking or privacy issues. If I was to propose a more modern version of a CBDC for today, I think it has to incorporate privacy features such as zero-knowledge proof systems. They need to be able to prove the total amount in circulation. It should be a version of physical cash but for the digital environment.

What about disintermediation issues where retail users have direct accounts-- well we went for the unbanked first. We had caps on the amounts of money you could have in the central wallet, up to $10,000 or something.

Why was the cap established? We were doing this for the first, so we just went cautiously. It was not because of money laundering concerns. Having a cap might push back against disintermediation concerns. It was like mPESA using USDD on mobile phones.

Our principles: - Full privacy for users - Money should be seen as a form of protected speech - Security for the financial system - protect from bad actors by systemic risk (attacks on privacy are attacks by criminals) - Society does not need to limit harmful activity, but rather prosecute criminals once they cause harm - Prosecute crime after it happens, not through money

It's a right for privacy, not a need for privacy. The government gets to have view into people's privacy. There is a right to be left alone from government.

50 years ago, we had this privacy with physical cash. So the recent trend of financial surveillance is actually not the state that we have been in the longest. It's a relatively modern transition.

Government hates privacy. It's very risky for government to build CBDC. There's definitely privacy vs government as an issue. There are protections already baked into the constitution. But what about the contest between you as an individual and private actors and privacy in that context? I think that's more important at the moment. I mean Facebook, Google, etc. You don't have constitutional protection there. To me, even if you say, let's have private digital money everywhere we go, how do you take those sort of same principles, like I should be left alone, I should have autonomy over my own economics.

There is a right to privacy, but government hates this. There must be a separation of powers, and you must prevent the administrative state from taking away privacy.

Question 2

  1. What cryptographic or other technological solutions should be deployed to achieve true privacy while preserving the integrity of the monetary system?

Freedom perspective - everyone should be able to experiment with whatever monetary technology they want. It should be a free market for currency technology. It should not be mandated. What should be mandated is that the governments should get out of the way.

Mixers

The assertion was made by someone at the table that the only way to get privacy is either Fully homomorphic encryption or zero-knowledge proofs (disagree).