the technology behind cbdcs - oenb
TRANSCRIPT
The technology behind CBDCsState of the art, design options, and implications
Rainer BöhmeBIS/OeNB workshop on Digital currencies Central Banks and the blockchain: policy implications, Vienna, 25 October 2019.
Simply Scaling ?
“Although scaling is not innovative per se, it may be technologicallychallenging.
For example, in the case of the Eurosystem, the number of accounts couldgrow from around 10,000 to some number between 300 and 500 million.”
Ulrich Bindseil, Central bank digital currency – financial system implications and control, Working Paper, 2019.
The technology behind CBDCs, Rainer Böhme 1
Outline
1. Distributed systems: implementation and control
2. Design options: distribution of control for CBDCs
3. Resilience
4. Privacy
The technology behind CBDCs, Rainer Böhme 3
Money is Shared Memory . . .
Account
Transaction
Conflictingtransaction
The technology behind CBDCs, Rainer Böhme 5
Reasons for Distributed Systems
Communication as primary goal• Transmit messages between locations• Establish shared memory across multiple sites
Performance• Local processing• Parallelization
Availability• Load balancing• Redundancy
Distribution of control• Unobservability• Censorship-resistance• Joint decision-making
soci
o-e
conom
ical
tech
nic
al
control
implementation
The technology behind CBDCs, Rainer Böhme 6
Distribution of Control
in selected stylized topologies
centralized federated decentralized
(hierarchical) (localized)
asymmetric
Distribution of control
symmetric
The technology behind CBDCs, Rainer Böhme 7
Example
Conventional banking
Centralized control
Hierarchical topology
Distributed implementation for coverage and scaling
central bank
commercial bank
household
Internet technology lets us revisit this topology→ CBDCs
The technology behind CBDCs, Rainer Böhme 8
Outline
1. Distributed systems: implementation and control
2. Design options: distribution of control for CBDCs
3. Resilience
4. Privacy
The technology behind CBDCs, Rainer Böhme 9
Control Points in CBDCs
Integrity of the system state∗
∗: system state ≈ globally shared memory, in the case of CBDCs: assignment of values to accounts
“local”
Authorization to transfer funds
Individual objective
Options: distributed or centralized
Issues
• revocation
• disputes
• theft
• credential recovery
“global”
Sum of all accounts equals some target
Social objective
Recommendation: centralized
Issues
• counterfeiting
• uncontrolled monetary expansion
The technology behind CBDCs, Rainer Böhme 10
Comparison of Selected Payment Technologies
by the distribution of control
Local integrity Global integrity
(authorization) (verification)
Cash distributed centralized
end users exchange physical tokens mints: superior access to capital and technology
Electronic payments centralized centralized
intermediaries take risk laws, audits, CB-run payment infrastructure
Cryptocurrency distributed distributed
end users hold private keys transaction verification in a consensus protocol
“Cryptography without a safety net.”Not advisable for the generalpopulation w/ consumer devices.
Competition on userexperience and cost
The technology behind CBDCs, Rainer Böhme 11
Example
Centralized authorization
settlement system
intermediary (takes some risk)
authentication and proxy authorization
(can use 2FA and other consumer-grade technology)
authority to update accounts
financial identity = public key
authorize with private key
or computer program (“smart contract”)
The technology behind CBDCs, Rainer Böhme 12
Risk Acceptance Enables Global Scale
Payment intermediaries substantially relax the consistency requirements.
Account
Transaction
Conflictingtransaction
The technology behind CBDCs, Rainer Böhme 13
Example
Centralized vs distributed authorization
settlement system
intermediary (takes some risk)
authentication and proxy authorization
(can use 2FA and other consumer-grade technology)
authority to update accounts
financial identity = public key
authorize with private key
or computer program (“smart contract”)
The technology behind CBDCs, Rainer Böhme 15
Outline
1. Distributed systems: implementation and control
2. Design options: distribution of control for CBDCs
3. Resilience
4. Privacy
The technology behind CBDCs, Rainer Böhme 17
Assumption
Successful CBDCs marginalize other forms of money
universally accessible
electroniccentral bank-issued
M. Bech & R. Garratt. Central bank cryptocurrencies. BIS Quartely Review, September 2017, p. 59.
The technology behind CBDCs, Rainer Böhme 18
Studying Systems under Stress
“A distributed system is one in which the failure of acomputer you didn’t even know existed can renderyour own computer unusable.”
DEC SRC bulletin board, May 1987
Leslie B. Lamport, born 1941, retired from Microsoft Researchinitial developer of LATEX, Turing Award 2013
Image source: Wikipedia
The technology behind CBDCs, Rainer Böhme 19
ResilienceResilience is the ability to recover from failures.
Technical perspective:
Electrical power
Telecommunications
Network services
Central banks
provide
supervise
· · · Electricity · · ·
Behavioral perspective: commercial bank branches are “the face of the currency”.
financial education troubleshooting
The technology behind CBDCs, Rainer Böhme 20
Outline
1. Distributed systems: implementation and control
2. Design options: distribution of control for CBDCs
3. Resilience
4. Privacy
The technology behind CBDCs, Rainer Böhme 21
Privacy
(at least) two dimensions of CBDC privacy
“local”
WRT transaction counterparties
Options: keep or change default
Issues
• tracking and targeting
• price discrimination→ challenges the “unit of account”
• stigmatization/criminalization ofpeople who circumvent identificationfor legitimate reasons
“global”
WRT the operator of the system
Recommendation: high safety margin
The technology behind CBDCs, Rainer Böhme 22
Comprehensive Payment Records Are a Prime Target
Worst case: the system operator is the attacker.
Seltzer, W. & Anderson, M. in Social Research 68 (2), 2001
fiction reality
Bad, but almost unavoidable case: the system operator makes mistakes.
The technology behind CBDCs, Rainer Böhme 23
Data Breaches Scale with Heavy TailsCumulative distribution of published data breaches 2007–2016
101 103 105 107 109
0.1
1
10
100
1,000
Yahoo 2013
Yahoo 2014
Target 2013
Number of records compromised per breach
Expect
ed
num
ber
of
bre
ach
es
per
year
Data source: Privacy Rights Clearinghouse, own analysis following the method in Wheatley et al. 2016
Simply Scaling ? — Think Again
“Although scaling is not innovative per se, it may be technologicallychallenging.
For example, in the case of the Eurosystem, the number of accounts couldgrow from around 10,000 to some number between 300 and 500 million.”
Ulrich Bindseil, Central bank digital currency – financial system implications and control, Working Paper, 2019.
The technology behind CBDCs, Rainer Böhme 25
Summary
Design options and recommendations
Q1 Distribution of control (given distributed implementation)
• Global integrity to remain centralized.• Local integrity / authorization of payments TBD
Q2 Resilience• CB’s control of cash distribution today will shift to the control (and redundant provision)
of network services in the future. This requires significant technical capacity in-house.• Weak link/TBD: telecommunications layer and the “face of the currency”
Q3 Privacy• TDB: set the default for transaction partner identification to some form of pseudonym.• Main concern: the only effective way to prevent abuse of payment records is not to store
them in the first place. This concerns the backend (under CB control) as well as popularconsumer interfaces (likely under private control).
The technology behind CBDCs, Rainer Böhme 26
Next Steps
I am looking forward to:
• your feedback and questions
• working on a policy paper with Raphael Auer of the BIS.
The technology behind CBDCs, Rainer Böhme 27
Thank you for your attention.The technology behind CBDCs
Rainer Böhmerainer.boehme @ uibk.ac.at