Abstract
In recent years, electronic retail payment mechanisms, especially e-commerce and card payments at the point of sale, have increasingly replaced cash in many developed countries. As a result, societies are losing a critical public retail payment option, and retail consumers are losing important rights associated with using cash. To address this concern, we propose an approach to digital currency that would allow people without banking relationships to transact electronically and privately, including both internet purchases and point-of-sale purchases that are required to be cashless. Our proposal introduces a government-backed, privately-operated digital currency infrastructure to ensure that every transaction is registered by a bank or money services business, and it relies upon non-custodial wallets backed by privacy-enhancing technology such as blind signatures or zero-knowledge proofs to ensure that transaction counterparties are not revealed. Our approach to digital currency can also facilitate more efficient and transparent clearing, settlement, and management of systemic risk. We argue that our system can restore and preserve the salient features of cash, including privacy, owner custodianship, fungibility, and accessibility, while also preserving fractional reserve banking and the existing two-tiered banking system. We also show that it is possible to introduce regulation of digital currency transactions involving non-custodial wallets that unconditionally protect the privacy of end-users.
Highlights
As a form of money, cash offers many benefits to its owners
We argue that the desirable qualities that Zhang ascribes to synthetic central bank digital currency (CBDC) apply to our proposed solution, as well, except that our proposed solution still allows for “real” CBDC whilst the infrastructure would be operated by private-sector money services businesses (MSBs), including but not limited to banks, and, for our purposes, comprise both traditional commercial banks and financial institutions, as well as new entities that would only have central bank reserves as their assets and whose liabilities would, in turn, only be deposits
It is theoretically possible to build public digital currency infrastructure, even privacy-preserving digital currency infrastructure, using centralized technology [21], we argue that the salient features of a distributed ledger, including without limitation community consensus and immutability [20], are necessary for the infrastructure to succeed in practice
Summary
As a form of money, cash offers many benefits to its owners. Cash is possessed directly by its owners, allowing them to transact privately, without fear of being profiled, discriminated against, or blocked, while knowing that their money is as good as everyone else’s. We ask whether digital currencies can offer the benefits of cash in the age of electronic payments. Mancini-Griffoli and his co-authors argue that anonymity is a salient feature of cash, that privacy of transactions is essential, and that the specific design features of central bank digital currency (CBDC) could have a significant impact on financial integrity [1]. Our proposal provides a solution with the flexibility to accommodate the widely-acknowledged requirements and goals of CBDC and which is more akin to cash. It delivers a measure of control by restricting peer-to-peer transactions. The final two sections offer our recommendations and conclusion, respectively
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