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Question: 12. TBD I M P O R T A N T How could a CBDC provide privacy to consumers without providing complete anonymity and facilitating illicit financial activity?
Question
How could a CBDC provide privacy to consumers without providing complete anonymity and facilitating illicit financial activity?
Answer
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Note: See the answers to the sections:
- q04.
The simplest way to achieve this would rely on the existing intermediary financial institutions to continue to do what they already do in terms of Privacy, Natonal Security, and International Security BUT with the addition of the ability to use a real-time U.S. CBDC transfer mechanism instead of only the existing Automated Clearing House (ACH) Network. This allows the existing mechanisms that are part of the existing intermediaries structure to remain in place for Privacy and Security. This of course assumes the existing mechanism on Privacy and Security is acceptable.
In essence, it would mean adding a new parallel U.S. CBDC transaction network to the existing ACH Network. The new U.S. CBDC network handles the real-time transactions requirements of the U.S. CBDC. This requires the:
- Development of a U.S. CBDC is probably based on Stablecoin Model.
- Use of an energy-efficient Consensus Algorithm
- Development of a bridge between the existing ACH Network and the new U.S. CBDC Network
- Development of a new standardized Application Programming Interface (API) to connect the outside world to the newly enhanced combined ACH Network and CBDC Network for the existing intermediaries to use for transfers
- Note: The API could be in the form of Web Services, Remote Procedure Calls (RPC), Common Object Request Broker Architecture (CORBA), Data Distribution Service (DDS) or other interprocess communication mechanisms defined using ISO/OMG Interface Definition Language (IDL), standardized Web Services Interface Language (WSDL), etc.
Figure 1 provides a very simplistic overview of how a Dual ACH/CBDC network might work. The intention is to build onto the existing financial system already in place but to allow an option to use a U.S. CBDC probably built as a Stablecoin. The Existing Intermediaries would still fulfill their existing roles while providing an option to use a CBDC network to transfer the money. The existing validation and verification for the number of transactions, the quantity of money transferred, and all of the checks for criminal activity and assurance for privacy would stay in place.
Figure 1: Theoretical Very Simplified Dual ACH-CBDC Network Concept.Scenario Step Number Description Current Process 1 The First End User (Person, Corporation, Institution, a Computer process, etc.) goes into an Existing Intermediary and wants to transfer money to a Second End User.
2 The First Existing Intermediary uses the newly U.S. CBDC Application Programming Interface (API) to start the transaction. The First Existing Intermediary asks if the money is to be transferred immediately requiring U.S. CBDC or if it will just be done using U.S. Dollars.
3 The FIrst End User responds that they will be using U.S. Dollars.
4 A transaction is created that meets the requirements of the ACH is formulated.
5 The ACH Transaction is placed onto the existing ACH Network and routed to the appropriate Second Existing Intermediary.
6 The Second Existing Intermediary receives the transaction and waits for the transaction to settle (usually within 24 hours).
7 The Second Existing Intermediary places the money designated in the transfer transaction to the Second End User's bank account (i.e., debit, credit, checking, savings, Credit Card account, etc.)
8 The Second End User possesses the money.
Scenario Step Number Description U.S. CBDC Process 1 The First End User (Person, Corporation, Institution, a Computer process, etc.) goes into an Existing Intermediary and wants to transfer money to a Second End User.
2 The First Existing Intermediary uses the newly U.S. CBDC Application Programming Interface (API) to start the transaction. The First Existing Intermediary asks if the money is to be transferred immediately requiring U.S. CBDC or if it will just be done using U.S. Dollars.
3 The First End User responds that they will be using U.S. CBDC.
4 The First Existing Intermediary verifies that the First End User has the correct amount of U.S. CBDC to complete the transaction. If Not, the First End User can convert some existing U.S. Dollars to U.S. CBDC to complete the transaction.
5 A transaction is created that meets the requirements of the U.S. CBDC is formulated.
6 The U.S. CBDC Transaction is placed onto the new U.S. CBDC Network and routed to the appropriate Second Existing Intermediary.
7 The Second Existing Intermediary receives the U.S. CBDC transaction after the transaction is been validated and verified by the U.S. CBDC Consensus Alorithm.
8 The Second End User possesses the money.
Table 1: Various steps in using a simplistic theoretical dual ACH/CBDC network.Examples
The “desirements” specified in White Paper and identified by the OMG's White Paper Analysis as Privacy Issues are listed in Table 2.
Table 2: Examples of Privacy Desirements identified during the White Paper Analysis conducted by the OMGCategory Desirements Benefits B0004, B0022 Policies and Considerations P0004 Risks R0014 Design D0012 Discussion of Examples
Table 3 provides discussion points for each of the “desirements” identified by the OMG's White Paper Analysis.
Table 3: Privacy references of desirements in the White PaperDesirement No. Desirement Text Comment B0003 Complement, rather than replace, current forms of money and methods for providing financial services B0004 Protect consumer privacy B0005 Protect against criminal activity B0007 Provide households and businesses a convenient and electronic form of central bank money with: - safety
- liquidity
B0008 Provide entrepreneurs a platform on which to create new financial products and services B0009 Provide faster and cheaper payments (including cross-border payments) B0011 Make payments: - faster
- cheaper
- more convenient
- more accessible
B0012 Provide payment services to households and businesses around the clock, every day of the year B0013 Provide immediate access to transferred funds B0022 Provide a CBDC that is: B0024 Provide transactions finalized and completed in real time B0026 Provide a bridge between legacy and new payment services B0027 Maintain the centrality of safe and trusted central bank money B0037 Support private-sector innovation B0038 Allow private-sector innovators to focus on: - new access services
- distribution methods
- related service offerings
B0045 Enable rapid and cost-effective payment of taxes B0046 Enable rapid and cost-effective delivery of: - wages,
- tax refunds
- other federal payments
B0047 Lower transaction costs B0051 Generate data about users’ financial transactions similar to the current Commercial Bank1) and nonbank_money P0021 The intermediaries would operate in an open market for CBDC services P0023 CBDC would need to be readily transferable between customers of different intermediaries P0025 CBDC intermediary would need to verify the identity of a person accessing CBDC P0026 CBDC transactions would need to be final and completed in real-time P0028 Require significant international coordination to address issues such as: - common standards
- infrastructure,
- the types of intermediaries able to access any new infrastructure,
- legal frameworks
- preventing illicit transactions
- the cost and timing of implementation
R0001 Risk of affecting financial-sector market structure R0003 Risk to the safety and stability of the financial system R0007 Risk CDBC is difficult to use without service providers R0010 CBDC has Risk of significant energy footprint similar to Cryptocurrencies R0011 Increased Risk to consumer's vulnerability to: - loss
- theft
- fraud
R0014 Risk of not achieving an appropriate balance between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity R0018 Risk a CBDC could fundamentally change the structure of the U.S. financial system, altering the private sector and central bank: - roles
- responsibilities
R0019 Risk of reducing the aggregate amount of deposits in the banking system, which could in turn increase bank funding expenses, and reduce credit availability or raise credit costs for households and businesses. R0020 Risk that interest-bearing CBDC could result in a shift away from other low-risk assets, such as shares in money market mutual funds, Treasury bills, and other short-term instruments. D0012 Design should address privacy concerns by leveraging existing tools already in use by intermediaries D0013 Design should facilitate compliance with a robust set of rules already intended to combat - money laundering
- the financing of terrorism
- customer due diligence
- record-keeping
- reporting requirements
D0014 Design should involve private-sector partners with established programs to help ensure compliance with existing rules D0015 Design should include any dedicated infrastructure required to provide resilience to threats such as operational disruptions and cybersecurity risks 1)Commercial banks include banks licensed either by federal or state banking agencies, credit unions, and thrifts from the White Paper.
