Almost all Cryptocurrencies implemented so far use the concept of tokens, accounts, wallets, transactions, and distributed ledgers. In essence, these approaches use a model of the way money is handled in bank accounts1). Underlying these Cryptocurrencies is the concept of Coins. As a general rule, the Coin's value fluctuates and can be quite volatile:
Typically, these coins' values can be defined by the Gartner Group's Hype curve (See OMG's DIDO-RA problem statement).
For many cryptocurrencies, the hype curve is not considered much of an issue since the life expectancy for cryptocurrencies is in the order of decades at best, while the life expectancy of CBDC needs to be much, much longer.
Obviously, the Federal Reserve does not want CBDC to follow the hype cycle. That is why it is important for the Federal Reserve to move slowly and with a well-thought-out plan for CBDC.
One method proposed to avoid this volatility is the use of Stablecoins instead of traditional cryptocurrencies like Bitcoin, Ethereum, Ripple, etc. (See the OMG DIDO-RA discussion on Consensus Platforms for a more detailed list).
In the following example, the CBDC is modeled as a Digital account, each account representing an End User. The End Users would actually “own” a wallet that contains account information where money is recorded as a balance that can be added to or subtracted from. For example, a retail purchase would deduct the amount of the purchase from the customer End User's account and add it to the Store's account.
Figure 2 represents a stylized use of a Digital Account flow.
In this example, the End User's Digital Account Wallet is used to purchase an item in a store that lists for \$488.78.
Table 3 provides a possible withdrawal from the End User's Digital Account Wallet. If the withdrawal is accepted by the Digital Account Wallet's owner, the Digital Account certificates ownership is changed to the stores.
|Digital Account Model|| |
Table 7 provides a summary of using a Digital Account Model instead of a Digital Cash or Stablecoin Models. Many of the OMG identified “desirements” found in the Money, and Payments: The U.S. Dollar in the Age of Digital Transformation White Paper during the White Paper Analysis appear to be appropriate for a CBDC “Account Model”. The “Account Model” uses Digital Money in an analogous model as Accounts for CBDC. For example, the “desirements”
B0005, which is a requirement to “Protect against criminal activity| In this context, criminal activity is either Money Laundering or Fraud. Fraud is an intentionally deceptive action designed to provide the perpetrator with an unlawful gain or to deny a right to a victim. Types of fraud include tax fraud, credit card fraud, wire fraud, securities fraud, and bankruptcy fraud. Fraudulent activity can be carried out by one individual, multiple individuals, or a business firm as a whole”, is easily associated with Accounts.
|B0005||Protect against criminal activity||In this context, criminal activity is either Money Laundering or Fraud. Fraud is an intentionally deceptive action designed to provide the perpetrator with an unlawful gain or to deny a right to a victim. Types of fraud include tax fraud, credit card fraud, wire fraud, securities fraud, and bankruptcy fraud. Fraudulent activity can be carried out by one individual, multiple individuals, or a business firm as a whole.|
|B0010||Expand consumer access to the financial system||A financial system is the entire set of non-cash-based institutions (i.e., banks, thrifts, insurance companies, stock exchanges, etc.) permitting and facilitating the exchange of funds. The expansion would entail adding people to these institutions|
|B0022||Provide a CBDC that is:||Intermediated generally implies accounts or digital wallets. Identity-Verified generally implies validating and verifying a person's identity to gain access to their accounts|
|B0038|| Allow private-sector innovators to focus on: ||These innovations would predominately be account-based.|
|B0047||Lower transaction costs||Normally, there are no transaction costs for using cash|
|B0048||Provide a secure way for people to save||People save money in accounts unless we are offering piggy banks|
|B0049||Promote access to credit||Credit is, by definition, using cash you do not have access to.|
|B0051||Generate data about users’ financial transactions similar to the current Commercial Bank2) and Nonbank Money||This kind of data is collected on the activity in accounts.|
|B0054||Attract risk-averse users to CBDC||Risk Adverse investments usually pay little to no incentive to investors, but their value remains constant. Cash represents that kind of investment|
|P0002||Provide Yield benefits more effectively than alternative methods||Cash generally offers no yield, therefore, this would require accounts|
|P0005||Protect against criminal activity|| See:
|P0012||The firms that operate interbank payment services are subject to federal supervision||These services typically use accounts to move payments unless it is referring to armored guards and vehicles|
|P0013|| Systemically important payment firms are subject to ||Refers to the accounting practices used by the payment firms|
|P0017|| The PWG report recommends CBDC complement existing authorities regarding: ||Refers to the accounting practices for CBDC accounts|
|P0018||The Federal Reserve Act does not authorize direct Federal Reserve accounts for individuals||Refers to accounts|
|P0019||Federal Reserve accounts for individuals represent a significant expansion of the Federal Reserve’s role in the financial system and the economy||Refers to accounts|
|P0020||The private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments||Refers to accounts|
|P0021||The intermediaries would operate in an open market for CBDC services||Refers to accounts|
|P0023||CBDC would need to be readily transferable between customers of different intermediaries||Intermediaries imply accounts|
|P0024||CBDC would need to comply with the U.S. robust rules||Implies accounting and oversight rules|
|P0025||CBDC intermediary would need to verify the identity of a person accessing CBDC||Intermediaries imply accounts|
|P0027||CBDC a risk-free asset|| See:
|P0028|| Require significant international coordination to address issues such as:|
|P0030|| The Federal Reserve will only take further steps toward developing a CBDC if: || See:
|R0002||Risk to the cost and availability of credit|| See:
|R0009||Increased Risk of “runs” or other instabilities to the financial system|
|R0012|| Risk of increased concern related to the potential for: || See:
|R0013||CBDC offers no associated credit or liquidity Risk|| See:
|R0015||Require mechanisms to reduce liquidity Risk|| See:
|R0016||Require mechanisms to reduce credit Risk|| See:
|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.|| See:
|R0023||Risk of financial panic causing outflows from Commercial Banks to CBDC without prudential supervision, government deposit insurance, and access to central bank liquidity|| See:
|D0001||Design should be for a non-interest-bearing CBDC, for example, would be less attractive as a substitute for commercial bank money||Commercial bank money implies accounts|
|D0002||Design should allow the central bank to limit the amount of CBDC an End-User could hold||These restrictions imply accounts|
|D0003||Design should allow a limit on the amount of CBDC an End-User could accumulate over short periods||These restrictions imply accounts|
|D0005||Design could affect monetary policy implementation and interest rate control by altering the supply of reserves in the banking system||These restrictions imply accounts|
|D0008||Design should allow for interest-bearing at levels of the CBDC to be controlled independently of other safe assets||These restrictions imply accounts|
|D0010||Design should consider the potential for interest-bearing CBDC as a new policy tool on the channels of influence in monetary policy||These restrictions imply accounts|
|D0011||Design should generate data about users’ financial transactions in the same ways that commercial bank and nonbank money generates data today||These restrictions imply accounts|
|D0012||Design should address privacy concerns by leveraging existing tools already in use by intermediaries||These restrictions imply accounts|
|D0013|| Design should facilitate compliance with a robust set of rules already intended to combat ||These restrictions imply accounts|