The Bank for International Settlements (BIS) has produced a paper on Central Bank Digital Currencies discussing the foundational principles and core features of a CBDC. The following is an excerpt from the Executive Summary:1)
The Federal Reserve has suggested “Desirements”2) in a White Paper named Money, and Payments: The U.S. Dollar in the Age of Digital Transformation. These “Desirements” were captured and summarized in a White Paper Analysis conducted by the Object Management Group's CBDC WG. Ultimately, these “Desirements” need to be incorporated into a CBDC Data Strategy following the guidelines set by the U.S. government for government entities to develop a Federal Data Strategy.
The Federal Reserve has suggested a “Desirement” have the CBDC used internationally and as a mechanism to transfer funds across borders. These “Desirements” need to be added to a Federal Reserve CBDC Data Strategy. For more information, the OMG DIDO-RA provides a discussion on Federal Data Strategy. The Federal Reserve and the implementation of the CBDC should formulate their own Federal Data Strategy. The Data Strategy should also address matters covered in Section 4.4 National Privacy Considerations.
Since the Federal Reserve is striving for a CBDC with international appeal, it also needs to develop a Data Strategy, covering Data Governance, Compliance and Regulation. Table 1 provides some insight into data governance the CBDC needs as part of a Data Strategy.
|Data Residency ‡||
Data Residency is the set of issues and practices related to the location of data and metadata, the movement of (meta)data across geographies and jurisdictions, and the protection of that (meta)data against unintended access and other location-related risks3)
Data Sovereignty is the concept that information which has been converted and stored in binary digital form is subject to the laws of the country in which it is located.
|Data Localization ‡||
Data Localization is the act of storing data on any device that is physically present within the borders of a specific country where the data was generated.
|Benefits||B0009, B0015, B0035, B0036, B0041, B0052|
|Policies||P0004, P0005, P0006, P0012, P0023, P0024, P0028|
|Design||D0013, D0015, D0016, D0017|
|B0009||Provide faster and cheaper payments (including cross-border payments)||
There is a lot of promise coming from the Blockchain world vis-a-vis decentralization and transactions per second, To a large extent this is driving the Stablecoin Desirements such as:
In addition to the speed issues, there are huge costs associated with consensus. See the OMG DIDO-RA discussion on Consensus Platforms.
|B0015|| Reduce cross-border costs to benefit: ||
The U.S. Dollar is already an international global currency.
However, even though the U.S. Dollar is the de facto world currency, it is partially because it is perceived as a neutral, unbiased, well-managed, and transparent commodity. If the CBDC were to change the rules to make it less well-managed, neutral, unbiased, and transparent there will be serious challenges to the U.S. Dollar. Part of the explanation for Bitcoins' adoption was that transactions were perceived to be beyond the purview of the U.S. government, in specific, but other governments as well.
Kimberly Amadeo, Why the US Dollar Is the Global Currency, The Balance 16 March 2022, Accessed: 10 April 2022, https://www.thebalance.com/world-currency-3305931 ))
|B0035|| Streamline cross-border payments by using: ||
|B0036||Preserve the dominant international role of the U.S. dollar||
|B0041||Support streamlining cross-border payments||
|B0042||Preserve the dominant international role of the U.S. dollar||
|B0052||Prevent Financial money laundering crimes||
There is already a rich legal framework in place to cope with Money Laundering within the U.S.; many of these can help prevent money laundering across U.S. borders. One example is the US Patriot Act, Title III: Anti-money-laundering to prevent terrorism of 2001, especially the
Also, 18 U.S. Code § 1956 - Laundering of monetary instruments has provisions for international situations:
|P0004||Protect consumer privacy||
Internationally, a major method of protecting consumer privacy is referred to as Data Localization. This section includes examples from Russia, China, India, European Union, and Brazil.
Data Localization policies classification 10) is summarized below:
Local-only Storing, Transmission, and Processing: This generally means an obligation to locally manage data or a prohibition of international data transfers. This is the strictest type of localization policy and is more likely to be descriptive of nations seeking broader control over citizen activities.
Local Copy Required: Companies are required to keep a copy of data in local servers or data centers. This allows for easier access to this data for regulation and law enforcement purposes, i.e., it is generally easier for local law enforcement agencies to access data stored locally than it is for them to access data stored in another jurisdiction.
Narrower, conditional restrictions: Transfers of data outside the country are only permitted if certain conditions are met by the transferee and/or by the recipient country.
|P0005||Protect against criminal activity||
There is already a rich legal framework within the U.S. to protect against criminal activity, which includes international activities (see the Details of National Security Considerations). Many of these laws and regulations are already well established and operational on the international level.
Human Trafficking: Intelligence Reform and Terrorism Prevention Act of 2004 The Intelligence Reform and Terrorism Prevention Act, section 7202 established the Human Smuggling and Trafficking Center to achieve greater integration and overall effectiveness in the U.S. government's enforcement and other response efforts, and to work with foreign governments to address the separate but related issues of alien smuggling, trafficking in persons, and criminal support of clandestine terrorist travel.
Drug Trafficking: 18 U.S. Code § 1952 - Interstate and foreign travel or transportation in aid of racketeering enterprises Five years maximum for traveling or using the mail or instruments of interstate commerce (telephone/internet) with intent to facilitate drug trafficking.
|P0006||Garner broad support from key stakeholders|
|P0012||The firms that operate interbank payment services are subject to federal supervision||
This is highly dependent on the Currency Model or mix of currency models chosen to implement the U.S. CBDC.
Existing intermediaries must already follow:
As well as take steps to prevent Money Laundering, such as:
U.S. Federal law requires a person to report cash transactions of more than \$10,000 by filing IRS Form 8300 PDF, Report of Cash Payments Over \$10,000 received in a Trade or Business. 11)
|P0023||CBDC would need to be readily transferable between customers of different intermediaries||
This requires international agreement on the details of what constitutes a transfer, the rules of the transfers, limits or restrictions on the transfers, etc. Although there are already agreements using the existing systems, these are often too slow for modern expectations.
Even though streamlining transfer processing using technologies such as Blockchain is promising (in order to reduce the time it takes to do a transfer) this should in no way mean that the rules can be ignored.
|P0024||CBDC would need to comply with the U.S. robust rules||
Most of the international agreements have to do with the detection and prevention of National Security which is a broad, extensive topic that requires an understanding of the U.S. Laws and Regulations, as well as, international treaties and agreements. Within the context of the CBDC, criminal activity can be one or more of the following:
|P0028|| Require significant international coordination to address issues such as:|