CBDC - A Mandate for Digital Property Rights

Summary and Introduction

Legacy systems of money, such as physical cash, and account-based solutions provided by commercial banks, and non-banks, are technologically inferior to currencies designed as digital bearer instruments. The latter concept was first introduced by the?Bitcoin Design Paper more than a decade ago and offers users censorship-resistant payment options with near-instant settlement finality globally without middlemen. Similar cryptographically secured decentralized?software applications - popularized under the term "blockchain" - have since been implemented in thousands of digital solutions, and nation-states around the world have announced the adoption of the paradigm to their systems of money, as well as other vital elements of their economies.

Not applying a digital bearer paradigm to currencies of the United States - or for that matter other nations, is no more reasonable, or justifiable than withholding electronic mail systems from citizens, or insisting on maintaining networks of human phone operators for telecommunication. We must recognize that the legacy banking system, and associated technology debt exerts outsized and entirely unnecessary frictions and costs to all functions of the real economy.

After moving any amount of money through the legacy financial systems fifty times, its entire value has been absorbed by middlemen.

Even more egregious, citizens are deprived of property rights available through digital bearer solutions, with currency built in this way being a necessary primitive for other rights currently intermediated through unnecessary middlemen.

The following outline thus addresses the current discussion around a U.S. dollar-denominated CBDC - which we understand to be a digital bearer instrument (see details below) - by the central bank of the United States, in a non-linear, multi-dimensional way.

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

To evaluate a potential central bank digital currency (CBDC), the Board of Governors of the Federal Reserve System (Fed) published a forty-page paper in January 2022 under the title?Money and Payments: The U.S. Dollar in the Age of Digital Transformation (the Paper) and requested the public's feedback on its content.

We drafted initial thoughts for a response for peer review on March 13th, 2022 here, and consequently conducted two open forums on March 29th, 2022 (recording?here), and May 12th, 2022 (recording here) to further expand the discussion through a wide variety of experts from different backgrounds.

Forum participants included: Congressman Tom Emmer, "Crypto Dad" Christopher Giancarlo, Prof. Lawrence H. White, John Kiff, Norbert Michel, Dr. Sean Stein Smith, Mike Cagney, Leon Perlman, Ezechiel Copic, David Mangini, Claude Lopez, Les Goodwin, Ben Bartlett, Amit Sharma, Ian Freeman, and many others.

However, the views expressed in this article are those of the author alone, unless otherwise indicated. Please see the postscript for background.

The drafts and summaries of the discussions, and recordings of the forums have been read, reviewed, and reprinted more than 400,000 times. This article largely represents the resulting official response we submitted to the Board of Governors of the Federal Reserve System on May 19th, 2022. Please follow this link for the original submission, as we will update the review you are reading as we receive more feedback.

Revised Executive Summary

In its own executive summary the Fed's Paper states: "For a nation’s economy to function effectively, its citizens must have confidence in its money and payment services. The Federal Reserve, as the nation’s central bank, works to maintain the public’s confidence by fostering monetary stability, financial stability, and a safe and efficient payment system."

We submit, that a first-principles approach to this discussion first requires the recognition that money and payment services, while no doubt important, are indeed systems and technologies, facilitating economic transactions towards specific outcomes. Simply speaking, citizens do not want money - a term we will disambiguate below - for its own sake, but for its utility and what it represents: a reliable placeholder for current and future use cases. Setting everyday payment functions for consumptive purposes aside, currencies are transferred for the acquisition of property rights, which provide long-term stores of value. The latter quality is observably absent from government-issued currencies (more below). Therefore it stands to reason, that without citizen's confidence in property rights, a nation's economy cannot function effectively.

As such our response adopted the following framing:

For a nation’s economy to function effectively, its citizens must have strong, and enforceable property rights. Not only are secure property rights positively correlated with access to credit and capital formation, which leads to economic development (more here), but they are more generally the foundation of economic prosperity, as guaranteed to U.S. citizens by the Fifth and Fourteenth Amendments of the U.S. Constitution, as well as by Article 1?of?Protocol?No.?1?to the?European Convention?on?Human Rights (more here).?The?executive agency?responsible for promoting economic prosperity and ensuring the financial security of its citizens is the Treasury Department, with the assistance of the country’s central bank,?currently responsible for managing the people's primary system for the exchange of property: its national currency.

Background

Despite the Fed Paper's surprisingly charitable assessment, payment technologies offered by the central bank have observably entirely failed to evolve alongside today’s network and wireless systems, building up technology debt for many decades. As of today, the central bank provides currency to the public only in the form of Federal Reserve Notes printed on a cotton and linen blend fabric, available in seven denominations: $1, $2, $5, $10, $50, and $100.

While legally classified as IOUs, these bills – and smaller denominations in coinage – provide citizens and non-citizens strong legal protection akin to property rights, enabling its bearer to settle transactions anonymously, and without a third party or fees by transferring the note from person to person.

However, as the precipitous drop in velocity of physical cash reported by the Federal Reserve Bank of St. Louis documents, a Federal Reserve Note is on average used less than five times a year to purchase domestically-produced goods and services. And, as the graph below shows (source here) central bank money in form of physical cash is observably entirely unsuitable for the functions of an effective modern economy.

Consequently, citizens are limited to using U.S. dollar-denominated currency in digital form via for-profit companies, in particular commercial banks', and nonbank currencies which by design are burdened with an ever-growing number of frictions, including censorship, time delays, and fees. The latter amounts to more than 1.97 percent of all commercial bank currency transferred digitally, in other words:

After moving any amount of fiat currency through commercial banks fifty times, its entire value has been absorbed by middlemen.

According to the Federal Reserves' reporting of real median household income in the United States, citizens earned an average $72,353 in 2021, while financial intermediaries extracted an average $2,700 from U.S. households in 2021 (see McKinsey Global Banking Annual Review 2021: The great divergence - Page 35). This means that the average U.S. family contributed 3.78 percent of their income directly to legacy financial services, while further paying a minimum of 1.97 percent more for all goods and services consumed. As merchants generally add a buffer of one percent or more to the price of their offers to account for the overhead created by financial intermediaries in the form of chargebacks, and other frictions associated with account-based systems, the effective price increase for consumers amounts to four to five percent.

To put these numbers into a wider context: Global financial services revenues grew from $20.5 trillion in 2020 to $22.5 trillion in 2021 at a compound annual growth rate of 9.9% (see this McKinsey Report for details). This number should be contemplated in conjunction with the International Monetary Fund's reported global gross domestic product of $94.9 trillion in 2021.

Currencies are network technologies, which function as the operating system for an economy.

For some time now, it is the US Dollar that dominates global trade. Nearly half of cross-border bank loans are US dollar-denominated, while only one-third are denominated in Euros, with loans in other currencies representing less than twenty percent combined. The dollar is only slightly less dominant in areas of the global economy like debt securities, trade invoicing, and payments using the?SWIFT?financial messaging system. Nearly ninety percent of foreign currency trading involves the US Dollar on one side of the transaction.

Guidance

With the understanding that currencies are indeed network technologies that compete globally, we adopted the following guidance, in a deliberate departure from the narrower directions suggested by the Fed Paper:

A. General

1. Technological innovation is the single most important determinant of long-term human well-being.
2. There is true value to learning through continued trial-and-error experimentation, resiliency, and ongoing adaptation to technological change.
3. Constraints on new innovation should be the last resort, not the first. Innovation should be innocent until proven guilty.
4. As regulatory interventions are considered, policy must be based on evidence of concrete potential harm and not fear of worst-case hypotheticals.
5. Where policy interventions are deemed needed, flexible, bottom-up solutions of an?ex post?(responsive) nature are almost always preferable to rigid, top-down controls of an?ex ante?(anticipatory) nature.

B. Specific

The contributors to this response have studied global CBDC efforts, as well as private market currency solutions for several decades, guided by an understanding that any U.S. CBDC must, among other things

·????????secure the property rights of citizens better than the legacy currency systems,

·????????provide benefits to households, businesses, and the overall economy that significantly reduces the costs and risks associated with the legacy currency systems;

·????????protect consumers rights of freedom of expression, self-determination and privacy;

·????????protect consumers and businesses from exploitation and criminal activity;

·????????have broad support from all persons holding or using U.S. currency today.

The last point must be emphasized as a departure from CDBC discussions, which frames the technology as a new tool for the Federal Reserve system, with consultancies, and technology providers approaching central banks as the client of their solutions, rather than the holders of current notes. Furthermore, an overwhelming amount of discussions fail to recognize the availability of new value transfer system as a paradigm shift, and thus engage in debates over the "importance of individual country context and policy goals for the design and implications of CBDC", consequently concluding that there "is no universal case for CBDC, there is no universal design or recipe to implement CBDC".?This assessment by the authors of Behind the Scenes of Central Bank Digital Currency, echoing previous statements by central banks, not only fails to appreciate the observable devastating externalities of centralized planning which override the individual's needs - and which has consistently failed to provide confidence and stability to economies around the world - but further turns a blind eye to the observable existing universal designs available to every citizen at the time of this writing. -- Technologies cannot be un-invented.

Urgency

With congressional bill H.R. 2211 from March 26th, 2021, the Board of Governors of the Federal Reserve System was directed to conduct a study on central bank digital currencies. The bill points to the efforts of other central banks researching, and - in some cases implementing - CBDCs, with developments dating back to 2014. Observably the Federal Reserve is years behind other nations in its own efforts to modernize its currency system, with Congress having to direct the Board of Governors to conduct research on, design, and develop, a CBDC.

[CBDC panel discussion at the Cato Institute with a keynote by Tom Emmer]

With the above-summarized framing, we formulated our answers to the questions raised by the Paper's publishers as follows.

1.????What additional potential benefits, policy considerations, or risks of a CBDC may exist that have not been raised in this paper?

The Paper defines a CBDC as a digital liability of a central bank that is widely available to the general public, and analogous to a digital form of paper money. The following response will make use of that definition while differentiating between the functions of current paper currency, and its uses cases - i.e., as a form of payment, with the understanding that currencies are technologies that systematize agreements over money. The latter is legally a contract between parties choosing a unit of account and a medium of exchange for their transaction.

To illustrate this point, one might imagine a pedestrian picking up a $100 Federal Reserve Note of a New York City sidewalk, consequently using the note as money to pay for his dinner at a restaurant.

A tribesman finding the same $100 bill in the Kalahari Desert might see its use case in starting his fire that night.

With that clarification of the observable distinction of money as - a legal agreement - and currency - a system of money - a technology, we will answer the first three questions (for unknown reasons rolled into one) in the order posed below.

1.a. What additional potential benefits of a CBDC exist?

A CBDC constructed as a digital bearer instrument can:

a) mitigate against the pervasive loss of purchasing power,

b) provide real-time transparency into the financial system,

c) curtail the warrantless surveillance of legitimate private financial transactions,

d) provide financial inclusion for citizens and non-citizens,

e) globally promote US values,

f) offer faster and more efficient disaster financial response,

g) secure the global dominance of the US Dollar,

h) reduce costs to deliver goods and services.

1.a.a. Mitigation against the Loss of Purchasing Power

As of March 2022, US customers maintain demand deposit accounts with commercial banks holding $18.55 trillion, earning no interest at all, with another $21.92 trillion held in “savings” accounts, yielding on average yearly interest below two percent. However, current levels of monetary inflation have eroded the purchasing power of these funds at greater than eight percent, and by some accounts real inflation exceeds twenty percent when accounting for housing and other costs not considered by the consumer price index.

Note: Monetary inflation, defined as an increase in the broad money supply, is caused either by an increase in bank lending or large fiscal deficits. Whether this leads more to asset price inflation or consumer price inflation (or neither) depends on a number variables, including interest rates, commodity scarcity, etc. (extended overview here).

While the Fed discontinued its official reporting on net interest income for commercial banks in Q4 of 2002, commercials banks earned consistently netted more than two percent interest on deposits ($362 billion in the last reported quarter).?Moreover, effective for the reserve maintenance period beginning March 26, 2020 the Fed reduced the ten percent required reserve ratio against net transaction deposits for commercial banks above the low reserve tranche level to zero percent, and the three percent required reserve ratio against net transaction deposits in the low reserve tranche was also reduced to zero percent, increasing the ability of commercial banks to generate yields from deposits. Commercial bank currency – ostensibly “consumer deposits” – are as such in a constant state of lending.

However, as of today consumers do not participate in the yield generation from their account holdings in the same way commercial banks do. – A digital bearer CBDC can enable citizens to seamlessly move funds from their own yield-earning states to another consumer's yield-earning account, while further participating in the growing peer-to-peer lending markets with yields outperforming those of money-market accounts, and certificate of deposits. These measures can – potentially significantly – reduce the current loss of purchasing power experienced by U.S. citizens.

1.a.b. Provide real-time transparency into the financial system

As the collapse of the global financial system in 2008 showed, commercial bank currency enables these institutions to obscure risks associated with currency creation. Digital bearer instruments issued as composable non-fungible tokens can carry information across the stages of creation, and securitization without the need of third parties stamping broad and subjective risk labels on these instruments. A longer explanation of that design is provided in the answer to questions 22 below.

1.a.c. Ending Wholesale Surveillance of Private Financial Transactions

To date, with few exceptions financial transactions involving digital forms of fiat currencies result in the disclosure of personal identifiable data of the recipient and sender, regularly sharing this information with a number of intermediaries retaining copies - often for undisclosed purposes. This wholesale surveillance of financial transactions is at the core an externality of regulation purportedly aimed at bad actors wanting to use the financial system for the purpose of money laundering or other nefarious activities. However, as extensively documented and widely reported (see?this Economist article) AML measures have largely failed to mitigate illicit financial activity, while intermediaries keep exposing sensitive information to a wide variety of data brokers, and their often outdated networks and systems are susceptible to criminals gaining access to slews of poorly secured databases.

47% of Americans experienced financial identity theft in 2020.

While the paper mentions of the necessity of privacy-preserving features, they are followed up by remarks that anti-money laundering (AML) regulations will still need to be followed. However, these concerns fail to position AML regulations as an exemption from the prohibition of warrantless surveillance. The Fourth Amendment to the U.S. Constitution requires the government to obtain a warrant, upon a showing of probable cause to gain access to an individual’s person, house, papers, and effects, and applies to individuals’ financial records obtained by financial institutions. As of today, private companies have de facto been deputized to perform wholesale reconnaissance of transactions performed by citizens using computerized means. However, as the later now offer digital bearer solutions, the indiscretionary recording of personal financial transactions must be viewed as an externality of legacy financial systems such as account-based architecture, and its underlying database structure.

99% of AML flags are false positives: legitimate transaction marked as "suspicious".

According to as study by IBM AML analysts spent much of their time data gathering and attempting to corroborate alerts that resulted in ninety-nine percent false-positive outcomes. Every year millions of hours are wasted in this way. The costs of these efforts are ultimately borne by citizens forced to use the legacy banking system for financial transactions.

However, more egregious though is the weaponization of fiat financial systems by totalitarian governments which persecute their own citizens, including for such ‘crimes’ as publicly disagreeing with the party line in social media. A problem that US Federal Reserve Notes currently provide a partial solution to.

Today, digital privacy - including financial privacy - is readily available via encrypted communication, and peer-to-peer value transfer solutions.

1.a.d. Financial Inclusion

While the paper stresses the importance of inclusion of the ‘unbanked’ to the financial system, it omits the reasons why citizens do not maintain bank accounts. Despite the fact that legal tender laws point to the obvious public nature of fiat currencies, governments regularly deputize commercial entities to administrate and intermediate the use of national financial systems.

This extension of government powers to otherwise commercial entities have in some cases led to the outright confiscation of funds?custodied?by banks. These ‘bank bail-ins’ have been used in Cyprus, unlawfully forcing depositors with more than 100,000 euros to write off a portion of their holdings. Although the action prevented bank failures, it has led to understandable unease among the financial markets in Europe over the possibility that these bail-ins may become more widespread, while eroding consumer trust in banks in general.

Setting these extreme examples aside, the fact that financial institutions are empowered to impose their own conditions on the use of the banking system has led to a systemic discrimination against consumers that are deemed to be unprofitable, and in some cases do not conform with the moral framework of banking executives.

The largest group of unbanked, however, is comprised of individuals unable or unwilling to pass stringent anti-money laundering procedures often charitably labeled as ‘know-you-customer’ requirements.

Tellingly, that term appears in quotations within the secretly extended legal requirements for - what must otherwise be considered - an invasion of financial privacy regulations. CBDCs discussions offer little hope for the two billion unbanked citizens, most of which do not even possess government credentials.

1.a.d. Promote US Values

Cash issued by any country has largely the same properties – namely the ability to act as a recognizable medium of exchange, without the need for a middleman, while settling transactions in real-time with finality. As such the historical success of Federal Reserve Notes is its ability to serve as a medium of exchange, a unit of account, and a pricing function when local currencies could no longer provide these functions.?

While legally considered IOUs, Federal Reserve Notes have de facto long been the most successful and profitable technology exported by the United States. It costs the federal government?around 14 cents to produce a $100 bill, and a few more cents to send it overseas. In exchange for each of those bills, the issuer receives a permanent interest-free loan of $100.?

1.a.e. Faster, more Efficient Disaster Response

The Fed's Paper alludes?to recent improvements to the U.S. payment system, claiming that its efforts in "payments have been a particularly active field of private- and public-sector innovation." However, the?U.S. Government Accountability Office, an independent investigative agency that reports to Congress, issued a?comprehensive report?on the nearly $3 trillion in funds dedicated to mitigate against externalities from the government's unprecedented shutdown of large parts of the US economy. The report uncovered disturbing deficiencies in the federal payment system, with many citizens waiting weeks for checks to arrive in the mail, with some funds never arriving at their reported destination.

The federal government sent?stimulus payments to 1.1 million deceased people totaling nearly $1.4 billion. - Government Accountability Office

1.a.f. Securing the Dominance of the US Dollar

As of today, the U.S. Dollar is the world’s reserve currency, awarding enormous privileges to the issuer of the currency. However, several countries have ambitions to subvert the Dollars positions in the global economy.?These nations have long done away with checks, provide e-money solutions to their citizens, and enabled large parts of their merchants to utilize ubiquitous mobile payment solutions using QR codes with sub one percent or no fees at all. As some of these applications already have more users than the United States has citizens, it is easy to see how these solutions might be adopted by a growing global population, should a U.S. digital bearer instrument not be available in the near future.

1.b. Policy Considerations

As of today, the goals of U.S. central bank's monetary policy are?to promote maximum employment, stable prices, and moderate long-term interest rates.

For the nation’s economy to function effectively, human capital must be allocated efficiently. However, legacy technologies frequently lead to misallocation of human capital. In particular obsolete network technologies – such as systems of money (currencies), using data siloes, require human intervention akin to dispatchers in legacy phone networks. Keeping citizens occupied with non-productive labor, prevents these individuals from acquiring skills in demand by the free market.

Internet technologies have proven to be the largest contributor to employment opportunities over the past twenty years. Decentralized software solutions – such as blockchains – are now extending the capabilities of this global network over pure information distribution to a new network layer of value distribution. The latter already enables a myriad of employment options. However, a climate of “regulation by enforcement” has driven much of the development of this promising new economy out of the United States. A U.S. CBDC designed as a digital bearer instrument, allowing for “programmable money” solutions can reverse the trend, and ensure viable employment options in the space within the United States.

When prices are stable, long-term interest rates remain at moderate levels, so the goals of price stability and moderate long-term interest rates go together.??

2. Could some or all of the potential benefits of a CBDC be better achieved in a different way?

To answer the question of "potential benefits of a CBDC" requires to first establish the negative externalities of current implementations of digital currencies, further necessitating an understanding of the terminology, as well as current technologies. Currencies are systems of money. Setting legal tender laws aside, money is an agreement between two or more individuals or entities - observably anything can be money.

From a technological perspective, the unit of account for the latter is merely a user interface function, since the medium of exchange has de facto defaulted to bytes. Legacy technologies, such as database-maintained digital ledgers, carry an inherent principal-agent risk and are not censorship-resistant. As such, potential benefits from a digital currency can only be achieved by a CBCD that is a true digital bearer instrument, which is optionally custodied by a central or commercial bank on behalf of the actual owner of this digital property, without the ability of the institution to revoke control over these assets without due process.

The implementation of a CBDC must therefore enable financial service providers (FSPs) - including commercial banks and credit unions - to offer 'CBDC Cash Accounts' (CBDCCA). In a departure from the current demand-deposit account system paradigm, CBDCCAs would take on the form of 'digital lock boxes', fulfilling the proposed requirement of a CBDC analogous to a digital form of paper money. FSPs would offer 'blind custody' solutions, curtailing the principal-agent problem inherent in traditional account-based systems. A robust ecosystem of these custody solutions has developed over the past five years and is readily available to serve the legacy banking system with appropriate technologies.

“Requiring users to open up an account at the Fed to access a U.S. CBDC would put the Fed on an insidious path akin to China’s digital authoritarianism.” - Congressman Tom Emmer

3. Could a CBDC affect financial inclusion? Would the net effect be positive or negative for inclusion?

3.1.???Could a CBDC affect financial inclusion?

As of today, the unbanked as a percentage of the population is greater in the United States than in all other G7 countries and far more concentrated among those at the lower end of the income distribution. Today people are most-often excluded from the financial system due to their socio-economic status and/or because they cannot meet the requirements imposed on the commercial banking sector. According to a?2019 survey?conducted by the Federal Deposit Insurance Corporation, an estimated 5.4% of U.S. households were unbanked” in 2019, which means that in 7.1 million US households not one person had a checking or savings account at a bank or credit union. Of these 29 percent cited that they “don’t have enough money to meet minimum balance requirements”, another 16.1 percent of unbanked households cited that they “do not trust banks”. Lastly, 20% of the unbanked do not have the necessary personal identification documents to establish a bank account.

As before, the net effect of a CBDC on financial inclusion will largely depend on the specific implementation. If the CBDC design will indeed be analogous to a digital form of paper money - and in particular not require government-issued credentials - a relevant portion of the unbanked will be able to participate in the financial system, using a digital bearer instrument, potentially providing a net positive effect to that cohort.

3.2. Would the net effect be positive or negative for inclusion?

If implemented as a digital bearer instrument available without the need for government-issued credentials, a U.S. CDBC will provide an overwhelmingly positive net effect, decreasing the suffering of not only millions of Americans, but potentially hundreds of millions of people around the world who currently use Federal Reserve Notes as their only safe-haven from government overreach and hyperinflation. This requires that a U.S. digital bearer CBDC can be stored in any available un-hosted (non-custodial wallet), and specifications for these are made available open source.

4. How might a U.S. CBDC affect the Federal Reserve’s ability to effectively implement monetary policy in the pursuit of its maximum-employment and price-stability goals?

The legacy financial system disproportionally disadvantages citizens having to use cash as their only means of compensation. With the ascendants of the ‘gig economy’ recent job opportunities have opened up to induvial that are able to receive payments in digital form. However, citizens without bank accounts are excluded from these positions.

Furthermore, a CBDC implemented as “programmable money” can enable entirely new industries, enabling employment opportunities for U.S. citizens in particular if fostered in the United States, rather than leaving these to other nations.

Programmable money can also provide granular, real-time price information across a wide area of consumer products, offering better insights into price stability, and looming inflation.

5. How could a CBDC affect financial stability? Would the net effect be positive or negative for stability?

In as much as the Fed's discussion paper raises the concern that new payment services "could pose financial stability, payment system integrity, and other risk, if the growth of nonbank payment services were to cause a large-scale shift of money from commercial banks to nonbanks", it should be noted that the five largest electronic payment processing companies by market share (PayPal, Stripe, Amazon Payments, Braintree, and Block (now Square)) are already indeed not commercial banks. In as much as these entities are subject to quarterly assessments, and general scrutiny by investors, and a collapse of one or more of these private entities is unlikely to pose a risk to financial stability.

Financial instability in the U.S. economy was in the past primarily caused by market distortions, such as the creation of fiat currency supply for non-productive activities. These distortions were frequently compounded by commercial bank money systems and products built upon those. The opacity of the legacy system masked the buildup of systemic risks, and was largely responsible for the near collapse of the economy in 2008, causing nine million Americans to lose their jobs, ten million to lose their homes, and destroying nearly one-third of nations' gross domestic product.

As such, a CBDC – made available to commercial banks as a digital bearer instrument and (ultimately) “programmable money” must first and foremost transparently report on – and surface - structural problems, and have the technical capability to provide real-time reporting functions to all market participants. – The ‘net effect’ is bound to be overwhelmingly positive.

6. Could a CBDC adversely affect the financial sector? How might a CBDC affect the financial sector differently from stablecoins or other nonbank money?

While commercial banks today generate roughly 30 percent of their revenues from payments (see this report by McKinsey & Company), consumers are already turning to cheaper and faster solutions - a trend that will only increase.

As with Federal Reserve Notes, a CBDC implemented as a digital liability of the central bank that is widely available to the general public, and analogous to a digital form of paper money would not adversely affect the financial sector. To the contrary, a U.S. dollar-denominated digital bearer instrument would enable the financial sector to provide competitive solutions to end users – i.e., “programable money” - with the underlying security layer of a central bank.

If the American people ever allow private banks to control the issue of their currency,?first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. - Thomas Jefferson?

It must further be noted that the “financial sector” does not exist as an end to itself but is a conduit to facilitate real economic activities. And, in as much as a CBDC introduces efficiencies to the primary use cases of currency (lending, store of value, spending/payment), it will encourage commercial banks to adopt equal or better technologies.

7. What tools could be considered to mitigate any adverse impact of CBDC on the financial sector? Would some of these tools diminish the potential benefits of a CBDC?

7.1. What tools could be considered to mitigate any adverse impact of CBDC on the financial sector?

This distribution of a U.S. digital bearer CBDC should be implemented analogous to the way physical Cash is being distributed today.

Commercial banks must be allowed to create hosted “branded wallets” that can hold CBDCs from?any?central bank, as well as?any?privately issued digital assets. The ability to create branded CDBC wallets should be provided as software development kits and must be available to both custodial (hosted), and non-custodial wallet providers. The latter ensures the “cash-like” quality of a CBDC, while fostering financial inclusion for individuals currently excluded from the legacy financial system.

8. If cash usage declines, is it important to preserve the general public’s access to a form of central bank money that can be used widely for payments?

Yes (assuming the question refers to paper money). Technological complex implementations will always encounter periods of unavailability - i.e., 'network outages' caused by natural disasters, wars, or simply human errors. Paper money must be widely available to address these situations.

9. How might domestic and cross-border digital payments evolve in the absence of a U.S. CBDC?

“Payment” is too vague of a term to be discussed in any meaningful way. However, in as much as digital bearer instruments of any unit of account can?settle?with finality in near real-time, and provide “programmable money” optionality, these are already technical reality that cannot be ignored without suffering the consequences of technological debt. The latter can already readily be observed in the decline of USD-denominated transactions of global economic activity. According to the?International Monetary Fund?the US Dollar's share in global exchange reserves has fallen to its lowest level in twenty years.

10. How should decisions by other large economy nations to issue CBDCs influence the decision whether the United States should do so?

CBDC's implemented as a true digital bearer instrument with the ability to create "programmable money" provide an instant competitive advantage to the economies of any nation implementing it. This technology exists today, and its adoption is actively being pursued by other large economies. The United States must urgently increase its efforts to catch up to these developments, to avoid putting its own economy at a distinct disadvantage.

11. Are there additional ways to manage potential risks associated with CBDC that were not raised in this paper?

From a technological perspective, the medium of exchange has observably defaulted to bytes. The unit of account of any currency is as such a mere user interface function. Which is to say, discussing the latter amounts to arguing about the color of bytes

Currencies are network technologies that exist in the wider context of the internet. Engagement with the latter is largely a matter of client technologies - i.e., digital wallets. The ability to freely use the latter, while supplementing it with nation-state enforcement mechanisms that protect human agency outweighs the importance of a discussion of 'currencies', including CBDCs.

12. How could a CBDC provide privacy to consumers without providing complete anonymity and facilitating illicit financial activity?

The question entails a false choice, assuming the intellectual integrity in reference to a CBDC's analogy to physical cash. The latter medium of exchange currently provides complete anonymity, enabling a cottage industry comprised of licensed financial service providers who profit from illicit activities. However, as with previous questions, the answer is largely dependent on the technical implementation of a CBDC. Assuming the latter will indeed take on the form of a digital bearer instrument, any measures directed at curtailing 'illicit activities' cannot to be implemented at the level of a digital bearer instrument, but can readily be addressed using big data analytics.

As the findings of the congressional hearing from July 18, 2018 concluded:?

Criminals may find it more expedient to transfer money anonymously via the Internet, but they have surely found it easier to commit crimes with the advent of better automobiles, computers, and communication devices. None of these items should be criminalized.?

13.?How could a CBDC be designed to foster operational and cyber resiliency? What operational or cyber risks might be unavoidable?

Cyber resiliency is primarily achieved by the decentralization of individual data controllers. These suffer from an inherent principal-agent problem ("admin access"), exponentially increased by legacy technology, in particular database solutions. Unavoidable cyber risks are those inherent to the human condition, as most cyber security breaches are not a result of technical intrusion but hacking by the means of social engineering.

14. Should a CBDC be legal tender?

Yes, however only in respect to its?acceptance?by government agencies. With the exception of federally chartered banks, organizations, and private persons must not be legally required to accept a CDBC.

15. Should a CBDC pay interest? If so, why and how? If not, why not?

No. Central Banks must be provably market neutral. The Fed was established to provide price stability and prevent periodic banking crises. It has accomplished neither but instead caused price instability and massive banking failures, by distorting market forces. The Fed’s near-zero interest policy has set the economy on an unsustainable course: With inflation at record highs and interest on various types of savings accounts at less than one percent, those who thought to have been acting financially responsible and saved are de facto being penalized for trusting the central bank, and forced to accept what is, in effect, a negative rate of interest. Credit is no longer being allocated by the market but to classes of borrowers as determined by political interest.

16.??Should the amount of CBDC held by a single end-user be subject to quantity limits?

No. Also: what qualifies as an "end-user". Would the largest corporations be "end-users"?

17. What types of firms should serve as intermediaries for CBDCs? What should be the role and regulatory structure for these intermediaries?

In order to fulfill the requirements of a CBDC analogous to a digital form of paper money, the role of intermediaries should be limited to "blind custody", similar to the functions physical lock box vendors - including commercial banks - provide today.

18. Should a CBDC have "offline" capabilities? If so, how might that be achieved?

Yes. Several solutions exist today that work on the principle of unspent transaction outputs (UTXOs), and/or prepaid credit or calling cards.

19. Should a CBDC be designed to maximize ease of use and acceptance at the point of sale? If so, how?

Yes. - QR codes and Near Field Communication (NFC) have long been used for payment functions, and most point-of-sale systems support their implementation already.

20.?How could a CBDC be designed to achieve transferability across multiple payment platforms? Would new technology or technical standards be needed?

To achieve transferability across multiple payment platforms, a CBDC design should be compatible with the Ethereum Virtual Machine (EVM). While originally developed for the open-source Ethereum blockchain, EVM has emerged as the de facto standard globally. The paradigm provides standalone implementations across the most used programming languages (Python, C++, JavaScript, Go, and Haskell), and a majority of existing decentralized network systems (i.e., blockchains and directed acyclic graphs) opted for EVM compatibility. Already more than one hundred client applications (“wallets”) utilize the standard, with an estimated 2.7 billion users as of March 2022.

21.?How might future technological innovations affect design and policy choices related to CBDC?

Predictions for how future technological innovations can affect design and policy choices for a central bank-issued digital bearer instrument can be deduced from past technological innovations such as the introduction of the voice-over-internet protocol (VoIP). While some governments penalized their own citizens, making it "illegal" to use VoIP client software (presumably to protect state-owned telecommunications carriers), other nations embraced the technology, and allowed new industries to be built atop of the protocol. This greatly benefitted the citizens of these countries, which were heretofore metered by the Minute for every phone call. Telecommunications companies adopted the protocol for their backbones and phased out obsolete infrastructure.

Digital bearer instruments built atop decentralized software solutions such as blockchains, have been successfully tested for more than a decade, and reliably move tens of billions worth of currency daily. According to the 2021 McKinsey Global Payments Report, revenue from global payments exceeded $1.9 trillion in 2020. In light of that year's global gross domestic product of $84.7 trillion, it could be said that each product or service incurred an extra 2.2% tax. - Not enabling the US Dollar to operate as a frictionless digital bearer instrument, is not akin to keeping the rotary phone alive in the age of smartphones, it is comparable to forcing internet users to affix stamps on their emails. Less messages are being sent, fewer commercial transactions are taking place, and innovation is stifled.

As, Prof. Lawrence H. White concludes in his article Should the U.S. Government Create a Token-Based Digital Dollar?, as "long as its use is entirely voluntary, there is not much to object to other than the likely waste of taxpayer money to subsidize the costs of creating and operating it."

22.?Are there additional design principles that should be considered? Are there trade-offs around any of the identified design principles, especially in trying to achieve the potential benefits of a CBDC?

Preface: The outline below is merely an initial example. For any currency implementation to have long-term viability it must enable permissionless innovation for the next iteration of programmable money.

The difference between the various categories of “money” is mostly rooted in the complexity of the agreement, or what might be referred to as meta-data associated with the value shown as contract value or account balance. The higher complexity paired with – in the legacy system - often unstructured meta-data frequently requires manual intervention, batching, and other procedures performed by the financial service providers maintaining these contracts via legacy database solutions. The costs of these inefficiencies are currently borne by the account holder in form of fees that include margins for the financial service providers which control these outdated systems.

Decentralized software systems - such as blockchains and directed acyclic graphs, using cryptographic primitives, can address these frictions via standardization of metadata into digital bearer instruments (“tokens”) and automated transfer mechanisms via smart contract systems.

The latter requires a multidimensional implementation consisting of horizontal, and vertical metrics. The former references the different contract categories (“money”), while the latter will generally reference the velocity within the category. Horizontally these functions are already being implemented in digital wallets with hundreds of projects either live or in development. Vertically it can be observed that several projects are already taking market share within categories such as mortgages, municipal bonds, and payments.

Ostensibly, fiat currencies address challenges arising from the desired value exchange between two or more parties through funds that are readily accessible for spending. The latter are grouped under the label M1 by the Federal Reserve and, aside from physical cash, include funds recorded in demand deposit accounts, commonly referred to as "checking accounts".

While many merchants prefer cash over digital payments, this is largely a result of costs and time delays inherent to current electronic payment systems and their purveyors, such as debit and credit card companies. Ultimately, these payment options overwhelmingly make use of the aforementioned money classified by central banks as M1.

Assuming a U.S. digital bearer CBDC addresses these problems for sellers, it is a reasonable thesis that merchants would be motivated to adopt the new solution while encouraging counterparties to use it. Thus, the product-market fit could generally be achieved. However, because consumers frequently have myriad other digital payment solutions at their disposal, we will next examine these options.

Competition may also arise from digital currencies issued by other nation-states. While foreign exchange markets are generally not designed to cater to the payment needs of consumers, digital currencies issued by central banks may remove friction introduced by intermediaries in the form of time delays and fees.

Depending on interoperability and design choices, citizens exposed to fiat currencies with rapidly decreasing purchasing power could opt to store value in a currency of their choosing and only convert to the local fiat when necessary for payment functions. This can only be observed for physical cash today.

Setting further classifications into consumer, commercial, and more granular segmentations aside, investors may be tempted to consider the final cumulative value for 2020 as the total addressable market.

A U.S. digital bearer CBDCs follow protocols, and consequently, form new standards across these categories. Aside from providing transparency in this way, this design provides future utility as the desired “programmable money”, as divided into four main sections: creation, moving, storing, and governance – each section with its own subsections of entity, use case, and function (who/why/how).

U.S. CBDC design must consider the creation process of all money across a number of categories which in step one could greatly improve the overall transparency, and manageability of the movement of money, and related values – i.e., seigniorage and demurrage. These categories might include mortgages, certificates of deposits, corporate debt, student loans, auto loans, credit card debt, checking accounts, and HELOC.

While CBDC design papers largely omit discussions around the instantiation of fiat currency. It is necessary to examine the current creation process of fiat currencies which are largely brought into existence by the process of collateralized lending activities by commercial banks (e.g., mortgages), a business model not readily available to competing private currencies.

It can readily be observed that a small but flourishing lending market is evolving in the decentralized finance space. Although these solutions are today largely limited to digitally native assets.

Central bank digital currencies might open access to these solutions to a broader audience, should they be interoperable with these innovative solutions. However, residual frictions, and - most importantly: continued debasement of fiat currency - will mean that fiat currencies may be relegated to their unit of account function, while interest-bearing digital assets will be the new status quo.

As the Paper defines a CBDC as a digital liability of a central bank that is widely available to the general public, and analogous to a digital form of paper money, any friction not inherent to Cash must therefore be considered a trade-off. And, in as much as these trade-offs manifest in friction to the exchange of a digital bearer instrument, client technologies (i.e., “wallets”) will either mitigate it (best case), or avoid using a U.S. CDBC designed in this way altogether (worst case) – similar to communication protocols implementing “least-cost routing” around more expensive network participants.

P.S. As a venture fund with a focus on sustainable digital solutions, our in-house team of financial engineers, and data scientists has reviewed well over two thousand (2,000) projects throughout the past six (6) years - exceeding the combined number of experiments that all CBDC teams globally were exposed to. Importantly, we are applying a multidimensional, interdisciplinary - and very technical - approach to the analysis of the viability of a solution. Some of the thoughts shared above are being discussed in greater detail in our upcoming book Streaming Money.