The Future of Money: The 3 New Ideas You Need to Know this Week (Issue 28 - 1 February 2021)

Dear Friends, 

Welcome back to my weekly newsletter where I share some of the major developments on the future of money that you need to know about!

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If you enjoy this content, you will also love what I post on Twitter (@HenriArslanian) and the library of videos on my YouTube channel.

Here we go!

1. Why 86% of Central Banks Are Looking at CBDC

The Bank For International Settlements (BIS) just released its latest major survey of 65 central banks (which represent 72% of the world population and 91% of the global economic output) on their plans for a central bank digital currency (CBDC).

 Some interesting takeaways came out that are worth noting

• 86% of central banks are now exploring CBDCs, with the majority conducting experiments or PoCs (proof of concepts) and 14% moving forward towards development and pilot programs.

• Central banks representing 1/5 of the global population are likely to issue a retail CBDC in the next 3 years.
• 7 out of 8 central banks with advanced CBDC pilots or implementations are in emerging economies, with a focus on improving domestic and cross border payments, which will hopefully help reduce some of the costs associated with sending money around the world. 

Source: Henri Arslanian GIF page

• Whilst central banks are looking at both wholesale and retail CBDC, there has been a very noticeable jump in interest in retail CBDC (perhaps a result of Libra/Diem + COVID-19?)
• Retail CBDCs are a particular area of interest for emerging economies, with broader financial inclusion as a major goal. For wholesale CBDCs, general payments efficiency remains the primary driver.
• The surveyed central banks also remain focused on stablecoins, with 2/3 of them studying their impact.
• However, the legal authority to issue CBDCs remains a concern. A quarter of central banks do not have the authority to issue a CBDC and almost half remain unsure as to whether they can issue a CBDC under their existing legal framework.

We’ve been pretty bullish on the transformative potential of CBDCs in this very newsletter, so it’s very interesting to see just how far CBDCs have progressed in the eyes of central banks around the globe. 

And for a deeper dive into CBDCs, check out my explainer video on the topic!

Watch this space!

Pic of the Week

2. Will Quantum Computers Put Your Bitcoin at Risk?

As quantum computing has moved from the theoretical to the probable, many in the crypto community are wondering whether their Bitcoin will continue to be secure, as quantum computing can easily break blockchain’s complex cryptographic functions. 

The answer depends on how your Bitcoin is stored.

In short, if your Bitcoin is stored in an address that you have already used, your Bitcoin could indeed be at risk. But if it's in a new address, the risk will be limited. 

This is because the Bitcoin blockchain uses an algorithm called ECDSA (Elliptic Curve Digital Signature Algorithm) to generate a public key using a private key.

But experts believe that ECDSA could potentially be broken by quantum computers using a modified version of Shor’s algorithm.

However, the other algorithm used in Bitcoin, SHA-256, is seen by many experts as being quantum-safe, which means that there is no efficient known algorithm, classical or quantum, which can invert it.

While there is a known quantum algorithm, Grover’s algorithm, which performs “quantum search” over a black-box function, SHA-256 has proven to be secure against it.

To explain the above in simpler terms, let's focus on basic person-to-person Bitcoin payments.

These can be divided into 2 categories, each affected differently by a quantum computer.

In the first type, a public key directly serves as the Bitcoin address of the recipient.

A transaction to such an address is called ‘pay to public key’ (P2PK).

This was the most common type of address used in the early days of Bitcoin.

Many of the original coins mined by Satoshi Nakamoto himself are still stored in such addresses.

Since every transaction in Bitcoin is public, anyone can obtain the public key from any P2PK address. A quantum computer running Shor’s algorithm could then be used to derive the private key from this address.

This would allow any malicious actor who has a quantum computer to basically take control of the coins that are stored in that address.

In the second type of transaction, the address of the recipient is composed of a hash of the public key.

Since a hash is a one-way cryptographic function, the public key is not directly revealed by the address.

The most popular implementation of this is called ‘pay to public key hash’ (P2PKH).

The public key cannot be retrieved from such an address and is only revealed when the owner or private key holder initiates a transaction.

This means that as long as funds haven’t been transferred from a P2PKH address, the public key is not known and the private key cannot be derived using a quantum computer, as quantum computers are unlikely to be able to break a SHA 256 algorithm. 

However, if any funds, of any amount, have at one point been transferred from a specific P2PKH address, the public key is revealed.

A quantum computer running Shor’s algorithm could then be used to derive the private key from this address.

In practice, usage of P2PK addresses has declined significantly since the introduction of P2PKH in 2010; as of 2012, P2PKH has become dominant.

In addition, most wallets today are programmed not to use the same address more than once, which reduces the risk with P2PKH. 

But a real risk of a quantum attack remains for all Bitcoins in P2PK addresses and reused P2PKH addresses.

Many have tried to quantify this risk, including a team of researchers from Deloitte who analysed the Bitcoin blockchain.

They found that the number of Bitcoin in P2PK addresses has stayed practically constant over the years at around 2 million Bitcoin.

These coins can be assumed to have been generated through mining and have never been moved from their original address.

Following the introduction of P2PKH in 2010, most of the Bitcoin has been stored in these "safer" types of addresses.

The Deloitte research team also found that the number of Bitcoins stored in reused P2PKH increased from 2010 to 2014, and since then has been slowly decreasing to reach the current amount of 2.5M Bitcoins, which suggests that people are generally following the best practice of not using P2PK address as well as not reusing P2PKH addresses. 

However, this means that there are still around 4.5 million Bitcoin that are potentially vulnerable to a quantum attack, or about 25% of the total amount of Bitcoin that will ever exist!

Source: Deloitte

So what can be done to mitigate this risk?

In theory, if everyone would transfer their Bitcoin to a new P2PKH Bitcoin address, then we would not be vulnerable to a quantum attack. 

But the reality is that this will be impossible, as many of the early day Bitcoin “owners” have most likely lost their private keys by now.

These Bitcoins (roughly 2.5 million in total) are basically sitting ducks, just waiting for the first person to be able to use quantum computers to guess their private keys. 

Whilst some have proposed solutions (e.g. providing a time ultimatum to move them to a new address or else miners will refuse transactions from such addresses), such a solution is unlikely to work for practical and ideological reasons.

However, for the remainder of Bitcoin, there are numerous practical options that are available to us, such as upgrading the current ECDSA algorithm to a quantum resistant one. 

Many believe that this is similar to the Y2K bug, as there is a clear path as to how we can fix this issue, which can be implemented when the time is right. 

The reality is that, for the moment, we are far from quantum computers being an immediate risk to the Bitcoin network. Many experts believe that over 1500 qubits would be required to break the Bitcoin blockchain, and they would all need to be entangled.

Google, generally seen as one of the most advanced players in this space, is currently at 53 qubits. So many experts believed that we still have some time.

However, researchers in China recently announced that they had developed quantum computers that are potentially 10 billion times faster than Google.

So expect increased discussions on this topic in the coming months!

Money Quote of the Week

“That man is richest whose pleasures are cheapest.”

Henry David Thoreau

3. What Does Janet Yellen Think of Bitcoin?

Discussing Bitcoin with Janet Yellen in Davos in January 2019

All eyes were on Washington this week, with the crypto community eagerly awaiting a bit of clarity regarding Bitcoin and other digital assets from former Federal Reserve Chairwoman and incoming Treasury Secretary Janet Yellen.

In her recent Senate confirmation hearing, Yellen took somewhat of a skeptical stance towards crypto in general, voicing her concerns about the asset’s connection to terrorism and how it was being used “mainly for illicit financing.”

But her written remarks on the topic, which were submitted to the Senate Finance Committee, were far more positive, with Yellen specifically citing crypto’s potential to “improve the efficiency of the financial system.

Yellen also clarified that she would use her new position to work closely with the Federal Reserve along with federal banking and securities regulators on building and implementing a new regulatory framework for crypto assets and the new wave of innovations coming from the fintech sphere, a welcome and reassuring message to the broader crypto ecosystem.

These mark Yellen’s first public remarks on cryptocurrency since 2018. 

It’s undoubtedly a bit early to expect actual specifics from the new Treasury Secretary on cryptocurrencies.

After all, she has a lot on her plate at the moment!

But the steps her and her team choose to take will undoubtedly have an impact.

These subtle signals and incremental signs of progress, like the Office of the Comptroller of the Currency’s (OCC) decision to allow federally chartered banks to use stablecoins for payment purposes, show that the United States is moving forward when it comes to the future of money.

Definitely an area to closely monitor moving forward!

My Crypto Capsule This Week

?My FinTech Capsule Interview This Week

Whilst I disagree with many of Professor Nouriel Roubini's views, it is important to hear both sides of the debate in order to make your own decision on the impact of cryptocurrencies on the future of finance and money.

My Upcoming (Virtual!) Speaking Engagements

25 February - Hubbis (Digital Assets: Now Too Important To Ignore for Asset Managers?)

1 March - UBS (The Future of Money)

18 March - Blockchain Africa Conference (Latest Global Institutional Crypto Trends)

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See you all next week!! 

Henri Arslanian

*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with.

?Who is Henri?

Passionate and focused on the future of finance and money, Henri Arslanian is the PwC Global Crypto Leader, the former Chairman of the FinTech Association of Hong Kong and an Adjunct Professor at the University of Hong Kong, where he teaches the first FinTech university course in Asia.

Henri advises many of the world’s leading crypto exchanges, investors, financial institutions and tech firms on their FinTech and crypto initiatives as well numerous governments, regulators and central banks on Fintech and crypto regulatory and policy matters.

 With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author and is regularly featured in global media, including Bloomberg, CNBC, CNN, the Wall Street Journal and the Financial Times.

Henri was named by LinkedIn as one of the global Top Voices in Economy & Finance and is the host of the FinTechCapsules? and CryptoCapsules? social media series.

Henri was recently named by Onalytica as the #1 most influential individual on Finance globally on LinkedIn out of 50k+ individuals working at the top professional services and management consulting firms in the world. 

Chambers Global also named Henri the “highest profile FinTech consultant in Hong Kong” and Asian Private Banker awarded him the “FinTech Changemaker of the Year” award.

Henri’s latest book, The Future of Finance: The Impact of FinTech, AI and Crypto on Financial Services, published by Palgrave Macmillan, was ranked as one of Amazon’s global top 10 best-sellers in financial services and was recognized as one of the “Best FinTech Books of All Time” by Bookauthority.

Before joining PwC, Henri was with a FinTech start-up and previously spent many years with UBS Investment Bank in Hong Kong. Henri started his career as a financial markets and funds lawyer in Canada and Hong Kong.

You can learn more about Henri on his website (www.henriarslanian.com) and you can reach him at [email protected]