Kiffmeister’s #Fintech Daily Digest (02/20/2021)*

Non-technical analogy to explain the security and resilience of an ideal offline token-based CBDC

WhisperCash‘s Razvan Dragomirescu provided this great Twitter thread to push back on claim of the recent Riksbank staff memo that, in order for a central bank digital currency (CBDC) to be cash-like, it would require verification by a remote ledger in order to avoid double spending. It dismissed the possibility of using local devices that cannot be tampered with and programmed so that a token cannot be spent more than once, claiming that such 100% tamper-proof devices do not exist. And here’s Razvan (slightly edited by me):

A purely offline CBDC would not come without rules. They would be enforced by a trusted agent of the central bank, in the form of software running inside a TEE or secure element. These would include rate limits on transactions, maximum balances, unique keys per card, etc. In the event of a complete compromise of one card (however unlikely or expensive), the attacker can theoretically mint or double spend any amount. However, she cannot force other legitimate users to bypass the issuer rules on their cards.

For instance, a per-transaction limit of EUR 500 means she can only spend it in increments of EUR 500. A maximum limit of 10 transactions per day or 3 transactions from the same user per day means she can only spend the newfound fortune slowly and in small denominations. You can double spend but you cannot impersonate another user, so you have to use your real (KYC-ed) identity when paying. Maximum balances and maximum offline transaction values mean high value items cannot be bought/sold this way.

It would be like counterfeiting quarters to try and buy a Lamborghini, or buying $10 worth of grocery at the checkout counter by minting a thousand counterfeit pennies one by one. It would be hard to pay for anything meaningful (fast enough to avoid detection), hard to carry in large enough volumes and can still put you in jail for currency counterfeiting if caught. This is better than counterfeit physical cash that can be spent in any volume, to anyone and leaves no trace.

A Third Bitcoin ETF Takes Aim at North American Market

CI Global Asset Manager filed a preliminary prospectus for its CI Galaxy Bitcoin ETF Bitcoin exchange-traded fund (ETF) with the Ontario Securities Commission. The ETF, if approved, would be Canada’s third after Evolve and Purpose launched their own this week. Purpose’s ETF launched yesterday on the Toronto Stock Exchange.  

What Is a Non-Fungible Token (NFT)?

“A NFT (non-fungible token) is a special cryptographically-generated token that uses blockchain technology to link with a unique digital asset that cannot be replicated. Non-fungible tokens differ from popular cryptocurrencies such as Ether (ETH), Bitcoin (BTC) and Monero (XMR), which are fungible; for example, you can exchange one Bitcoin for any other Bitcoin. Although the usage of NFTs has spread in various industries, they’re synonymously associated with the gaming and digital collectibles sectors and are most commonly found as a specific Ethereum token built on the ERC-721 standard. However, in 2021, their use is starting to spread to other blockchains like Binance Smart Chain’s BEP-721 protocol.” 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.