Kiffmeister’s #Fintech Daily Digest (07/25/2021)*

Mondex Memories and CBDC

This blog post makes a nice backdrop to my regular reminder that anonymous peer-to-peer (P2P) offline digital currency is not an impossibility, as some claim. In fact, it’s been done before. Mondex was a stored value digital currency platform that took the form of a rechargeable smart card on which prepaid values are stored locally.

“We feel that an offline capability is essential for a central bank digital currency (CBDC). Networks break, whether through lack of coverage, software or hardware failure, high demand or cyberattack (or even physical attack). It’s better if the wheels of commerce can keep turning in any of these circumstances.”

My Two Cents Worth

Mondex was not alone. There was also MintChip and VisaCash. However, none of them developed enough customer acceptance to become viable. Also, at the time, computer scientists argued that such smartcards could never be strong enough to support existing  currency schemes. However, rapid technological progress since then is likely to have addressed some of these security concerns, such as the complex offline capable dynamic data authentication/combined dynamic data authentication security features for stored value cards. 

In fact, the Bank of  Canada is currently investigating what they call a “universal access device” (UAD) to securely store and transfer CBDC in a cash-like way. In terms of their requirements, a UAD should be manufactured at a low cost and issued by the Bank to ensure maximum inclusion. A UAD could embed a local, secure store of value, be network-independent and operate for long periods on a local power source. If there is an infrastructure failure, a UAD may prevent the interruption of digital transactions.

And WhisperCash and BitMint are a couple of private companies working on UAD-like applications. In particular, WhisperCash has actual working prototypes, dedicated smart cards, and solutions that work on basic featurephones. 

The Riksbank is Not a Believer

However, the Swedish Riksbank, in a recent working paper, claims that “all CBDCs will need a ledger that keeps track of CBDC ownership regardless of whether they are token-based.” They assert, with no substantiation, that:

“It is possible to make exact copies of digital tokens, because a digital token is essentially a string of zeros and ones. Regardless of where it sits, this piece of data is imminently copyable. We can reproduce it exactly, in as many copies as we wish, without harming the original. We often encounter the argument that digital signatures make it impossible to counterfeit digital tokens. Yes, that is true, but copies can still be made. Are they not counterfeits? We have also heard the argument that notes and coins cannot be double spent because they are “handed” over to the receiver. But this is obviously not the case. The point is rather that it is sufficiently hard/expensive to make copies that are completely indistinguishable from the original (as in the case of digital tokens). 

A-priori it seems that a simple solution to the double spending problem would be to use local devices that cannot be tampered with and program them such that a token cannot be spent more than once. Unfortunately, such 100 per cent tamper-proof devices do not exist. Furthermore, the economic incentives for tampering with the devices are strong, and the system would not support “graceful degradation”. The latter means, essentially, that that it is sufficient for one device or one vendor to be malicious for the whole system to break down. These challenges might be mitigated by a sufficiently large chance and cost of being caught in double spending CBDC tokens. But, that would require that it is possible to trace down where the double spending has taken place, something that again introduces the need for a ledger.” 

The gauntlet has been thrown down!


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