Cash is an offline thing

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With CBDCs, we should be able to buy milk when the cloud is down.

One of the big attractions of building a new digital cash infrastructure to implement a digital currency instead of just putting a simple peer-to-peer protocol on top of the existing digital money systems (i.e. bank accounts and debit rails and the like). , is that it would increase the diversity of the infrastructure and, therefore, the resilience of the payment system, which is a vital national infrastructure.

If the card acquiring fails, as is the case every now and then, or the banking network fails for any reason – and that happens every now and then, you can see the complete failure of all payment transactions within the Euro Target2 system for several hours a year (with backup systems and emergency modules also initially inoperable) – then a parallel digital cash register system should continue to work on different tracks.

In fact, the ability to transact between devices that are not connected to a network, either because the cloud is down, there is no mobile network, or there is no power due to a natural disaster, is an important design requirement for Chinese digital currency and it should be one for any other digital currency intended to replace or even supplement cash.

That’s actually a tougher question than it initially seems, and the failure at Amazon Web Services (AWS) in December when the Amazon cloud disappeared not just once but twice shows how tough it is. Amazon has all the money in the world and I have no doubt that they employ some of the best engineers in the world, but even that combination can’t offer 100% availability. And when AWS went down, the impact was significant. In fact, some vacuums, light switches, and cat food dispensers no longer worked, the Wall Street Journal found. This is viable – I can go for a couple of hours without watching Netflix

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– but I could imagine that the impact on the economy would be a little bigger if the money stopped working for a while.

This must also be remembered by others who would like to offer cash alternatives on a population scale around the world. Facebook is one of them. Their Novi wallet now allows (some) US customers to exchange digital dollars over WhatsApp, and they have big plans for it. Mark Zuckberg told Congress that the digital currency Libra (now Diem) would “expand America’s financial leadership,” but its services went down just a few weeks ago when nearly three billion Internet users couldn’t access Facebook, Instagram, and Instagram due to an outage Had WhatsApp, Facebook Messenger, and other tools for about six hours.

(The Facebook outage has interesting effects that go far beyond the fact that people send each other silly pictures of cats. Facebook and WhatsApp in particular are national infrastructures in large parts of the world.)

In addition to potential device failures, programming errors, server hacks and software upgrades that went wrong, there is the infrastructure for communication to and from the servers: the interweb tubes. For most of the people in most of the world, this means cell phones. We often talk about the creation of first generation mobile financial services in developed countries, but developing countries need financial services that are only mobile. But cellular networks can fail due to fires, floods, or management incompetence, and trading must not stop!

On and off

All of this means that a digital currency that is supposed to work at the population level in both developed and developing countries must work offline, as I have repeatedly emphasized (e.g. here in Forbes). If it can’t work offline, it’s not a viable cash substitute or a viable strategic platform for new financial services. Suppose Facebook’s Novi wallet becomes as important to the economies of countries around the world as the banking networks are today? In this environment, six hours of downtime could be utterly catastrophic and seriously damage economies as payments are the only part of the financial infrastructure that is actually critical.

(It doesn’t matter if the stock market falls for a few days or if bonds are delayed for a day or two. But when the payment system collapses, the real economy grinds to a halt.)

Kwame Oppong (Head of Fintech and Innovation at Bank of Ghana) said at the recent Ghana Economic Forum that efforts to provide financial services to people without bank accounts are being hampered by “the availability of connectivity and electricity”. This is why a central bank digital currency (CBDC) retail infrastructure needs to be built from a number of new building blocks that are parallel to the e-money infrastructure to bring diversity, inclusion and resilience to the payment network: a CBDC must be there for everyone, not just people with bank accounts. Anyway, credit cards won’t work if the network goes down, and neither will Bitcoin, so we’ll have to look elsewhere for the new infrastructure.

Hard not soft

This aspect of the digital currency fascinates me. Getting a true cash alternative into the mass market takes some innovative thinking, and I suspect that depends on the use of secure, tamper-evident hardware. Vipin Bharathan wrote here a year ago and talked about visas

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proposed offline payment system (OPS) that implements digital currency using digital signatures generated in this hardware, in the form of Trusted Execution Environments (TEEs) in cell phones and laptops, etc. This is only one of the proposed solutions but illustrates the general class of most likely implementation pretty good: since these chips cannot be cloned, they provide a way to prevent subversion of transactions even when moving from device to device with no blockchain or database in sight.

These TEEs are chips (just like chips on bank cards or the SIM cards in cell phones) that cost next to nothing. Given that banks and telecom operators are not insolvent, they seem to offer pretty solid protection for a mass market solution and, as IDEMIA points out in the discussion of their offline CBDC solution developed with ConsenSys, they can be embedded in a wide variety of devices (not just smart cards or cell phones).

This use of tamper-proof hardware means that if the cellular network crashes due to a botched software upgrade, cloud services go down due to a DNS misconfiguration, and power goes out due to strong winds blowing trees on power lines, you should still be able to get cash from Send your phone to a neighbor’s phone via bluetooth or UWB and you should be able to tap your contactless CBDC smart card on a shopkeeper’s cellphone to buy groceries.

The failures of Facebook and Amazon did the useful function of reminding us that vague talk about networks and clouds and blockchains is no substitute for the detailed risk analysis and countermeasure planning required to move the next piece of vital national infrastructure to create: CBDCs.


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