Unchained - Central Bank Digital Currencies: How Should Privacy Be Built In? - Ep.206

Episode Date: January 5, 2021

This panel, from a panel for the fifth anniversary of Hyperledger, features Rob Palatnick, managing director of global head of technology research and innovation at the DTCC and chairman of the Hyperledger board, Matthieu Saint Olive, Codefi payments product manager and CBDC advisor at ConsenSys, and Robert Bench, assistant vice president at the Federal Reserve Bank of Boston. In this discussion on the current outlook on central bank digital currencies (CBDCs), they cover:  what main problems CBDCs can solve whether CBDCs should be open sourced why building a new technology for CBDCs is preferred over using existing tech how concerns over CBDCs and their privacy implications differ across countries what possible pain points or opportunities CBDCs pose for central banks whether CBDCs should be blockchain-based to what extent CBDCs will be distributed and open networks, and whether fees would be charged for transactions how central banks are thinking about methods of adoption, like whether they will bank directly with retail customers or still use commercial banks  how developers balance the drawbacks and benefits of blockchain-based CBDCs with different stakeholders whether stable coins will be replaced by or coexist with CBDCs and what the future holds for the continued development of CBDCs   Thank you to our sponsors! Crypto.com: http://crypto.com 1inch: http://1inch.exchange    Episode links:  Rob Palatnick: https://www.dtcc.com/our-experts/robert-palatnick Brian Behlendorf: https://twitter.com/brianbehlendorf?lang=en  Matthieu Saint Olive: https://twitter.com/msaintolive?lang=en  Robert Bench: https://www.bostonfed.org/home/people/bank/robert-bench.aspx Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin. This week on Unchained, we're featuring a panel discussion from the fifth anniversary of HyperLedger on Central Bank Digital Currencies. The speakers are Rob Palatnik, Managing Director of Global Head of Technology Research and Innovation at the DTCCC at the DTCCC and Chairman of the HyperLedgeer Board. Mathew, St. Olive, Code 5 Payments Product Manager, and CBDC Advisor at Consensus, and Robert Baton, assistant vice president at the Federal Reserve Bank of Boston. In this discussion on the current outlook on central bank digital currencies or CBDCs, we cover how and when privacy should be built into a central bank digital currency, the role of commercial banks in distribution, whether or not transaction fees should be charged in a central bank digital currency, and how to structure one keeping in mind the constraints around scaling and security. It was a great discussion and I hope that you enjoy it as much as I did. And now here's the panel discussion on CBDCs from the Hyperledger 5th anniversary. Crypto.com, the crypto super app that lets you buy, earn, and spend crypto, all in one

place. Earn up to 8.5% per year on your BTC and more than 20 other coins. Download the Crypto.com app now to find out how much you could be earning. One inch exchange is Defi's leading dex aggregator that discovers the best trade practices across all dexes. One Inch was launched in May 2019 by two White Hat hackers at ETH Global's ETH New York Hackathon. One Inch has reached almost $7 billion in overall volume in just over a year. Hi, everyone. Welcome to our panel. So we have three great speakers for you.

One is Bob Bench, who's the assistant vice president at the Federal Reserve Bank of Boston. We also have Rob Palatnik, managing director of Global Head of Technology Research and Innovation at the DTCC. and who is also chairman of the Hyper Ledger Board. And then Matthew St. Olive, the CodeFi payments product manager and CBDC advisor at consensus. Welcome to our panelists. Why don't we start by having you each go around and stating what it is that you and your organization do and how it is that you're either working on central bank digital currencies or other blockchain-related initiatives?

Rob, why don't you start? I'm sure. Thank you very much, Laura. And thanks to the panelists. And first, as chairman of the Hyperledger Board of Governors, I would like to congratulate Hyperledger on five years. I think the accomplishments just in helping push software, push the ideas, push the concepts, and push the discussion and bring together the community in sessions like this has been phenomenal. And part of the great value that Hyperledger is bringing to the world as we embark on this journey. So I run research and innovation for DTCC.

DTCC is Depository Trust and Clearing Corporation, where one of the premier financial industry post-trade infrastructures in the world in the United States where the primary mechanism for clearing and settlement of equities, cash trades, most of the non-futures and non-option markets all settle through DECD. So we're not a payment organization. We're primarily a clearing and settlement and regulatory reporting and data organization. But we move assets around and having a new and consistent set of payment rails would certainly benefit our client, our industry. Great. And over to Bob. And thank you for having me, Laura and Brian. So my name is Bob Bench.

an AVP at the Federal Reserve Bank of Boston. So what our team does is we, association with the DCI at MIT, we are working on a general purpose central bank digital currency research project. The main idea here, as opposed to Rob's organization, which handles the securities markets, we are trying to understand what are the tradeoffs in trying to build a Fiat alternative digital currency. And we're starting at the core layer.

We think that there are unique designations. requirements to central banks fiat currencies. And we think that that needs to be built, and we're going to try to build it for research purposes. What we think about is almost a Linux for central bank currencies. And so we are in year one of this project. We plan on releasing open source software in summer 2021, along with a white paper. And we look forward to people from the community testing our product, playing with our

product, much like HyperLedger and Linux did over their history. And we're excited to release this and get your feedback. That's interesting. Yeah, I'll have some questions about that. But before that, why don't we turn to Matthew? Hi. So, Matthew Satolyev. I'm leading Transcensus work on CBDC globally.

So briefly, Transcise is a software company, a pioneer in blockchain. Our founder and CEO, Joseph Rubin, co-created Ethereum six years ago and then created transancies to build a community around Ethereum. and we are really in between public blockchain innovation and enterprise and strongly believe in the convergence of the two and CBDC is a great example of this. We are really close to HyperLager and really grateful to be part of this community. We have contributed to HyperLager with HyperLager Bezou,

which is an Ethereum client, open source Ethereum client, which we submitted almost two years ago. And we strongly believe that HyperLager brings, a lot of value by having this, by being this greenhouse with 15 projects, which allows for collaboration, creation of standards, and all of this is really critical for enterprise adoption. And then more specifically on CBDC, so we are really committed to support central banks on CBDC.

We are working with six different central banks on CBDC pilots, wholesale, retail, and cross-border pilots. Right now we believe that central banks do not yet plan to go live with CBDCs. They need, they are cautious by nature. And so they need experimentation. They need to understand, as you said, Bob, what are the trade-offs, what are the capabilities, and how to implement it very concretely. And so it's really exciting time for us to see this technology being used by such high provider institutions. So as I'm sure everyone's well aware, when it comes to blockchain technology, people always make a joke that the solution to everything is just to put a blockchain or put it on a blockchain.

But obviously, that's just a joke because that's not the case. So when it comes to central bank digital currencies, what are the main problems that could be solved or alleviated with central, sorry, the problems with central bank money that could be alleviated or resolved with blockchain technology? And this is just an open question. Anyone can answer it. So I think that if I can start briefly, I think there are three main problems in terms of, which are wholesale, retail and cross-border. So wholesale, there are already existing our KGS systems and interbank settlement, which worked pretty well. But there are delays and costs associated to this. And more importantly, there is lack of programmability and programmability

do not solve the problem, but provide additional value. For cross-border payments, obviously, we are still relying on our correspondent banking infrastructure that is completely outdated, very slow, very costly. And here, many people believe that CBDC can significantly facilitate cross-border payments. And then for retail, CBDC, I'm not sure we solve a problem because in developed countries, we have great means of payments, but it can be more relevant for developing countries. And even for developed countries, it will actually not solve problems, but create new opportunities. And Rob, do you want to add something from the wholesale side? Yes. So from the wholesale perspective, and I guess Mattel touched on two aspects to the digital currency that

if realized in a central bank digital currency would be of tremendous value. One is that they would be digital and they would be a consistent methodology for recording those payments and tracking and tracking where the money is moving. And second, that they're programmable. So those two things in combination is what really brings that value. Within the wholesale ecosystem of the financial industry, there are many different process flows that are really unique to every asset class. So equities has a particular process flow, various fixed income transactions have process flows, money markets have their process flow. And all of these have their own settlement workflow, their own margin models.

So it seems fairly obvious that if we adopt a more efficient payment rail, that consolidated all of the cash movements for our clients in the industry, that it would be much easier for our clients to manage their liquidity needs. So it just, the math of it just seems much simpler. And Bob, does you want to add anything? Sure. I mean, I think, you know, we're certainly not wed into a blockchain architecture. But, you know, certainly there are advantages there. Resiliency across distributed networks, there's benefits there. And again, our research is primarily around tradeoffs, right? So the challenge with distributed networks is they're really complex. and complexity adds a tax surfaces, and those things can cause challenge to one of our most important goals, which is security.

But certainly, the traceability of certain blockchains is very intriguing from an AML CFT standpoint, right? The ability of firms like chain analysis and elliptic to track funds globally, fairly instantly, as long as you have some KYC somewhere along that trail is really unique and interesting and new for the AML CFT world. So again, I think there's a lot of positive aspects, and we're looking at those and what tradeoffs exist with those distributed systems. Yeah, I imagine that there's a segment of the leadership that already has their hackles raised about what you just said. But actually, before we get to that, because obviously that raises privacy issues, I do want to just to ask you about something that you mentioned in the beginning about how you're working on the solution and you're going to release the code for it in the summer. So I'm just curious, you know, if you are working on solutions for central bank, digital currencies, then do you see that as something that would be an open source technology and a government would build that kind of solution using open source code? Of course.

And governments currently use a plethora of open source code. Much of the government architecture is built off Linux. And, you know, we at least, at least our research team in concert with MIT, we don't believe in security. by obscurity by obscurity. We think that if code is going to be secure, you need a lot of people looking at it and a lot of people working on it. And it's very hard for that to be done when it's a very small classified team. Again, we, you know, the Federal Reserve and Treasury have not made any announcements regarding central bank digital currency plans to go live in any sense the word. But we think the best use of our research time is to build something open source

where we can build off the minds of the women and men who take part in the open source community. And why are you building something as opposed to maybe using one of the existing technologies? One is, and to be sure, our division will be evaluating public and private platforms to test our own in-house build. But one, you know, I think it's really interesting to build something from the ground up. You learn a lot about your platform if you build it yourself. You learn a lot about the difficulties, you learn a lot of the tradeoffs, that we may not have learned if we exclusively use a provider. I think that's critically important. Two is, you know, I think joining with MIT, we are really building on some of the better brains in this space.

Nahad Nurula, who runs the DCI, has put together a fantastic team of some of the top cryptographers and developers in the world in this area, and we want to see what they can do with the very unique design requirements for central bank digital currency. As far as I understand, is not a single platform that has exclusively been built for the design requirements for central bank digital currency. There's been a lot of enterprise chains for value, so to speak. But we think central banks have unique design requirements, and we're going to try to build for that purpose. And Matthew, you've worked with a number of different governments or consensus is working or has worked with South Africa, Singapore, Thailand, Hong Kong, Australia. and I just wondered how do concerns differ across countries

and what factors tend to affect their concerns? Is it like the size of the country or are there cultural factors or is it about kind of the existing penetration of fintech technology or how are different governments thinking about this? Yes. Just before answering the question, I just want to react on what Bob said about open source, which I think is quite important is that one of the great benefits

of DLT, open source, is that the transfer of values, the value capability is embedded. And so it's much different from any other technologies like database or whatever. Here you have the protocol itself allows transfer of value, which, and then on top of this open source software, people will build additional proprietary applications

and make a business out of it. And this, we see this as the opportunity also to foster digital innovation. And the Bank of England has foretested a boost of GDP of 3% with the general purpose CBDC, which I think is quite exciting. Then when it comes to, in our distribution with central banks, there are several things. So first of all, this technology is new to them. So first, the first thing they need is to basically get their hands dirty and start to understand exactly what are the capabilities, what are.

what are the trade-offs and how they can implement it. When we look at the technology layers, they have some concerns about how we can manage privacy, how we can manage transactions throughput, so how many transactions per second you can manage, and how will it be interoperable with other systems, whether it is legacy systems or new DLT platforms that might be built with the same protocol or with different protocols.

So they have this need of understanding, understanding the technology. But as we see the markets becoming more and more mature, central banks are also more focused on what the use cases, what's the application. And here collaboration between the public, so the central banks and the private sector is absolutely key. Because they need to understand not only how the individuals will use the CBDC, but how the enterprises, how the private sector will be able to use it, how it will solve their, their their penpoints and how it will allow them new opportunities. And so there's obviously a lot of collaboration very useful with the financial institution

for the wholesale layer, but also for the, I mean, any merchants, every merchant needs a means of payments. And so understanding how they can manage a subscription, their invoices in a smarter way, in a better way is very important for the central bank to understand, to properly design it. And Rob, why don't you maybe give more insight to what Matthew just said and tell us how the DTCC currently works with central banks and maybe mention some of the pain points that he discussed as well as new opportunities that you see could come with as CBDC. Sure. And, you know, I guess the way, you know, we look at the entire ecosystem in the financial industry and in the financial markets across the globe, basically, is that they're helping people manage their retirement accounts, their pension funds, you know, the financial industry serves a purpose that benefits to everyone. So being able to move assets and move value in exchange for those assets with a complete confidence in the integrity of the markets and in the integrity of that your asset is accounted for or your money is accounted for is critical. And DTCC's primary focus has long been on that resiliency, on the safety and soundness of markets, and that when you make a trade of an of, of,

a security, you buy a stock, you sell a stock, you sell a money market instrument, that when you do that transaction, you get your money or you get your stock. And it is unquestioned that accounting exists, is reliable, has integrity, is verifiable. So the markets that exist today have instrumented that and built that through decades of incremental advancement, incremental advancement in the technology, in market practices, in regulation, in oversight. The Federal Reserve Bank in the United States and central banks around the world have been critical components of making sure that those markets have that safety and soundness, that they can scale when scale and performance is necessary, that in the, in the

face of market volatility and disruptions that they're resilient and that everyone always can be confident that those markets work. So when we start looking at, so all of that is kind of table stakes. That's the foundation. You know, when something goes wrong at two in the morning today, everyone knows exactly what happened. That's the point in time where we're processing variable annuities or, you know, there's something in the process that already is going on there that we've been working on for decades, it's been instrumented, it comes up on your alert screen, you know exactly how to respond. As we start moving into replacing components of the infrastructure and especially the payment rails, you're going to have to have that same degree of confidence that when something

goes wrong, you know exactly how to fix it. You know exactly where to find that problem and that the system itself is resilient in the face of security attacks, of unexpected, you know, natural disasters of any kind of disruption and that the markets can keep on operating. So our focus in the wholesale markets has long been making sure that train works and that all of it works without problem, without fail, and that we can test failure scenarios, that we can try things out. Payments is a critical part of how DTCC processes. The equity markets have a cycle, Trading occurs on exchanges. Today's cycle is at the end of the day.

All day long, those trades are submitted into a organization, central securities, clearing corporations, and depositories. Then at the end of the day, traditionally, we have various netting cycles. Some activities settle on a two-day basis. And everyone knows that in two days, all of your settlements net down, and you will have to settle. You either have to send a security, or receive a security, and then you have to either send a payment or receive a payment,

and that all nets. So 200 million trades, net down to 1 million payments. So in this world with central bank digital currency, making sure that that payment is as reliable and is durable and has integrity, it's non-refutable, it can't be duplicated, it can't be denied that you actually made that payment, and that it has the same integrity as payments do today and better because it's traceable to the degree privacy and regulations wanted to be traceable and that you can have confidence that once it's executed, it's immutable. All of those would add tremendous value to the existing system. So we're going to get a little bit more into

kind of the technical details around how to structure CBDC on the back end. But I actually want to draw in one of the questions that came in through Q&A from Jacques. And hopefully I'm not going to butcher this name too much. Becon, do it looks like. Who wrote, should CBDCs be blockchain-based, why or why not? I don't know if maybe Bob or Mathew want to address this, but maybe we should just get that question out of the way before we talk about more technical details.

Again, I think one thing that we try to reiterate is in our research, we'll find that while I think there is a great value to interoperability amongst CBDCs to solve some of the cross-border issues. Every country needs to decide for themselves the design requirements, right? Like any good product manager, you're focusing on your customer. And the customers of Sweden may be very different than the customers for the Eastern Caribbean Central Bank. And so you need to solve the problems that your customer is bringing to you.

And so there might be economies that their blockchain may help out, and there might be ones where a centralized database is a lot more appropriate. And I think that's something that needs to be discussed is every central bank needs to solve the problems of their customers. Like every software company needs to solve the problems of their customers. So it's, you know, again, like we've discussed earlier, there's upsides. But you need to understand your customer first. Yeah. And to emphasize on this, so we also believe that some CBDT will be built with DLT and particularly ETERA, Morcoran, and Apple, Jabezu, and others won't.

but and we also strongly believe that there is no one-size-fits-all solution. It's just impossible. Each country, each jurisdiction have a specific requirements, whether it's in terms of a number of people in the country or the attachment to privacy. And so each approach will be quite different, but we believe that at the core layer, which is brought with DLT,

which prevent all double spending, which is really the core of the technology to prevent double spending without a central party to maintain a central ledger is absolutely key. So this is one of the key benefits. The second one is programmability.

So when we imagine programmability, it's already possible somehow with centralized systems where one centralized party would say, okay, if you do this action, I will do this output. What is again quite exciting is that with the LT you can create those smart contracts,

we can execute themselves to, depending on an input that provide and outputs. And all of these without any central party and with a significant trust, because anyone can look at it, verify that it does, what it says does, and that's really bring a lot of value. And then what's even more exciting is the next step,

is when we start to have an ecosystem, such an open ecosystem, which is very different from our world garden systems we have today. When we have this open ecosystem, we have composability, which means that products built by one company

can leverage the product built by the others. And it goes really much further than the open API or open banking API system where people can connect through APIs. Because here it's native in the protocol, and that's what we have seen recently, over the last year with the emergence of decentralized finance,

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And normally that does come from, you know, what we think of as a centralized institution. So for a central bank digital currency, what is the backend structure in terms of like who's running nodes? Is it all like a permission chain? How do you spread that out to make it secure? And yet also, I'm sure, you know, the more spread out, as we all know, the kind of greater limitations on scaling, at least as far as I understand.

So how are you guys thinking about how to structure, given those constraints? So that's something we think about a lot. Certainly, I don't necessarily a lot of times we think about whether or not there's a malicious actor intent, right? And that's, I think, a lot of what Bitcoin and Ether were based upon was the assumption of a malicious actor

and the removal of a trusted party. But certainly there's a lot of gains to be had from resiliency standpoint, having a distributed system. And that's kind of where we look at the upside for distribution in our initial research. But again, and again, we are exclusively focusing on the retail use case. If you're going to have throughput that's comparable to existing retail payment methods, you're going to have impact there.

And so understanding how you can maximize resiliency, but also throughput and settlement finality for the retail use case is one of the most critical tradeoffs. And so, again, we think less about centralization and more about malicious actor intent when we look about, you know, centralized versus distributed systems. But can you also answer what I was asking about in terms of who would be running nodes and how do you resolve that issue? Because is it just a permission chain or would there be any way to kind of open it up to other people? Or is that one of the potential attack vectors for like some kind of, yeah, unfriendly actor on the network? So that's something we're still looking into. I don't think we've gone that far in our research. we're still working on our core level code base.

So that's something that we're currently mapping out, but I don't have a good answer for you on that yet. And Matthew, is this something that you guys have thought about? Yeah, so from our perspective, so today central banks are really focused on permission the chain where the central bank and regulated financial institutions like banks and payment service providers will run nodes. and this consensus will emerge through those regulated financial institutions.

And the fact that the central bank is, as you say, central, but the fact is there's the only entity allowed to issue the CBDC. And that's fine. And that's, again, one of the benefit of the technology is that you can program into the protocol itself, each role and responsibilities of different stateholders. So, yeah, really, they focus on this. And then those regulated financial institutions,

for general purpose will be responsible to distribute it to the end users, but still in this open-ato system where there is trust and where the transfers are so simple between one PSP and the other, and this will be seamless. But we also believe that, and I'll finish with this, sorry, that we still believe that central banks will, in a couple of years, be actually quite open to public blockchains. We always do this from parisand with internet.

People initially, when they see a new technology, they do not understand it, they see the problems. And indeed, there are some limitation at the beginning. And they do not trust this technology. But as it is being implemented, as it is being used initially as a niche, and then by more and more companies, and we already see large bench, large financial institutions, using public blockchain,

we do believe that some CBDCs will be, either directly issued on public bloodshains, or at least that there will be some bridges between the permission network built by the central banks and the public blockchain in which other companies are building their own applications. I'd like to add a little, just I guess from a hyperledger perspective.

And I've been around the industry over 40 years, and the pace of technology and the way technology moves is not in a straight line. and everyone kind of wants the answer immediately when an idea came out, but it's like finding a piece of metal and imagining an iPhone. I mean, it just the gap between those two is a whole lot of development exercises. So I think, you know, it's a tribute to the consensus, Matteo and his company and Joe Lubin, who's a colleague of mine on the board of Hyperledger,

that the Ethereum community started out as very public-focused and, public chain. But with Bezou and their contributions to the community, they've made this tremendous investment in private enterprise models as well. It's a tribute to Bob Bench and Neha and the work they're doing on evaluating new security models because security and threat vectors are ever present and ever increasing. And the role of HyperLedger with its greenhouse and its many projects is to bring together lots of different dimensions. It's not the game. isn't over. It's like, you know, when the book on computers was written 50 years ago and saying, all right, that's going to be the model and it will have vacuum tubes and you flip these switches,

where the first book on relational databases was written and then that was the end of it. It's a progression. And we're all learning from each other. The fact that we have these conversations and DTCC apparently is the only one on this panel that is not writing its own blockchain software. But we're investing through our, we have a couple of prototype projects, Project Ion that's doing clearing and settlement on DLT as a fully functional prototype. And we have this project Whitney, which is a private market's securities issuance. And we've been able to write those on multiple blockchains, both public and private, to understand them to see just the way Bob was explaining,

to see what their scale dimensions are, what it means to put out. different nodes, what it means from a resiliency perspective, and we're all sharing and we're all learning from each other. So it's a progression. And something else that I was curious about before we dive into what I think is probably going to be a somewhat meaty topic, which is the privacy issues that came up earlier. I was just wondering, you know, for normal public blockchains, transactions are typically paid for with a fee. Would that also be part of a central bank digital currency blockchain? So I guess I'll jump into that question because that's an important one. There are very specific legal laws, I should say, around how a central bank can charge for its services.

Right. So that is a constraint on a central bank bill, at least with regards to the United States. There may be other central banks that may model it differently. But I think questions about fee and I guess the later question on privacy are really important when you think about things like spam on network and DDoS attacks. That's something that isn't really talked about in CBDC conversations. A lot is the simple question of spam. But stopping spam is really important.

And fees is one way to do it. And having really robust identity structures is one way to do it. Those are two of the easier ways to fix that problem. And so understanding legal and policy constraints with regards to spam and DDoS attacks on one of these platforms is something we think a lot about. But as far as the U.S. is concerned, there are constraints around fees for any central bank payment process. Okay. Well, let's segue now to the privacy.

Or Matthew, did you want to add something? Yeah, I just wanted to end. One thing is you were comparing the transaction fee on public blood chain and CBDC. If it is built on private blood chains, even if we still have what we call gas to pay for the transaction, it might not need to have a price on it. And so the reason why it has a cost on public blood chain is that you have to pay for the validators who participate to the consensus. And so it is slightly different and might not be a hit way for CBD. BDC. And I also wanted to emphasize on what Hop said and finish with this, that all DLT platforms,

all blockchain are not created equally. And so picking the right platforms that fits your specific use case will be very important. And even if at consensus we are really focused on Ethereum, we also strongly believe that there are great alternatives out there and that they will emerge and be widely adopted. It just depends on what use case you are focused on. Okay. Yeah, so now let's talk about what Bob mentioned near the beginning, which I think is going to be of interest to a lot of people. He talked about how CBDCs have the potential to have built in KYC, which is know your customer and AML anti-money laundering processes built into them. And I think that obviously, you know, people have a lot of privacy concerns about CBDCs, particularly maybe because one of the first or the first to really be rolled out, is the DCEP in China, which, you know, there's, I think, a surveillance culture over there when it comes to their technology. So how is, how are different central bank digital currency players thinking about concerns over privacy? What are some of the options for managing privacy

when it comes to CBDCs? So I guess I'll hop in there. I think with regards to our research, you know, I think the question of privacy in the United States remains one that needs a lot more discussion and is a critical policy question, but certainly a question that informs technology. When we started our project, our main focus was how can we make something useful for retail purposes, primarily meaning extremely secure with throughput and finality equivalent to leading retail payment systems. But one of our learnings has been that you need to start thinking about privacy early in the stack.

One thing that we've been educated by the MIT folks is that the lady you had, privacy to a system, the less private it becomes. And so that's something that we are thinking a lot about. And certainly, we are not a policy team. We're exclusively a technology team. But understanding where a policy needs to enter into the platform is something is absolutely critical. And I think more advanced discussions need to happen to get a better understanding of sentiments around privacy with regards of payments, because I think it's still largely undefined, at least over here. Well, one thing that I was wondering about is, you know, Z-Cash and Monero have their viewing keys or, you know, ways to take a shielded transaction and have, you know, and I guess

proves, you know, certain aspects of that data to specific people. Is that an option that's being considered? We're not like going directly into, say, Zcash and Monaro. We have cryptographers that have worked on both platforms deeply that understand those methods very, very, very well. But that's not, like, we're not modeling any of our systems to date off of Zcash or Manaro or any platform that like that, you know, without question, the state will have to perform its financial intelligence functions. I think any institution, whether it's us, whether it's DTCC, any large banking entity, those rules are not going away barring a change in legislation. So we need to understand all of our customers' needs. So that being the users of the dollar and the members in the Treasury

Department that have jobs to do to stop financial crime. So that's a balance that has to be done. The key thing for our platform is understanding where do we put that privacy. Because I think regardless of how the privacy works, we need to make sure that if data is collected, only the data should be seen by the people responsible for seeing the data and no one else. And I think that's the hardest thing is once you collect data, it's on you to secure it. And so that's the most important thing for us, is making sure whatever we're required to collect is absolutely secure. I think I agree, but privacy, there's a lot to be discussed still. and I think technology is not the bottleneck. What's more important is the decision of the central bank

of how they want to design it. But when we look at the wholesale layer, so between the central bank and the financial institution, I think it is commonly agreed that the banks do not want other banks in the network to seek their transactions, the value, the quantity of activity. So this has to be made private to the other. banks, but for the central bank, the central bank wants to have access to this information,

whether natively or thanks to a court law or whatever, they want to be able to have access to this information. So I think that's one point. And then for retail application, there are different approaches, as you say, as far as I know, in China, it will be quite open. So even if the identity of the users are not directly visible on the CBDC platform and the CBDC ledger, you will see all the transaction, you will see history of transaction, and so you could deduce some of the identities.

So this is one option. And then there are honestly a lot of technical option to abstract or to create additional layers of privacy. Just to mention it, the most adopted ones. there are ideas around implementation leveraging zero knowledge proof or privacy groups. So there are basically different approaches, which, yeah, will depend on the use case and the jurisdiction and the objectives. And so now let's talk about adoption because they're, you know, just with the current system, this will be quite a shift if something comes to pass with CBDCs. So in general, how are a lot of CBDs, sorry, how are a lot of central banks thinking about how to get CBDCs adopted in terms of, you know, whether or not they'll use commercial banks the way that they're used now or whether they'll have their own retail accounts or, you know, just what are they thinking? Or is it just too early to even ask this question? Yeah, sure. I'll start. Starting with the banking intermediation, that's a critical question, right? There's really, really important policy implications to change in the current.

intermediary model. Some countries such as China are going with a two-tier model. There are certainly advocates for continuing the two-tier model here in the United States. That's something that has, like we said, tradeoffs. There's costs and benefits to that. Certainly

a direct model to a central bank requires a material operational optic by the central bank's activities. Doing retail compliance, retail servicing is hard. It's a lot of work. It's very different than wholesale. And I think, that's something central banks would be fairly new to most central banks. I think there's a world,

some central banks are looking at payment service providers. The technology community has gotten very good at directly handling retail customers. That's something that we need to learn from as a central bank of how they do it and what makes them so good at it. But again, I think that's something that is what we call phase two question. We don't think the core code base really changes much if you go through a two-tier model or a direct model or a payment service provider model. But I think what's critical is institutions like the Federal Reserve understand the impacts of any change to the model. So what does that mean for small and community banks if their deposit base erodes to some extent because of CBDCs? That's something really important for, say, community banks and the communities they serve.

So again, that's something we're looking at closely because we need to understand those tradeoffs. But just out of curiosity, so I understand that discussions may not have gone too far in this. But if central banks were to deal more directly with retail customers, does that kind of enable them to do things that they can't currently do with the model using commercial banks at the moment? Like, you know, are there sort of like pros to switching things up? I think there certainly could be, right? I think there's, so the FDIC does a really great research every year on the unbanked and the underbanked. That is something that is a really thorny question and it's been really hard to fix. What we do know from the FDIC study is that certain people are unbanked because they choose not to enter into relationships with banks.

And open question is, would they enter a direct relationship with a central bank? Maybe, maybe not. We don't know that answer. But that is something that is seen at least by some researchers as a positive is, are there certain unbanked persons who would rather work directly with the government? That might be true. And so those are the kind of things you look at. Certainly, there are an advocate citizens if they had direct accounts. So again, another issue where government benefits could be more quickly received.

But a lot of research has to happen and a lot of tradeoff research has to happen because there's a lot of stakeholders. I mean, you know, you look at how many, Rob, I'm sure, with DTCC, the amount of stakeholders you have in your environment is enormous. And getting all those people to the table to agree on a new model is extremely hard. And so you really have to understand all the issues when you bring all the people to the table because it's a dramatic change. I mean, I think one of the general first laws that we all adhere to is do no harm. So I think there's a lot of different ways of looking at the alternatives that technology can

bring. But there are definitely some capabilities like the comments we've all made about resiliency and security that have been quite durable over many decades. and we don't want to lose a lot of those values. I am a part or an advisor to the Digital Dollar Project, and that does, is advocating for a two-tier system, a wholesale system that involves interactions between the central banks and the banking tier and a second tier that's retail oriented.

I think there are a lot of different models, and I'm sure a lot of the work that, Bob is doing with MIT and some of the other academic institutions that we're all speaking with and that are part of Hyperledger as well are going to contribute in a great way over the next few years to advancing thought leadership on this. Well, Rob, I actually wanted to ask you a question about what you said about how, you know, you're not trying to do too much damage with whatever changes you make or do no harm. But, you know, this technology obviously could bring a lot of benefits if it were to do more than simply just keep the existing processes in place.

So in that regard, like, how do you kind of work with the different stakeholders to talk about what different benefits you could get if you were to embrace more disruption? I completely agree with you. So let me just make that clear. And I think most of us that are in, certainly in this conversation, but in this ecosystem and that are trying to push the technology, I agree with that idea as well. I think we've got this tool and we're a little bit afraid of the power of this tool.

It's like a lightsaber in the hand of a three-year-old. And there's a bit of, you know, to some of the questions that are on the Q&A and the earlier question before, do we need DLT, distributed ledger to answer central bank digital currency or even increasing or improving the efficiency of equity settlement or any asset settlement. The fact that the entire world is basically spending a tremendous amount of energy on reconciliation of information constantly, that everyone on this call has a different view of what a ledger is, of how much money or how many assets they have on the ledger, and then we have to go through a variety of different protocols

to reconcile what we all should know as a central truth is something this technology can answer. Does it need to answer it in a broad public, either proof of work, proof of stake model? Is it able to trust certain entities like federal banks, like governments, like certain institutions that were created specifically for trust? How do you trust them in the event of security and malware onslaughts and various actors looking to subvert that?

These are all questions that need to be answered. But the basic premise that this technology can enable much more efficient interactions, much more efficient tracking of sources of truth, absolutely true. So I think there's a willingness on everyone's part to take a fresh look. at those long-held beliefs that our traditional silos on mainframes that needed to be reconciled with other mainframes was the way everything had to work. We're ready to throw that out and say, let's move to something new, but we need to do it with, you know, with all the concerns about safety, soundness and protecting everyone's retirement account, everyone's investments, everyone's pensions.

So there's that balance of how do you disrupt, but address the concerns of people with real assets that want to make sure that they can pay their rent. And I actually want to call another question by Jacques Picomte, which is should CBDCs coexist with stable coins or replace them? I don't even know if this is something that you are considering, but maybe I would be curious to just hear. what your thoughts are on that? I think that's more towards Bob and the Fed. I mean, I think the aspect of stable coins right now is a way of creating equivalence with the crypto ecosystem and what that evolves into once there's additional,

once there's viable fiat currencies issued by governments and viable other types of currencies issued by organizations like Facebook and consortium that support that, how that balances out with the values underneath cryptocurrencies will be an interesting thing we're all interested in seeing. I think there's two different things with CBDC and stable joins. One, and it's about the aspect of money. It's either it is a store value and a means of payment.

And I believe that it's unlikely. that stable coins will become widely adopted as a store of value. For instance, even Libra, the Facebook project, people will pay with this, but you will not keep your earnings and your salary in your WhatsApp wallet. It just doesn't make sense. And so the way we derive this is that we believe

that some stable coins or CBDC will be more appropriate to specific use cases. And so, for instance, we see on the public, blockchain maker which is a stable coin which works very well and the

way it is built and organized is fully decentralized it's done by a community and it will probably not make sense for DTCC to use it

DTCC will very likely prefer a CVDC issued by the Fed but it would make sense for a number of projects that happen in the Web3.0 and similarly we believe that some

stable coin will be preferred for niche use cases and will basically coexist with CBDC. Yeah. So with regards to stable coins, we think about this a lot. I spent my prior career helping build one of the larger stable coins out there. USTC.

Yeah. That circle. Yep. And I think most stable coins right now, aside from die, are commercial bank deposits on a new rail. It's commercial bank money. And I think that's fundamentally. different than central bank money. And I think that, you know, for the countries that bring out

CBDCs, I think that they'll continue to coexist with stable coins. I think the stable coin use case will continue. And I think that they will coexist. I think there is a use case for direct central bank money in a digital form for retail persons. Whether or not the United States chooses to do so, it is a major policy decision above my pay grade. But I think certainly countries will Certain countries are going to go forth with retail CBCs and enable retail persons to have central bank money. But I think stable coins will continue to exist through the commercial banking system, moving commercial bank money on new payment rails. And we're going to achieve significant innovation through that way. Certainly, there's brilliant women and men working on the problems that can be solved with commercial bank money on these rails.

And certainly our team looks to learn from them. But I think there are fundamentally different use cases for commercial bank money. on these rails and central bank money on these rails. All right. So we're going to have to wrap up. But before we go, why don't you all each say kind of what you expect going forward in terms of the next steps on this journey or, you know, what questions you're looking to resolve as these different efforts continue? I'll start. So we're actually building a fully functional prototype.

type. We call Project Ion working with our financial industry clients to simulate clearing and settlement on a distributed ledger in an accelerated settlement type model where you can optionally say, I want to settle this trade immediately, I want to settle this trade in a hourly net, I want to settle this trade in two days. So something that combines the, the, the, the current ecosystem and a digital asset ecosystem. We're expecting to implement a cash token as part of that prototype build. But we've been talking to the digital dollar project about making this an eligible pilot for central bank digital currency in the wholesale markets. So we expect to be active working with our industry, certainly working with the Fed, our payment rail,

on different models. And if we can help advance the thought process on how this could work in the wholesale markets, we're well in. On my side, I think we are kind of at a turning point where in the last couple of years, central banks have been testing the technology to understand whether or not it's technically possible

to create a CBDC. And I think when you look at all the reports, all conclude that it is possible. There are some things where the technology has to be pushed further, but basically it's possible. But now what's really exciting is central bank will start to work with the private sector to identify clear use cases, clear needs of how this CBDC can be really used and adopted, and that will make things quite interesting.

I think over the next couple of years you're going to have a lot deeper understanding of the use cases here. I think the technology certainly makes this possible. Transaction throughput really isn't an issue. But understanding why people want this and convincing them, and particularly the wholesale, the world that Rob and Matthew had been dealing with recently, I think that's really compelling because you don't have to throw any issue of privacy and identity. And I think there could be compelling, compelling developments in that front if you get the right stakeholders in the room. But I think, you know, policymakers are going to start catching up with technologists in this area.

And I think that's going to be really, really helpful. Folks like the Digital Dollar Project, Consensus, HyperLedger, educating policymakers and getting them up to speed is really going to enable this technology to be better and understand how to use it to help all the economies who want to approach us in a thoughtful way. I think it's going to be very interesting. Great. Well, this has been a fascinating discussion.

Thank you all so much for participating. And thank you to HyperLedger for hosting. and yeah, we'll have to resume this conversation at some point in the future. Looking forward to it. Thank you, Laura. Thank you. Thank you very much, mom. Thanks, Brian.

Thank you, everybody. Bye. Thanks so much for joining us today. To learn more about CBDCs, Rob, Mattu, and Bob, check out the show notes for this episode. Don't forget, you can now watch video recordings of the shows on the Unchained YouTube channel. Go to YouTube.com slash C slash Unchained podcast and subscribe today. Unchained is produced by me, Laura Shin, with help from Anthony Youne, Daniel Ness, Bossie Baker, Josh Durham, and the team at CLK transcription. Thanks for listening.