This is the third of a three part blog written by Markus Hammer about a digital Franc for Switzerland. In the first part, it was described why states and their
central banks are currently pushing their CBDC plans with great momentum, its relation to private cryptocurrencies like Bitcoin, and why the latter are not like money. In the second part it was
explained what a CBDC as a digital state currency is an what its benefits and threads could be, based on its design. This part 3 will introduce the Swiss e-Franc as proposed by SNB and whether
its nature is rather preserving or disruptive.
A SWISS E-FRANC CBDC ANTE PORTAS: NOT MADE TO DISRUPT BUT TO COMPLEMENT PHYSICAL CASH THROUGH A TOKEN, OPERATED VIA A SOFTWARE ON A CENTRALIZED SYSTEM
Like central banks of other countries, also SNB is quite active in its preparations for a national cryptocurrency, in fact, is currently already testing a Swiss CBDC under near real-live conditions. The underlying design and approach is described in a working paper published by the SNB in March, 2021. In this paragraph, I will outline in more detail its impact onto our current Swiss system and from a policy, financial market and technological point of view.
Switzerland is probably one of the most liberal countries, widely appreciating their liberty rights, particularly their economical and privacy freedom from state interventions. The introduction of a CBDC would trigger an intensive public debate, for sure. Financial stability, data privacy or the quite relevant financial service sector of Switzerland, could be at stake depending on the design of an e-Franc. In a wise anticipation of such political realities and Swiss particularities, the SNB proposes no game changing or even disruptive approach for a CBDC. Instead, SNB utilizes the given technological development to prepare Switzerland for the money of the 21st century while preserving the existing legal and economic framework. This looks like a typical Swiss compromise, and a smart one.
SNB itself writes on its homepage:
"We propose a token-based system without distributed ledger technology and show how earlier-deployed, software-only electronic cash can be improved upon to preserve transaction privacy, meet regulatory requirements in a compelling way, and offer a level of quantum-resistant protection against systemic privacy risk. Neither monetary policy nor financial stability would be materially affected because a CBDC with this design would replicate physical cash rather than bank deposits."
With this, SNB differs quite significantly from other CBDC proposals and it provides answers to all of the elaborated relevant key design criteria equally for a Swiss e-Franc.
The SNB proposal in short ...
- ... would not introduce an account-based / wholesale CBDC and dis-intermediate the market structure by changing the existing 2-tier architecture. It would, instead, rather introduce a retail CBDC replicating the physical cash. Hence, also all consumer and merchant interactions including KYC controls would remain with the commercial banks (and money creation and database exclusively with SNB). Discussions about jeopardizing financial stability or the thread of abusing monetary policy up to its potential extremes (see doom-scenario), are avoided from the outset and no new pathway would be built to expose the independent SNB to political pressure.
- ... would focus on value-based money, i.e. a Swiss e-Franc as a digital token only. Such token is not meant to replace but only complement the Swiss bills and coins as physical cash, whilst in the same time applying the anonymous payment feature known from traditional cash as a bearer instrument also to the digital world. The system, hence, would comply to privacy-by-design and privacy-by-default standards with merchants not inherently learning the identity of their customers, banks insights remaining to be limited to their own customers' activities and central banks protected from detailed knowledge of citizens' related activities.
- ... would be operated on a centralized system via software technology and - in contrast to blockchain -thereby achieve both, high efficiency and cost-effectiveness. In addition, a technological basis would be created to facilitate interoperability with banking platforms and further emerging crypto-platforms e.g. from Big Techs to generally open up for private public partnerships.
What makes a Swiss e-Franc solution such as proposed by SNB smart, special and feasible in the first place, is the utilization of selected technologies and technological features respectively, including (1) enablement of transaction privacy by blinding the required digital signatures and (2) by-passing inefficiencies and cost ineffectiveness of DLT / blockchain-based technologies by using a (centralized) open source software solution.
(1) Blind digital signatures to create anonymous tokens and to provide privacy protection even against quantum-computing attacks
As said, SNB would not directly interact with the customers, hence, the authentication is delegated to the commercial banks, which can leverage their existing infrastructure. Further, SNB would not retain any customer information, but only would maintain a list of spent coins. SNB proposes to introduce a genuine digital bearer instrument, replicating physical cash and preserving its existing features, comparable with the known process of withdrawing cash from an ATM. Technologically, such concept is facilitated by leveraging digital signatures based on public/private key cryptography on one hand side and blind-signing the coins via special encryption by the users' smartphone on the other hand side.
Public/private key infrastructure for digital signatures is already widely used, e.g. in business transactions subsidizing handwritten / wet signatures via electronic / digital signatures, hence known in the market. A coin would be a public/private key pair, and the private key known only to the coin owner.
What makes the proposed solution equally special and innovative, though, is the concept of using blind signatures. A blind signature is a cryptographic signature which prevents the signer from learning about the contents of the message being signed. Concretely, the customers would blind their coins upon withdrawal before transmitting them to the central bank for signature, and thereby neither the central banks nor further downstream the commercial banks would be able to trace purchases back to the buyers. The financial value itself is derived from the SNB's signature on the public key of the coin. SNB has multiple denomination key pairs available for coins of different value to be blind-signed. The merchants can use SNB's public key to verify the signature but has to deposit the received coin with SNB to check that the coin has not been redeemed before (i.e. double-spent). Hence, the blinding aspect guarantees data privacy to the customer, which makes the SNB CBDC a true digital bearer instrument. In addition, and from a security perspective, SNB proposes to use RSA as the blinding cryptosystem which would provide a privacy-protection even against quantum computer attacks. And even if the central bank's signing keys should ever been compromised, e.g. through physical attacks or unforeseen algorithm, there would be a fall-back solution facilitating refunding of unspent coins to the customer affected, simply by implementing a key revocation process.
The workflow below illustrates the use case for the withdrawal of a Swiss e-Franc step-by-step (source: SNB - working paper):
Steps performed, include:
- Customers authenticate vis-à-vis their commercial bank based on KYC and technical authorization credentials and obtain the public denomination key of the central bank for that value
- Customers' mobile computes a public and a private key for the coin and choses a blinding factor - the coin's public key is hashed and blinded then
- Customers' phone send the blinded public key and authorize the commercial bank to withdraw the coin and debit the customer's account
- Commercial bank debits the amount from the customer account
- Commercial bank authorizes customer request with own e-signature and forwards it together with the blinded coin to the central bank for signing
- Central bank deducts this coin from the own account and blindly signs it with its private key for the specific value
- Central bank returns the blind signature to the commercial bank
- Commercial bank passes on the blind signature to the customer's electronic wallet
- Customer's phone un-blinds the signature and stores the newly minted coin
The use case of spending an e-Franc coin is similar as paying the merchants in cash, except for the settlement process where the merchants have to deposit the coins.
(2) No DLT or Blockchain, but Free/Libre and Open Source Software ("FLOSS")
Instead of a DLT-based network, SNB would use a token-based, software-only CBDC, a so called FLOSS (Free/Libre and Open Source Software). A DLT is not required as a central party - the central bank - is available, in contrast to e.g. the Bitcoin network. Related inefficiencies can be avoided as no consensus-building mechanic with a proof of work is required. A FLOSS operates also without additional security hardware, e.g. A SIM card. An app alone would suffice. As an open software all relevant stakeholders, from the central bank to the financial sector, merchants and customers would have access to all the details of the solution and the right to customize the software as per their own need. This is in the same time also a core prerequisite for the interoperability (and competition) between the providers. The proposed solution would require a high-available online service and database in order to avoid double spending. Both can be achieved with state-of-the-art software and hardware components and be equally efficient (low processing time for high put-through-rates) and cost-effective (e.g. using a cloud-service for data storage).
Benefits of a Swiss retail CBDC as per current SNB design
The most significant advantage of the proposed SNB design is that it enables preservation of the benefits of our traditional money system whilst in the same time creating a basis for introducing a minimal invasive own retail CBDC / Swiss e-Franc as mid-term probably unavoidable element of Switzerland going digital.
The core benefits would be:
- The decision to preserve the existing 2-tier architecture and to focus on retail CBDC only (excluding wholesale CBDC), both guaranteeing financial stability and monetary policy as today.
- The utilization of technological schemes and thereby enabling the transaction privacy feature also for a Swiss e-Franc by blinded digital signatures including its security features, and the high efficiency and scalability / cost effectiveness by a FLOSS-based solution.
- The creation of an interoperability potential with other platforms by using the portability of tokens with its underlying possibilities to be integrated easily. This could include even a multi-tier framework including also Big Techs and go beyond the current 2-tier structure, hence allowing so called public private partnership ("PPP") system for the money of the 21th Century.
- For the user, the counter-party risk would be eliminated and usability could potentially be even enriched further. E.g. such coin could be used to cryptographically sign all types of electronic contracts end thereby facilitate full use of related smart contracts, and also the objective of online micropayments could be supported.
Is there reason for remaining worry?
There are currently no plans of SNB to issue a retail CBDC due to its still uncertain overall benefits over its risks compared with the existing means of e-payment and cash payments. Also the ongoing testing of an Swiss e-Franc as part of the project Helvetia is considered merely as a feasibility study (see also a recent interview of SNB Thomas Moser with Finews). Nevertheless, the more CBDCs of other countries start entering into Switzerland or Big Tech stablecoins arise as serious competition to the national currency, this would put a serious thread to the monetary sovereignty of Switzerland. In that case, an e-Franc would simply be indispensable and - at least from my personal perspective - there would not be a way around a deployment of a Swiss CBDC. If in that case a digital Swiss Franc would be like the proposed one, its deployment potentially would not even require revisions of existing law, though, of course strong communication would be required beforehand, also to create trust into an e-Franc. The proposed design includes strong security features as described and the solution is currently been tested in a close-to-real environment to establish operational readiness as part of the SNB project Helvetia. Nevertheless, it will not be for granted that the undisputed great trust of the Swiss citizens into their traditional CHF currency and the related reputation of SNB will telquel be extended also to the Swiss e-Franc.
If the solution would differ from the described proposal and be more invasive from a policy standpoint due to whatever reasons (pressure from other countries, market players, the public), this would require lawmakers and ultimately Swiss citizens to make up their mind and decide as part of the democratic process, and - except perhaps in the case of the application of emergency law - the Swiss citizens would have their say before facts are created.
Bottom line, and as a Swiss citizen, I would not be worried for the time being. Yet, I would closely observe further developments and plans of the government for a Swiss e-Franc to be informed and build up some knowledge in this context of e-government and Switzerland going digital to make an educated decision once due. As a lawmaker I would start to familiarize with this topic and proactively put it on the political agenda and ask the right questions early on. This article is an attempt to condense a highly complex subject in common language terms, a subject which concerns all of us as one significant aspect of our digital future.