Today the BIS Innovation Hub Swiss Centre announced a new central bank digital currency (CBDC) research Project Tourbillon with David Chaum, a cryptographer and founder of eCash, a form of digital cash piloted in the 1990s. Together with Thomas Moster, an alternate board member of the Swiss National Bank (SNB), Chaum published a paper on eCash 2.0.
The key features of the solution are cyber resiliency including from quantum computers, scalability and privacy. The two authors wrote another paper last year, which shares many of the same features and we explored more deeply.
Privacy and anonymity are the most challenging demands of a CBDC. eCash is capable of anonymous payments. However, to receive the cash, the consumer must go through a KYC process with their commercial bank. The clever feature is that even though the commercial bank and central banks authorize you to receive the CBDC, they can’t identify the coins. Comparing it to a banknote, you know the serial numbers of your notes, but the banks don’t.
This is a strong solution to the issues of transaction privacy and anonymity. However, today anyone can acquire physical cash from another person. They don’t need a bank or central bank permission. Like most CBDCs, if the government is not so benevolent, the central bank could prevent a consumer from accessing eCash 2 digital money.
Blockchain is not at the core of the solution, which is one of the reasons the solution is so scalable. However, it’s possible to optionally use the CBDC with public blockchains and hence also smart contracts.
One of the challenges with the software-based solution is that transactions are verified online by the merchant, the merchant’s bank, and the central bank. So there’s a need for an offline solution. Chaum is planning to publish a paper about an offline proposal that combines a smartphone and a card.
Meanwhile, the SNB is also involved in Project Mariana, which will explore automated market makers for FX transactions in cross border CBDC payments.