With CBDCs we should be able to buy milk when the cloud is down.
One of the great attractions of building a new digital cash infrastructure to implement a digital currency, instead of just laying a simple peer-to-peer protocol on top of the existing digital money systems (ie, bank accounts and debit rails and such like), is that it would add to diversity to the infrastructure and therefore resilience to the payment system, which is vital national infrastructure.
If card acquiring fails, as it does now and then, or the banking networks goes down for any reason – and this also does happen from time to time, look at the complete failure of all payment transactions within the Euro Target2 system for several hours last year (with backup systems and contingency modules also initially unable to function) — then a parallel digital cash system built on different rails should carry on working.
In fact, the ability to transact between devices that are not connected to a network at all either because the cloud is down, or there is no mobile network or there is no power because of a natural disaster is a key design requirement for the Chinese digital currency and it should be one for any other digital currency that intends to replace, or even complement, cash.
That’s actually a tougher ask than it seems at first and December’s failure at Amazon Web Services (AWS), when then Amazon cloud vanished not once but twice, shows just how tough. Amazon have all the money in the world and I don’t doubt they employ some of the very best engineers in the world, but even that combination can’t deliver 100% uptime. And when AWS went down, the impact was significant. Indeed, as the Wall Street Journal pointed out, some vacuum cleaners, light switches and cat-food dispensers stopped working. That’s survivable — I can get by for a few hours without watching Netflix
This must be on the minds of others looking to deliver population-scale cash alternatives across the globe. Facebook, is one of them. Their Novi wallet now allows (some) US customers to exchange digital dollars across WhatsApp and they have a great plans for it. Mark Zuckberg told Congress that the Libra (now Diem) digital currency would “extend America’s financial leadership”, yet only a couple of weeks ago his services were down too when an outage left almost three billion internet users unable to access Facebook, Instagram, WhatsApp, Facebook Messenger and other tools for roughly six hours.
(The Facebook outage has interesting ramifications that go way beyond people sending stupid pictures of cats to each other. In large parts of the world Facebook, and in particular WhatsApp, are national infrastructure. They are vital to business, whether they carry payments or not.)
In addition to potential equipment failures, programming mistakes, server hacks and software upgrades-gone-wrong, there is the infrastructure of the communications to and from the servers: the interweb tubes. For most people, in most of the world, this means mobile phones. We often talk about creating financial services mobile-first generation in the developed world, but the developing world needs financial services that are mobile-only. Yet mobile networks can go down because of fires or floods or management incompetence and commerce must not stop when they do!
On And Off
What all of this means is that, as I have repeatedly pointed out (eg, here in Forbes), a digital currency that is to function at population scale in both developed and developing countries must be able to work off-line. If it cannot work off-line then it is not a viable cash replacement and not a viable strategic platform for new financial services. Suppose that Facebook’s Novi wallet becomes as important to the economies of countries around the world as banking networks are today? In that environment a six hour outage could be completely catastrophic and inflict serious damage to national economies because payments are the only part of the financial infrastructure that are actually critical.
(It doesn’t particularly matter if the stock exchange goes down for a few days or if bond issues are delayed by a day or two. But if the payment system goes down the real economy grinds to a halt.)
Speaking at recent Ghana Economic Forum, Kwame Oppong (head of fintech and innovation at the Bank of Ghana), said that efforts to bring financial services to people without access to bank accounts are hindered by “the availability of connectivity and power“. This is why a central bank digital currency (CBDC) retail infrastructure must be constructed from a new set of building blocks that sit in parallel to the electronic money infrastructure to bring diversity, inclusion and resilience to the payments network: a CBDC must be for everyone, not only people with bank accounts. Anyway, credit cards won’t work if the network is down and nor will Bitcoin, so we need to look elsewhere for the new infrastructure.
Hard Not Soft
This one of the aspects of digital currency that fascinates me. Some innovative thinking will required to deliver a genuine cash alternative into mass markets and my strong suspicion is that it will depend on the use of secure, tamper-resistant hardware. Writing here a year ago, Vipin Bharathan talked about Visa’s
These TEEs are chips (just the like chips on bank cards or the SIM cards inside mobile phones) that cost next to nothing. Given the fact that banks and telecommunications operators are not bankrupt, they seem to provide pretty solid protection for a mass market solution and, as IDEMIA point out when discussing their offline CBDC solution developed with ConsenSys, they can be embedded in a wide range of devices (not only smart cards or mobile phones).
This use of tamper-resistant hardware means that when the mobile network has crashed because of a botched software upgrade, cloud services are down because of a DNS misconfiguration and the electricity is out because of high winds blowing trees down on power lines, you should still be able to send cash from your phone to a neighbour’s phone via Bluetooth or UWB whatever and you should till be able to tap your CBDC contactless smart card on a shopkeeper’s mobile phone to buy some food.
The Facebook and Amazon failures performed the useful function of reminding us that vague talk about networks and clouds and blockchains is no substitute for the kind detailed risk analysis and countermeasure planning that will be required to create the next piece of vital national infrastructure: CBDCs.