Central Banks Consider Blockchain-Based Digital Currency At ITU Meeting

NEW YORK – The UN International Telecommunication Union’s Digit Fiat Currency (ITU-DFC) Focus Group is meeting in New York this week to consider the potential promise and pitfalls of central bank-issued digital currency.

“This is one of the biggest gatherings of expertise and stakeholders for digital fiat currency or central bank currency of its time,” said David Wen, chair of ITU-DFC and chief scientist at eCurrency, in his opening remarks at the meeting, which is taking place at the Cornell Tech Campus on 18-20 July.

[Note: the final outcome document from this week’s event will be posted here when available.]

“Many people, when we started, said it would be many years before central banks are thinking about issuing digital currency,” he said, “but … with so many countries having studies, [and] use cases, I think that time will come much sooner.”

ITU-DFC Focus Group Meeting

The Focus Group meeting is composed of an ITU Workshop on Standardizing Digital Fiat Currency and its Applications, and a set of three working group meetings, held in parallel, to discuss DFC in more detail according to the following themes:

1. Regulatory Requirements & Economic Impact
2. Reference Architecture & Ecosystem
3. Security

Each of the three working groups will produce a deliverable report by the end of the meeting that will include actions and recommendations for the next steps in the ITU-DFC Focus Group process.

Present at the meeting are ITU members, telecommunications industry representatives, computer scientists, Silicon Valley tech innovators and investors, and central bank representatives from countries including Brazil, Norway, China, Sweden, Philippines, Egypt, India and the United States.

This meeting is the second in a series of meetings to explore this topic, which began on 12 October 2017 at a meeting in Beijing, and will continue through October of 2019. The outcomes document for the Beijing meeting can be found here [pdf].

(See below for more background information on the ITU-DFC.)

Digital Fiat Currency

During his opening remarks, Wen described the development of digital fiat currency as similar to the development of digital music. Currency, as music, has existed for thousands of years. In the movement toward its digital form, currency will not really change, as music had not really changed. It is only the mode of engaging with currency that will change, he said.

Wen went on to explain the potential benefits of DFC. “The concept of digital fiat currency is an inclusive one. It is not meant to be used only by financial experts, it is meant to be used by everybody,” he said, adding, “It has to be useable, convenient, secure and trusted.”

Wen explained that DFC is not about getting rid of the central bank, it is about “how can the technology help to make sure the current financial system can be improved, can be made secure, can be made efficient.”

There are multiple encrypted digital payment systems that can be used to provide the infrastructure for digital fiat currency. David Chaum, founder of DigiCash, the first-ever digital payment system, suggested in his keynote presentation that a blockchain-based system would be ideal. Blockchain is inherently secure, efficient and scalable, and with the right infrastructure could be extremely fast and could handle a very large number of transactions per second. In addition to meeting these needs and requirements, blockchain could also provide the basis for a globally-integrated, efficient and secure system of payment.

“We sense there’s something really new and dramatic taking place that may affect the world in an important way. In fact, as you know, some of the world’s biggest problems are perceived to be related to finance, and income inequality, which payment systems have been linked to,” Chaum said. “There’s a lot of possibilities of different kinds of structural disruption, where these technologies may be key to the survival of large populations. So, this is important stuff.”

A participant further explained that if such a digital fiat currency system were to be developed, it would rely upon the telecommunications companies to step in to provide the digital payment services to consumers through mobile technology, to literally provide what Wen had earlier termed, and perhaps coined, as “streaming digital currency.”

Potential Pitfalls

Wen noted that “today, a lot of strange things are going on. Engineers are trying to issue money themselves, and they need to ask the central banks, ‘is this money?’.” He then reiterated the importance that money should be issued within the proper legal and regulatory frameworks of central banks.

However, it is not even clear how “legal” digital currency would be within the current legal and regulatory systems of some countries. Lawrence Rufrano, executive director of the Advanced Financial Technology Lab at Stanford University, shared some insight into the financial law and regulations in the United States.

“It is not clear that the Federal Reserve Board has the power under federal law to issue a cryptocurrency,” he said. “What the federal law says is that the Federal Reserve can issue ‘notes,’ but it doesn’t [say] anything about digital currency, in the form that I think we’re contemplating right now.”

“We have another very important organisation in the banking system called the FDIC. The FDIC, also by law, cannot insure cryptocurrency. So, what does that mean?” Rufrano asked. “It means that banks aren’t really going to be holding cryptocurrency, because it’s a risky asset, and it’s just not going to be allowed by the regulators. So, that’s why I’m saying it’s theoretical, in terms of the discussion we’re having.”

“There is a strong belief system [in Silicon Valley] that blockchain and virtual currencies are good. There is a very strong anti-government feeling, there is a high level of distrust of government,” he said. “This came primarily from the financial crisis that occurred in the United States. So, they’re looking for a decentralized system, not a centralized system.”

Rufrano, nevertheless, acknowledged that “the dynamics of the possibility of a basket of virtual currencies competing against [a] sovereign currency is quite possible. I’m not going to say it’s going to happen, but there is an element of possibility.”

On the topic of sovereignty, Chaum resonated Wen, expressing that “sovereignty without reason is probably not as good as sovereignty with reason.” He qualified this saying that if a country is providing good services to its people, that is a good thing.

Background of ITU-DFC

The ITU-DFC Focus Group is part of the ITU Standardization Sector (ITU-T) that “assemble[s] experts from around the world to develop international standards known as ITU-T Recommendations which act as defining elements in the global infrastructure of information and communication technologies (ICTs),” according to the ITU website.

The mandate of the ITU-DFC Focus Group, according to the website, is to:

• “Study the economic benefit and impact of introducing DFC over mobile money;
• Investigate the ecosystem of digital fiat currency implementation for financial inclusion;
• Map the functional network reference architecture and process components required to implement digital fiat currency and integration with existing payment systems for interoperability;
• Identify use cases, requirements and applications of digital fiat currency;
• Develop better understanding of the security, regulatory implications, consumer protection, fraud prevention and counterfeiting issues of DFS and how can digital fiat currency can address these concerns;
• Identify critical sovereign security, transparency and verifiability of DFC technology and provide guidelines towards the escrow of critical software and hardware components to ensure trust and verifiability; and
• Identify new areas for standardization in ITU-T study groups.”

This mandate is aimed at informing central banks and other stakeholders how to best move forward with the potential development and issuance of digital fiat currency, in order to ensure that this groundwork is in place to enable the possibility of a smooth transition.

David Branigan graduated in May 2018 from the Studley Graduate Program in International Affairs at The New School. His research is focused at the intersection of technology, public policy and human rights.

 

Image Credits: David Branigan