Reimagining the future of money: freedom-bearing, human-centric
In this article, I will discuss a few key misconceptions, concerns and risks related to current digital money designs.
Digital money can flourish or it could be a disaster. It’s in the hands of decision makers.
The focus is on central bank digital currencies (CBDCs), non-sovereign digital currencies, stablecoins, payment tokens, asset and deposit tokenization and other forms of private currencies (all referred to here as ‘digital money’).
I’ll also suggest a few key principles for building a secure, efficient and versatile form of digital money for online and offline use.
Key takeaways
- The idea of digital money is to fulfil the vision of restoring the old way of payment with cash and to fit it for the digital age.
- The main challenge is enabling two parties, human or devices, to trade like cash with no intermediaries and not dependent on a network of validators.
- Protecting privacy is critical for digital money in order to obtain public trust, while also maintaining quantum-grade cybersecurity, resiliency and sustainability.
- Central banks continue to grapple with risk-prone crypto-based CBDCs, ignoring an emerging world of eco-friendly, quantum-randomness-based digital money that is already here.
- Digital money can flourish or it could be a disaster. It’s in the hands of decision makers, and you start by choosing the right technology.
A golden opportunity that should not be missed
Historically, whenever payment became easier and smoother, commerce flourished and civilization advanced greatly. It happened when barter was replaced by primitive money, when precious metal became standard money and then again when pre-minted coins replaced scales.
We saw the medieval period end and the renaissance bud up when the first promissory notes became popular and introduced the notion of paper money.
We now face an opportunity to cure a fundamental deficiency experienced by money when most of it became computer handled. Money then lost its identity, which was there when money was physical, and it shrunk to be a number only.
This opportunity opened up after the seminal paper by Nakamoto in 2008, although Chaum brought the buds of the revolution back in 1982, and Samid filed the first comprehensive digital currency patent in 2007.
The advent of digital currency introduced a new financial language that restores identity to digital coins and thereby puts them at par with physical coins as to the inherent advantages held by banknotes and metal coins, while offering cyber-unique advantages through being subject to cryptographic processing.
Privacy, fraud and high costs
Among the purposes of digital money are preserving the features of physical cash and especially enabling bilateral privacy payments with no intermediaries, making it suitable for the functions of an effective modern economy.
Apart from the hurdle of lack of privacy in all payment rails, excluding cash, data from McKinsey revealed an average US family lost about 3.78% of monthly income in 2021 through charges by legacy financial services providers.
On top of that, when you pay with a credit card, you give a merchant your credentials in order to conduct a bank transfer. Credentials can potentially be stolen and used fraudulently countless times at the expense of the issuer, so they erect and dictate the deployment of a complex and expensive fraud detection system, which the fraudsters time and again pierce.
That is what the high fees are for. On top of that, merchants add a buffer of 1% or more to the price of their merchandise to account for the overhead created by credit card issuers in the form of chargebacks, and the effective price increase for consumers amounts to at least 4%.
Well designed cash-like digital coins that are splitable to any denomination only by a traders’ device and which also have a unique verifiable identity overcome these privacy and fee hurdles. Customers will pay a digital coin to a merchant, and move money, or any portion of a tokenized asset, from one to another, free of charge, with adjustable privacy.
Behind the scenes of central banks’ CBDC exploration
The most basic need of people, businesses and countries that central banks should fulfill is that money is stable and universal.
You can put your digital money into your digital device, back it up, encrypt it, secure it, be assured that its buying power will not erode, and use it anytime, everywhere.
Central banks should work for us. Currencies are the operating system for an economy. Major central banks claim to be trying to stay at the frontiers of what’s going on in digital currency and finance.
However, currently, major central banks are exploring digital currency architectures, both retail and wholesale, that may jeopardise the little freedom and privacy that is left.
Under advice and guidance of consulting firms, credit card and banknote issuers, and other lobbyists, they explore architectures that may open the door for bad actors to cause the entire currency system to collapse and for foes to peer inside citizens’ sensitive data.
NSA director of research Gil Herrera recently warned about the looming threat of quantum attacks and AI-cryptanalysis which threaten the safe custody of assets and, even worse, could potentially cause the collapse of the entire financial ecosystem.
The idea of selecting different algorithms for each specific component or deploying The National Institute of Standards and Technology algorithms, like Crystals-Dilithium or Falcon, cannot mitigate the risk of national currency collapse. Their security is based only on no published breach, but they have no mathematical proof of efficacy.
How can it be fixed?
Currently, the only manner to make CBDCs quantum-safe is by deploying lavish use of quantum randomness, combined with continuous rolling mutations of random algorithms in the transaction protocols, and by deploying Pattern-Devoid-Ciphers, such as the Trans-Vernam family of ciphers, which rely on mathematical proof of efficacy.
Fatal misconception regarding offline payments
It’s common knowledge that dedicated secure hardware is essential to mitigate risks such as double-spending and unauthorised money creation (counterfeit money) for offline payments. The Swedish Riksbank recently stated that a counterfeit-safe, quantum-resistant offline payment solution is not in reach in the near future.
Other central banks are being lured by technology vendors that promise that their secure elements can prevent distribution of unauthorised money via a cryptographic dialogue between payer’s and payee’s secure elements.
However, central banks need to realise that it is impossible to prevent distribution of counterfeit coins that are transacted in an offline mode when a cryptographic dialogue is carried out between payer and payee.
This vulnerability relates to most known secure elements/devices, stored-value cards, universal access devices and Tamper Resistant Elements (TRE), such as smart cards, SIM cards, embedded secure elements and so on, that are already being tested for offline clearing and final settlement capabilities.
It derives from realising that any cryptographic dialogue that convinces a payee offline may be emulated by a resourceful counterfeiter.
If you wish to execute payments between two parties in offline mode when there is no internet connection, with no risk of counterfeit money to be distributed by adversaries, you need to have a physical procedure (not cryptographic) that enables a fast, instant, simple and secure (up to being quantum-safe) validation process and payment transaction, with finality of payment.
Closing thoughts
Regrettably, policymakers around the world still grapple with risk-prone crypto-based CBDC solutions that could potentially cause every citizen to pay an enormous unnecessary tax, will be vulnerable to identity theft and private data breach and which could cause the entire national currency to collapse.
CBDCs and other digital currencies, asset tokenization, tokenized deposits and digital payments, will face a multitude of challenges, including operational, security and monetary challenges. They are threatened by new attack vectors including quantum and AI-cryptanalysis.
Only very few central banks decided not to ignore feasible quantum-based technologies as well as quantum-resistant protocols, in which transactions with digital currencies are not relying on one cipher, but on random mutations of the algorithms. A concept that is superior in every way to the existing implementation of currency, legacy and digital, and that will eventually enjoy legal and regulatory clarity, along with mass adoption.
Let’s work together, public and private sectors, to grasp the fascinating opportunity to democratise access to finance and to contribute to economic and financial inclusion by equalising and connecting people, and creating trust between strangers, embracing interoperability, advocating digital innovation in sovereign money and in non-sovereign digital currency networks.
About the author
Amnon Samid is a seasoned and forward-thinking professional who has devoted his long and successful career to commercialising innovative technologies that benefit people and society.
His current focus is delivering practical digitalisation and tokenization solutions that benefit individuals, businesses, communities and governments without trade-offs regarding ease of use, functionality, use cases, cybersecurity up to being quantum-safe and regarding users’ privacy.
Amnon leads an AI-powered cyber-innovation hub called BitMint, serves on the expert panel of the Digital Euro Association and is a co-founder of a non-profit digital tokenization think-tank.
Follow Amnon Samid on LinkedIn.
