Gary Gorton (Yale) and Jeffery Zhang (Federal Reserve) recently wrote a fascinating paper on the systemic risks of ‘stablecoins’ and the prospects for a central bank digital currency (‘CBDC’).
I believe a U.S. CBDC is inevitable.
The questions that follow are:
Does the CBDC take the form of (i) a token, or (ii) a citizen’s deposit account at the Federal Reserve?
How do you protect privacy?
On question 1, the deposit account could enable new, powerful tools for the Fed to achieve macroeconomic objectives (e.g., helicopter money), but at the risk of totalitarian-level control over who can spend how much on what, and where and when they may do so.
Not ideal!
On question 2, you could imagine a spectrum from the digital yuan (where the state sees all) to a cryptographically secured, anonymous digital cash. The key unlock for the latter is the advance of zero-knowledge (ZK) proofs.
If you’re keen to learn more, you should read this piece by Aleo co-founder Howard Wu, and Ben Laurie’s paper Selective Disclosure.
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Originally published 12 August 2021 at porticoadvisers.com.