Designing a backbone for the digital pound

Following a rapid decline in cash payments and the emergence cryptocurrencies such as Bitcoin, many countries are beginning to explore the feasibility of a national, central bank digital currency (CBDC) that could be used to make everyday payments.

To date, most of the conversations around CBDCs have been focussed on whether they should go ahead or not, rather than on the major infrastructure that would be needed to support such a venture.

However, the argument for launching a national digital currency has already been settled by China, according to Paul Sisnett, a tech entrepreneur whose Netherlands-based company paywith. glass is currently looking at the architecture involved in supporting a potential retail CBDC in the UK.

From the moment China announced it was powering ahead with the digital yuan two years ago – while the rest of the world was just taking tentative steps towards looking at CBDCs – competing economies have been “caught on the backfoot” says Sisnett.

In the US, progress in exploring a digital USD was glacial until March this year, when a Biden government executive order called for “the responsible innovation of digital assets.”

Biden’s order came as the dollar’s reign as the world’s reserve currency is under threat, claims Sisnett, because in the digital currency era reserve currency is no longer relevant.

As it is, he adds, global reserves of the US dollar have decreased by “trillions” because they are no longer used as much for trade.

“The US has suddenly figured it out, which was reflected in Biden’s executive summary, section four, where he talks about foreign central bank digital currencies and the threats to US sovereignty and US dominance,” Sisnett adds.

The second thing to note about the digital currency era, says Sisnett, is the infrastructure, which, he claims, is as important as the currency itself, in terms of asserting global influence.

“It’s not about the currency. It’s about who owns the infrastructure. China can offer other countries its infrastructure for their CDBCs especially to nations that are already in debt to the superpower – and what that means is that China will have the final say about what happens to a sovereign currency that’s built on its systems.”

And, he adds, if all those countries have a smoother, faster way to trade with China, then they don’t need to use the US dollar as a reserve currency.

Hailing from the telco world, Sisnett is firmly ensconced in the world of infrastructure. The platform architect was involved in designing and deploying part of the 2.9G EDGE network in the Caribbean for AT&T; his company has also designed infrastructure for ISPs and data centres.

The nomadic entrepreneur’s interest in fintech was first piqued 10 years ago, he says, as he found himself moving from country to country working on tech projects.

To avoid the hassle of setting up bank accounts in each country he started to experiment with blockchain technology and cryptocurrencies.

“Yet every time I solved one problem, it turned out to be a symptom of another problem. So, I tried to solve that problem but then I realised the overall issue I was trying to solve was 50 years’ worth of legacy infrastructure that hasn’t changed in a world that has moved on so far,” he says.

“So, I thought, while it may seem insane, we need to create brand new infrastructure to replace this legacy infrastructure that everything’s sitting on,” he adds.

SWIFT for digital currency

And so, the concept of paywith.glass was formed – an intelligent digital currency/electronic payment (iDC/EP) network that claims to provide global replacement for SWIFT for the digital currency era.

Released this year, the platform is built on the company’s proprietary distributed cloud architecture, an open-source distributed ledger protocol and a proprietary machine learning High-frequency trading (HFT) algorithm.

It supports digital fiat currency, cryptocurrency and other units of value including loyalty programme points or tokenized real estate. Paywith.glass also claims to enable secure, instant, and nearly free global financial transactions of any volume at inter-bank rates – with no foreign exchange costs at infrastructure level.

Says Sisnett: “Since digital currency is data, we want to enable all the functionality, all the capabilities, the issuance of CBDC, the interoperability of payments, the compliance and to set up an infrastructure that allows everything to work from a technical standpoint,” he says.

“It comes from 20 years of experience designing telecommunications and common data centre infrastructure solutions and all the security and data privacy issues that go with that along with about a decade of blockchain experience and all the different disciplines that are needed to pull all of his together,” he adds.

The platform’s underlying Distributed Ledger Technology (DLT) is based on the Stellar payment network’s permissioned blockchain but employs no native cryptocurrency.

According to Sisnett, only 20% of the technology involved in the infrastructure is blockchain because blockchain doesn’t scale effectively to meet the requirements of the retail CBDC that the UK is currently exploring.

It’s worth pointing out that there are two main types of CBDCs: ‘retail’ CBDCs – which are effectively a digital extension of cash which can be used by everyone, and a ‘wholesale’ CBDC which can only by used by financial institutions to replace or compliment reserve currency in the interbank market.

Sweden and Switzerland are examples of nations which are pursuing a wholesale CBDC model, while the Bahamas, China, Nigeria the eastern Caribbean and Cambodia are examples of countries that have already launched a retail CBDC.

“Retail CBDCs require a scalability and need to be able to handle more than 300,000 transactions per second,” explains Sisnett, “whereas wholesale CBDCs are high value, low volume so you can build most of those solutions on blockchain technology.”

According to Sisnett, paywith.glass has been in development since 2016 but it has taken several years to perfect.

“Anyone who thinks that this can be done in six months or by the guys in IT who work in the basement of big banks is kidding themselves. It’s not that simple. The People’s Bank of China with the entire nation’s GDP at its disposal, took four years to get to pilot stage,” he says.

The UK’s CBDC

Sisnett’s team developed a prototype for the technology which was first demonstrated at UCL and Kings College London in 2018, when it  caught the eye of Amsterdam-based Startupbootcamp – a Dutch accelerator that helps start-ups scale internationally.

It was through association with two other start-ups on this Dutch programme that brought paywith. glass to the attention of the UK’s Payments Association and a consortium of other private industry stakeholders that are currently investigating the feasibility of a retail Central Bank Digital Currency (CBDC) in the UK.

Paywith.glass’s tech is now being used in a pilot to explore several retail CBDC deployments – which include use cases involving retail payments, cross border transactions as well as enabling servicing Payment Institutions (PIs) and Electronic Money Issuers to use the CBDCs.

“We’re pulling everyone together into a consortium first inviting the core technology partners and then the bigger banks to form a foundation to finalise the rules that everything sits on and to find out what new goods and services and products they can create.”

‘If we can provide a foundation that demonstrates what the digital currency era looks like then that’s when policy makers at the central bank and the Financial Conduct Authority can use this information to make policy decisions,” he says.

Companies that have already come to the table include a handful of fintechs and challenger banks from the UK, US and EU, as well and at least one Tier 1 UK bank.

“We’d also like card networks to come on board as well as more financial services companies, companies that offer aggregation solutions and companies that provide solutions for SMEs – the Xeros of this world – because we want to demonstrate what the full ecosystem will look like,” Sisnett adds.

He adds that they’d love to have other telco companies on board too. “Telcos were the first non-banks that looked at using digital money for any electronic payments – The M-Pesa initiative [a mobile phone-based money transfer service] is the perfect example of this.

“But a lot of telcos are, I guess, hesitant or just waiting for the traditional fintechs because many of them have been burned in the past. So, it would need to be a telco with an appetite and an interest in really going into this digital currency future.”

Where telco companies, broadband and cloud providers excel, adds Sisnett, is in their robust approach to cybersecurity.

“In the telecommunications industry, we’ve done such a great job of making things work. Every major company in the space has successfully managed to make everything work on the infrastructure layer to the point that it’s taken for granted and is completely invisible to the end user.

“Every single day AWS and Wix and all the providers in between are making sure your site doesn’t get taken down by cyberattack. They’re making sure that phishing attempts to get your email address and your password are blocked and that all the spam emails that are coming in go in the right place and are monitored. They’re doing all this stuff automatically.”

“Now if you’re going to build a CBDC solution then you have to revisit this because while the internet support is there for what we know today, the digital currency world is a slightly different kind of world, and you have to rethink those things that are now taken for granted.”

“Because once a G7 state gets its retail CBDC off the ground, even in the pilot stage, then China is not going to sit back and welcome them on board. Their digital army is going to be hitting this infrastructure daily and that’s what a design must compensate for. It must be designed with that in mind, security cannot be an afterthought.”