Digital currency hardware wallets and the essence of money

TL;DR

The paper critiques the prevalent focus on dual-offline, custodial-like digital currency designs and argues that the core value of digital money lies in bearer, non-custodial ownership held offline and transacted online. It advocates token-based architectures that separate issuance from processing and emphasizes wallets as bearer-instrument containers rather than custodial accounts. Trusted hardware and certified devices are presented as risky, costly, and innovation-suppressing, with fair exchange achievable via networked third parties or zero-knowledge approaches rather than hardware roots of trust. The work advocates cash-like resilience through non-custodial wallets and online settlement, with practical implications for CBDC design and policy that prioritize user control, privacy, and flexibility over mandatory hardware certification.

Abstract

Many proposals for the design and implementation of digital wallets assume that the purpose of the wallet is to enable offline payments via custodial accounts, ignoring the real problems faced by individuals and businesses that engage in retail payments, such as the anticompetitive behaviour of payment platforms and the decline of cash. More importantly, the proposals ignore the raison d'être of digital currency as a kind of digital money that can be held independently of custodians. Finally, the proposals demonstrate a profound lack of imagination about the nature of digital money and the devices that could be used to hold, manage, and exchange it. From these presumptions flows a set of architectural requirements that stifle the promise of digital currency to deliver novel and efficient ways to exchange value in the digital economy. In this article, we critically assess the essential problems that digital currency solutions are being proposed to solve, particularly with respect to the future of payments and the future of cash. We assess the validity of common justifications for account-based payments and certified hardware in the context of alternative designs, limitations, and trade-offs. We conclude that the interests of consumers would be better served by design approaches to digital currency that anticipate that digital assets would be held outside accounts, stored offline, but transacted online, without requiring the use of trusted hardware.