February 24, 2018
The remarkable growth of bitcoin, ether, stellar, etc. alongside the soaring market cap of the entire cryptocurrency space and the unprecedented bubble-like volatility have captured the attention of financial participants and market regulators across the board.
Part 1 of this article seeks to identify the benefits central banks face if they were to issue their own cryptocurrency (CBCCs) followed by the respective challenges and constraints detailed out in Part 2 (article coming out 3rd March).
The high-level mechanics of a CBCC are relatively clear:
- A central bank issues and controls the circulation of the national digital currency embedding tailored circulation volumes, rules and preferences of their own to the blockchain.
- The central bank provides stability to the underlying value of the CBBC by backing it up with the intrinsic value of its national economic output under a respective taxation regime.
Note: Venezuela is preparing a new cryptocurrency called “petro gold” that will be backed by precious metals. That’s shortly after the President launched an oil-backed token raising $735m in its first day of pre-sale.
This is not what is described above, nor is a concept that we are advocating. This effort can be seen as an attempt to raise debt prompted by the harsh economic reality Venezuela has been facing for the past decade.
- The CBBC is pegged to the existing fiat currency on a one-to-one basis, for example, until widespread adoption has taken place and the original fiat is officially replaced.
- The central bank in cooperation with other key market participants establishes a controls framework to monitor the flow of money and origin of funds, and to ensure compliance with KYC standards and tax rules.
- Bank of Canada has experimented with a CADcoin (Project Jasper) and achieved clearing and settlement through a distributed ledger shared among participating institutions. While CADcoin is a successful proof of concept pointing the way forward to a potential CBCC adoption, at this stage, not even BoC is considering deployment other than trials.
- Unparalleled transparency – The transactional transparency offered on a ‘non-stealth’ blockchain is a game-changing property of the technology that can lead the world to a new monetary system. This will directly result in positive externalities such as:
- ability to curb financial fraud and eliminate money laundering in a way and extent that could have never been accomplished before
- enable regulators to have a complete picture of the flow of money
globally. Tax havens and offshore zones will still exist but the direction and source of funds will be clearer
- allow the public and the media to scrutinise the amount of money in circulation and for the first time understand how much central banks have actually “printed”. This could prompt whistle-blowers and scandals of massive proportions to occur if a large economy is indicted in printing more money than originally declared.
Note: Fedcoin could also be structured to preserve anonymity similar to what Monero, ZCash and PIVX offer already.
This raises a critical design question: should it? Privacy is an implicit constitutional right but so is a stable financial system, free of money laundering schemes and facilities to finance terrorist activities.
- Faster payments and easy access to ‘bank’ accounts – this feature is particularly useful for the developing world and sets the tone for the so-called ‘People’s Bank’. This coincides with another up-and-coming technology – global broadband – that will serve as a key dependency and enabler:
- As an example, if a citizen of Zimbabwe opens up an account using Stellar’s Network, they can do so at virtually no cost and receive XLM payments directly to their wallet in return for the homemade goods they’ve sold to an American tourist. All they need is access to wireless internet and a 10 XLM starting balance.
- Here’s how close we are to actually achieving global WIFI, thanks to tech giants and disruptors like Elon Musk:
Note: For Western societies there are no obvious efficiency or resiliency benefits of adopting digital currency. Interbank payment systems are already performing quite well, using a form of electronic cash and are actively supplemented (at times even replaced) by innovative fintech companies such as Revolut, TransferWise, Monzo and Stripe.
- Universal Basic Income – as described in one of our previous articles, there are already a number of experiments proving out the claimed benefits of universal basic income. CBCCs are a top contender in satisfying the demands and challenges of implementation.
In our next article we will go into detail about the challenges associated with central bank-created money and what it will take the world to get to a global and standardised means of exchange and storage of value using CBCCs.
— END Part 1 —
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