As society starts to move away from cash, central banks’ potential to reap profits off issuing that cash could be threatened.
Many governments are worried about the mass adoption of cryptocurrencies and hence are considering the merits of creating a central bank digital currency (CBDC).
Central banks have woken up to the risks cryptocurrencies can pose to policy makers’ bread-and-butter business: the economy.
Hence the debate about the pros and cons of government digital currency closed private blockchains versus public blockchain cryptocurrency are increasingly on the agenda of policy makers and investors alike.
The mainstream media often wrongly refer to government backed digital currencies as cryptocurrencies without defining the new concept of central bank digital currency.
Cryptocurrency is a blockchain asset and not the liability of anyone. Central bank issued digital currency is based on a fractional reserve banking system based on debt and the liability of increasingly highly indebted nation state central banks.
Cryptocurrencies were created with the intention to make central banks, the traditional bastions of monetary policy, redundant in the face of a peer-to-peer electronic cash.
10 years after the publication of the Satoshi Nakamoto’s Bitcoin whitepaper, cryptocurrencies are considered to be utilized by the very institutions they were meant to subvert. Blockchain, the distributed ledger technology underpinning Bitcoin, is the tool that can be extended to a central bank digital currency.
Most of the current amount of money is digitized already, whether in bank reserves with the central bank, or in checking accounts at the local bank. Only a fraction of money supply is in paper money bills in circulation. But digital money, locked up in private ledgers and exchanged through dozens of heterogeneous databases from creditor to debtor, lacks the speed, stability, scalability, and security of a good cryptocurrency.
If you can’t beat them, join them
Many countries are increasingly thinking about a strategy of how to deal with the global rise and mass adoption of cryptocurrencies. If Bitcoin is the money of the people, fiat currency is the money of the state.
Governments and central banks from India, Japan, Canada, Russia, Switzerland to Singapore and the Marshal Islands are having projects as to how best create a government backed digital currency. Several other governments, including China, Estonia, and Iran, have discussed plans for their own digital currency.
Singapore has project UBIN and the Bank of Canada has Project Jasper and the United States is toying with the idea of a FedCoin, whereas Sweden’s Riksbank is contemplating the ‘e-Krona.’
In Sweden, the demand for cash has dropped considerably over the past decade. Already, many retail stores do not accept cash and some Swedish bank branches no longer disburse or collect cash. In response, the Riksbank has embarked on a project to determine the viability of an e-Krona for retail payments. No decision has yet been taken in terms of technology.
The Marshall Islands will issue its own cryptocurrency that will be circulated as legal tender along with the U.S. dollar.
The Head of the Swiss Stock Exchange has appealed to the Swiss National Bank to launch the e-Swiss Franc.
In response to these comments, the SNB repeated its message to the media that it did not consider any need for such a move. Mounting calls for Switzerland to introduce a blockchain-based national cryptocurrency therefore continue to fall on deaf ears at the Swiss National Bank.
Switzerland is a rich country and only small wealth disparity compared to Indonesia and other emerging markets but it seems that developments in fast growing countries like Indonesia could have been on the mind of the Head of the Swiss Stock Exchange.
While Bank Indonesia hasn’t banned exchanges from offering cryptocurrencies, it has asked investors to refrain from owning, selling or trading crypto token despite the growing number of Bitcoin investors. The Indonesian central bank doesn’t deemdigital currencies as legal tender.
Petro, an oil-backed cryptocurrency in Venezuela, was issued in an attempt to help the national economy. $735 million was raised during the first day of the pre-sale. President Maduro hopes ‘the petro will allow the ailing OPEC member to skirt U.S. sanction.’
Kazakhstan on the other hand is considering to follow Japan’s lead to make cryptocurrency legal tender and to sponsor its own state cryptocurrency, the Kazakhstan CryptoTenge, a digital asset tied to fiat.
The CryptoRuble shall be promoted for circulation on international markets, according to Russia’s Deputy Minister of Economic Development Oleg Fomichev, who stressed the CryptoRuble is designed to become Russian “digital money in light of the digital economy.”
Russian President Vladimir Putin stated that the Stone Age has not ended because humanity has run out of stones but because new technologies have appeared.
The promise of central bank digital currencies
Central Bank digital currencies or CBDC for short is meant to be an extension of existing central bank issued fiat money.
CBDC is not a well-defined term. It is used to refer to a number of concepts. However, it is envisioned by most to be a new form of central bank money. That is, a central bank liability, denominated in an existing unit of account, which serves both as a medium of exchange and a store of value.
There are notes and coins available to anyone and reserve and settlement accounts open only to licensed banks, already in electric form. However this is not based on blockchain and currently used for interbank payments.
The Bank for International Settlements in a report out in March, Central bank digital currencies, stated that Central banks must carefully weigh the implications for financial stability and monetary policy of issuing digital currencies.
A CBDC for all would challenge the current model of banks taking customer deposits and using that money to fund the lending that helps drive the economy. The consequences for bank business models and financial stability would need to be carefully parsed.
How to deal with the intervention from regulators for the current blockchain projects?
Here we take EcoBall as an example. EcoBall, as the underlying blockchain solution，will consider it from a trusted value network and provide an account mechanism. For a company’s business chain, the company can coordinate with the government’s supervision. There is a multi-privilege account on the main chain. The company only needs to provide a readable account to the relevant section. Then the supervisor can view the company’s chain. Information (accounts without permission, the information on the public chain can be stored encrypted).
Due to the fact that the blockchain cannot be modified, once a company’s information is written onto the blockchain, the data the regulator sees will be historically real data. In this way, it is valuable for some branches of the government to join in the EcoBall chain. Therefore, the regulatory guidance based on blockchain technology will be more valuable than the current Internet.
The public chain projects have been launched one after another, but the effect of the online main network is still far away from the commercialization. The core competitiveness of EcoBall is to take into account problems that need to be resolved in the large-scale commercialization of blockchains, and to make a breakthrough in high-throughput, decentralized distributed storage, cross-chain integration, free-to-use and other important business strategies and technologies to build a true platform system that satisfies the large-scale commercialization of blockchains.
For detailed information of EcoBall, please visit the official website: www.ecoball.org
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