Since the publication of Satoshi Nakamoto’s white paper in November 2008, “Bitcoin: A Peer-to-Peer Electronic Cash System”, the term “blockchain” has been synonymous with digital currencies in the sense of the underlying technology that enables the transfer of money. value, peer-to-peer.
What is interesting is that the term “blockchain” is not used once in this white paper. The aim of the article was to propose a solution to the central problem of the double spending of a digital currency, which is the representation of a transfer of value directly between the parties to the transaction, without the use of a third party. central trust.
Currencies are by definition a medium of exchange for goods and services, a unit of account, as well as stores of value. Money, in its traditional sense, fulfills all three of these elements.
Central bank digital currency
There is currently significant interest in central bank digital currencies, or CBDCs, not from the blockchain and crypto community, but actually from a core group of some of the most influential central banks, including the Bank of England, Swiss National Bank. , the European Central Bank, the Bank of Japan, the Bank of Canada, the Swedish Riksbank and the Bank for International Settlements.
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Confirmation at the end of 2020 from the Chancellor of the Treasury of the United Kingdom (Her Majesty’s Head of Treasury), indicates that the United Kingdom will draft regulations for private stablecoins and seek out CBDCs, demonstrating the current momentum on this topic. China has undoubtedly become a leader in its development of CBDCs, having recently proposed that there be a global set of rules that address issues such as interoperability between jurisdictions.
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Public confidence in central banks is at the heart of any national monetary policy and financial stability, and its confidence that the money provided by the central bank fulfills these three key elements of a currency – that it either issued in physical or digital form. A central bank digital currency is not a stable currency or a digital asset, but rather a digital representation of cash – that is, a digital book is worth the same value today tomorrow and that its purchasing power (what its holder can buy) does not fluctuate beyond certain thresholds.
The European Central Bank’s proposal for a digital euro is premised on supplementing the current central bank cash and wholesale deposit system in place. It is seen as a way to ensure European citizens have access to a safe form of money in a rapidly changing digital world, while actively promoting innovation in the field of retail payments, supporting vulnerable societies and by reducing their potential financial exclusion. A digital euro is also seen as an option to reduce the overall cost and ecological footprint of the current monetary and payment system.
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While economies are currently experiencing the development of ideas around issues of central banks, stablecoins, or private digital currencies, the experience has been roughly the same as with previous monetary innovations: coins, banknotes bank, checks and credit cards. Many see blockchain and distributed ledger technology, or DLT, as the mechanism to replace electronic money in traditional bank accounts. Just as paper money succeeded gold and silver, electronic transfers could replace paper money.
The rise of digital currencies
The current COVID-19 pandemic has driven cashless transactions and has had an impact on the way society interacts financially, which has accelerated the concept of digital currencies in people’s minds. With fewer cash transactions, businesses and consumers are more aware of the attributes and benefits of digital currencies.
Related: How has the COVID-19 pandemic affected the crypto space? Expert response
Already, central banks engage with other eligible financial institutions, most often clearing banks, through central bank electronic deposits. Along with this system, they also issue banknotes and coins to the public. The switch to digital versions of these notes and coins is a natural progression in our more digital world.
However, this trend could have an unintended consequence: in a cashless society, where the public no longer has access to a state-guaranteed payment system, the private sector would control the access, development and pricing of methods. payment alternatives. Unless governments issue digital currencies to the public through their respective central banks. But in a system where central banks could have a direct relationship with each individual, there would be significant disruptions in the commercial banking market, including issues of significant data holding and associated data privacy. Would citizens want the central bank to be informed of every transaction they have made?
To facilitate any CBDC, the technology platform must fulfill some key attributes:
- Convenience: The penetration of smartphones in modern society allows a well understood “tap-to-pay” system or a system based on the QR code.
- Security and resilience: Current mature cryptographic techniques offer users data protection; software or hardware based privacy enforcement. The resilience of a 24/7/365 infrastructure is critical to the performance of a CBDC.
- Speed and scalability: The volumes and throughput of transactions must be maintained at a justifiable cost. Today’s centralized card networks show that very high transaction capacities are possible. Authorized DLT networks could be equivalent substitutes for conventional technologies.
- Interoperability: The use of application programming interfaces, or APIs, is well established to support interoperability of technologies and enable inter-account transactions. Common data standards will also play a role in interoperability.
With the example of Bitcoin (BTC), the blockchain infrastructure provides a fully decentralized and unauthorized public network over which, theoretically, no one, entity or authority has control. Likewise, blockchain and / or DLTs can provide a similar network to support the issue of CBDCs within a national population.
However, the most popular framework for digital currencies is a centralized and authorized network that provides the issuing authority, which is usually the national central bank, with a degree of control and greater oversight of the “blockchain” that records data. digital currency transactions. This centralized distributed and authorized ledger could address these key attributes.
For some commentators, the ability of central banks to issue programmable CBDCs on an authorized centralized blockchain is a positive development – for example, defining and controlling the uses of digital currency issued so that it can only be used for food, not alcohol, cigarettes. or gambling. There are also transparency benefits that allow governments to act against tax evasion and other criminal activity, by accessing underlying transactional data.
The original rationale for Satoshi’s white paper was to establish a protocol that allowed for the digital, peer-to-peer exchange of value without the reliance or requirement to go through a central authority.
It’s ironic that the very benefits that Satoshi explained in this white paper are now being considered by central banks as they research and consider how technology could underpin a new digitally issued currency. The two concepts entered everyday conversation almost simultaneously, giving the impression that they are intertwined. Yet the technology and the use case may exist separately.
Digital Isle of Man, an executive agency of the Isle of Man government, continues to encourage and support research into the issuance and use of digital currencies in all their forms, including stablecoins and CBDCs . Soramitsu, a fintech company providing blockchain-based solutions to businesses and governments – which is currently associated with the agency’s accelerator program – recently announced its partnership with the National Bank of Cambodia to establish a secure digital currency and standardized alternative to paper banknotes on a single payment platform. The Bakong system is based on the Hyperledger Iroha DLT, integrated with the traditional banking system, and providing users with easy access through the scanning of identity documents, photo verification and biometric detection. Such international experience provides the island with significant insight into any potential future implementations of digital currencies.
There are, of course, a number of technical, economic, financial and legal issues, including the impact of a digital currency on monetary policy, financial stability and the business models of banks, which unfortunately cross the line. of this article.
The views, thoughts and opinions expressed herein are the sole ones of the author and do not necessarily reflect or represent the views and opinions of TBEN.
Steve billinghurst is the Regulatory Officer at Digital Isle of Man, responsible for engaging with businesses and individuals interested in understanding how the island’s financial services regulatory framework affects their digital business proposition. Steve’s role has also expanded to maintaining a knowledge and understanding of international crypto-finance developments in major competing jurisdictions and ensuring the Isle of Man’s competitive position through continuous review and updating of its own legislative framework.