Starting with The Bank of China’s announcement that it would be exploring the potential of a state-sponsored digital currency and continuing into the World Economic Forum in Davos, Switzerland that produced guidance for central banks navigate the digital landscape, 2020 is increasingly looking like the year governments take real steps into the world of cryptocurrency.
There are a variety of factors behind this push. China’s interest, for instance, is more a consequence of being able to exercise control over its monetary policies in the face of challenges from actual cryptocurrencies. Then, there are the initiatives among the central banks of Sweden, England, Japan, Canada, Switzerland and the European Central Bank, which have fostered a committee to review the potential outcomes and consequences of a central bank digital currency (CBDC).
A Coin For All Seasons
While none of the proposed CBDC frameworks are cryptocurrencies since they are all so far formulated to reflect the value one or more fiat note, the central banks are looking at established and emerging cryptos and stablecoins for cues on how their currency may fit into the larger digital ecosystem.
One of the main aspects of a digital central bank token is the disintermediation of liquidity and financing between the bank, currency issuers and even individuals. The World Economic Forum’s Central Bank Digital Currency Policy-Maker Toolkit outlines the potential wholesale, retail or hybrid model of such a currency, particularly for international exchange or transactions.
Presciently, Governor of the Bank of England Mark Carney hinted at this utility in August of 2019, while speaking at the Fed’s Economic Policy Symposium in Jackson Hole, Wyoming. There Carney explained that “a central bank-supported digital currency could replace the dollar as the global hedge currency.”
The high degree of fungibility in this currency, as well as the direct control it provides to the central bank that governs it makes the currency far more nimble than paper notes, though the centrality of those controls poses other sources of risk in the form of operational pitfalls or cybersecurity threats.
What Does This Mean For Cryptocurrencies?
How this might affect the broader cryptocurrency market is unclear at the moment. However, it does further shape the discussion over the character of digital currency, on that has already shifted dramatically with the announcement and continued troubles of Libra, backed by Facebook, Inc. (NASDAQ: FB) and a dwindling array of leaders in the online and digital technology worlds.
Given the seeming eventuality of private-sector digital currencies and the decline of cash, real work toward digitization from central banks could serve to highlight the benefits of true cryptocurrencies, particularly in the shortcoming of centralized digital assets.
In an analysis of the aforementioned WEF whitepaper, financial services firm ING issued commentary that outlined one of the problems of a CBDC, namely the risk of transaction verification and double-spending,
“Whereas with Bitcoin the solution to this problem is achieved by reaching ‘consensus’ across the validating nodes in the network,” the article explains. “With CBDC, validation could be done by the central bank itself, although the caveat is an increased risk of cyber threats because of the higher centralization of the governance mechanism.”
Cryptocurrencies like Libra or Bitcoin (and most other cryptocurrencies) wouldn’t face cyber threats to the same degree as a CBDC because they aren’t regulated by the bank and work based on a decentralized payment network that is powered by its users.
So while a CDBC could make current cryptocurrencies obsolete, the conversations around their path to existence seem to stand at speculative.
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