Economies are currently experiencing the development of brand-new thoughts around CBDCs, stablecoins or private digital currencies.
What is interesting is that the expression”blockchain” isn’t used once in that white paper. The purpose of the paper was to propose a solution to the core issue of double-spending an electronic currency, which is the representation of a move of value directly between transacting parties, without the use of a fundamental trusted third party.
Currencies by definition are a medium of exchange for goods and services, a unit of account, in addition to stores of value. Cash, in its traditional sense, fulfills all these three elements.
Central bank digital money
The affirmation in late 2020 in the United Kingdom’s chancellor of the exchequer (the mind of Her Majesty’s Treasury), says that the United Kingdom will draft regulations for personal stablecoins and study CBDCs, demonstrating the momentum that this topic currently has. China has undoubtedly emerged as a leader in its growth of CBDCs, having lately proposed that there be a global set of rules which addresses issues such as interoperability between jurisdictions.
Central to any national monetary policy and financial stability is the public’s trust in central banks, and its own trust that money provided by the central bank fulfills these 3 important elements of a money — whether it is issued in physical or digital form. A central bank electronic currency is not a stablecoin nor can it be a digital advantage but instead a digital representation of cash — i.e., that a digital pound today would be worth the exact same tomorrow and its purchasing power (exactly what its holder can buy) does not change beyond certain thresholds.
The European Central Bank’s proposal for an electronic euro is built upon the assumption of complementing the current cash and wholesale central bank deposit method set up. It’s seen as a means of making sure that European taxpayers are given access to a safe form of cash within an fast-changing digital world, while actively promoting innovation in the area of retail payments, encouraging society vulnerable and reducing their possible financial exclusion. An electronic euro is also seen as an option for the decrease in the general price and ecological footprint of the present monetary and payments system.
With markets now experiencing the development of ideas around central bank difficulties, stablecoins or private digital currencies, the expertise has been nearly the same as with previous financial innovations: coins, banknotes, checks and credit cards. Many view blockchain and distributed ledger technologies, or DLT, as the mechanism to replace digital currency in conventional bank accounts. As paper money succeeded silver and gold, electronic transfers could replace paper money.
The Growth of digital currencies
The current COVID-19 pandemic bought motivation for cashless transactions and impacted the way society interacts financially, which has accelerated the notion of digital monies in people’s minds. With fewer money transactions happening, businesses and consumers are more conscious of the attributes and advantages of digital currencies.
Already, central banks participate with other qualifying financial institutions, many often clearing banks, through the usage of digital central bank deposits. Alongside this system, they also issue banknotes and coins to the general public. A shift to digital versions of those notes and coins is a natural progression in our digitized world.
However, this trend could lead to an unintended effect: Within a cashless society, where the people no longer has access to a state-guaranteed system of payment, the private sector would control access to, growth of and pricing for other payment methods. Unless, that is, governments issue digital monies to the general public through their various central banks. However, in a system where central banks could have a direct relationship with every person, there could be significant disruption in the commercial banking market, such as the issues of significant data holding and related data privacy. Would citizens want the central bank to know about every trade they’ve made?
To ease virtually any CBDC, the technology platform must fulfill certain key attributes:
Convenience: The penetration of smartphones in modern society allows for a”tap-to-pay” system that’s well known or for a QR code-based system.
Security and resilience: Present mature cryptographic techniques provide users with data protection; either software- or hardware-based privacy authorities. The resilience of a 24/7/365 infrastructure is critical to some CBDC’s performance. Current centralized card networks reveal that very high transaction capacities are possible. Permissioned DLT networks could be equal replacements for traditional technologies.
Interoperability: The usage of application programming interfaces, or APIs, are well recognized to encourage technologies interoperating and enable interaccount transactions. Common data standards will even play a role in interoperability.
With the example of Bitcoin (BTC), the blockchain infrastructure provides a fully decentralized, fully permissionless public community which, theoretically, no one individual, entity or jurisdiction has control over. In the same way, blockchain or DLTs can offer a similar network to support the problem of CBDCs among a national population.
However, the popular frame for electronic monies is a centralized, permissioned network that offers the issuing authority, which is usually the national central bank, with a level of control and greater supervision of the”blockchain” that lists the digital currency trades. That centralized permissioned dispersed ledger could address these key attributes.
For many commentators, the capacity of central banks to issue programmable CBDCs to a centralized permissioned blockchain is a good development — for instance, defining and controlling the uses of their electronic currency issued so that it can only be used for meals, not smoking, cigarettes or gaming. There are also transparency benefits that allow governments to act upon tax evasion and other criminal actions, by means of access into the underlying transactional data.
The initial motive for Satoshi’s white paper was to establish a protocol which allowed for the digital exchange of value, peer-to-peer without the reliance or requirement to go through a central authority.
It’s ironic that the very benefits that Satoshi explained because white paper are now being considered by central banks as they study and think about how the technology could underpin fresh digitally issued currency. Both concepts have come into everyday conversation almost simultaneously, which makes it seem as though they are interwoven. Yet both technology and the use case can exist apart.
Digital Isle of Man, an executive service for the Isle of Man’s authorities, continues to encourage and support research to the issuance and use of electronic currencies in all their forms, including stablecoins and CBDCs. Soramitsu, a fintech company delivering blockchain based solutions to companies and governments — which is now an associate of the agency’s accelerator program — recently announced its partnership with the National Bank of Cambodia to establish a secure, standardized electronic currency solution to paper bank notes onto a single payment platform. The Bakong system is constructed upon the Hyperledger Iroha DLT, integrated with the conventional banking system, also providing users with easy access via ID file scan, photograph check and biometric detection. Having such global expertise provides the island with significant insight into any potential future implementation of electronic currencies.
There are, of course, a number of technical, economical, fiscal and legal issues, including the impact of a digital currency on monetary policy, financial stability and banks’ business models, that are regrettably beyond the limits of this report.
