Since the publication of Satoshi Nakamoto’s white paper in November 2008 “Bitcoin: a peer-to-peer e-money system” The term “blockchain” is a synonym for digital currencies in the sense of the underlying technology that enables the transfer of value between equals.
The interesting thing is that the term “blockchain” isn’t even used in this whitepaper. The purpose of the document was to propose a solution to the problem of double spending a digital currency, which is a transfer of value directly between the parties conducting the transaction without the use of a trusted central third party.
By definition, currencies are a medium of exchange for goods and services, a unit of account and a store of value. In the traditional sense, money fulfills these three elements.
Central bank digital currencies
The interest in digital currencies of the central bank, or CBDC for short, continues to this day, not on the part of the crypto community. but from a group made up of some of the most influential central banks such as the Bank of England, the Swiss National Bank, the European Central Bank, the Bank of Japan, the Bank of Canada, the Swedish Riksbank and the Bank for International Settlements.
The confirmation from the UK Chancellor of the Exchequer (Head of His Majesty’s Treasury) at the end of 2020 states: The UK will develop a regulation for private stablecoin and CBDC studies to show the current relevance of this issue. There is no doubt that China has become a leader in developing CBDCs. I recently suggested that there are a number of global standards that address issues such as interoperability between jurisdictions.
Fundamental to any national monetary policy and to financial stability is public confidence in central banks and their confidence that the money provided by the Central Economic Authority corresponds to these three key elements of a currency, regardless of whether they are issued in physical or physical form. Digital. A central bank digital currency is not a stable coin or digital asset, but a digital representation of cash, i.e. a digital pound of today that will be worth the same tomorrow and whose purchasing power (which the holder can buy) does not fluctuate beyond certain thresholds .
The European Central Bank’s proposal to create a digital euro is based on the premise of complementing the current central banks’ cash and wholesale system. It is seen as a way to provide European citizens with access to a safe form of money in a world that is rapidly moving towards digitization, while actively promoting innovation in retail payments to vulnerable people in society help and reduce their possible financial exclusion. A digital euro is also seen as an option to reduce the overall cost and environmental footprint of the current monetary and payment system.
Given that economies are currently brainstorming on issues related to the central bank, stablecoins, or private digital currency, the experience has been roughly the same as previous monetary innovations: coins, bills, checks, and credit cards. Many see blockchain and distributed ledger technology (DLT) as the mechanism to replace electronic currencies in conventional bank accounts. Just as paper money followed gold and silver, electronic transfers could replace paper money.
The emergence of digital currencies
The current COVID-19 pandemic has spurred the adoption of cashless transactions, impacting the way society interacts financially, and accelerating the concept of digital currencies in people’s minds. With fewer cash transactions, businesses and consumers are more aware of the properties and benefits of digital currencies.
Central banks are already working with other rated financial institutions, mostly clearing banks, using central bank electronic deposits. Along with this system, they also issue banknotes and coins to the public. The move to digital versions of these notes and coins is a natural progression in our more digitized world.
However, this trend could lead to 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 prices of alternative payment methods. Unless governments issue digital currencies to the public through their respective central banks. In a system in which central banks could have a direct relationship with each individual, however, the commercial banking market would be significantly disrupted, including issues of meaningful data management and the associated data protection. Do citizens want the central bank to be informed of every transaction they make?
To facilitate the use of CBDC, the technology platform must meet certain key attributes:
- Comfort: The presence of smartphones in modern society enables the use of a “touch to pay” system that many already understand, or a system based on QR codes.
- Security and Resistance: Current cryptographic techniques provide privacy to users, either through software or hardware. The resilience of a 24/7/365 infrastructure is critical to the optimal performance of a CBDC.
- Speed and Scalability: Transaction volume and performance should be kept at a reasonable cost. Current centralized card networks show that a very high transaction capacity is possible. Licensed DLT networks could be an equivalent replacement for traditional technologies.
- Interoperability: The use of application programming interfaces, or APIs, is well established to support technology interoperability and facilitate transactions between accounts. Common data standards will also play an important role in interoperability.
Using the example of Bitcoin (BTC), the blockchain infrastructure offers a completely decentralized, permissionless public network over which theoretically no person, organization or authority has control. Similarly, blockchain and / or DLTs can provide a similar network to support the issuance of CBDC within a national population.
howeverThe most popular legal framework for digital currencies is a central and authoritative network that gives the issuing authority, which is usually a country’s central bank, a degree of control and better control over the “blockchain” it registers . Transactions with digital currencies.Â This centralized and approved distributed ledger could address these key attributes.
For some commentators The ability of central banks to issue programmable CBDCs on a centralized and authoritative blockchain is a welcome development: for example, defining and controlling the use of digital money spent so that it can only be used for food, not alcohol, cigarettes or gambling. There are also transparency benefits that allow governments to tackle tax evasion and other illegal activities by accessing the underlying transaction data.
The original rationale for Satoshi’s white paper was to create a protocol that would enable peers to share digital values without the need for a central authority.
It is ironic that central banks are now considering the same benefits Satoshi outlined in this document when examining and examining how technology could prop up a new digitally issued currency. The two concepts entered the everyday conversation almost simultaneously and create the impression that they are related to each other are intertwined. However, both the technology and the use case can exist separately.
Digital island of man, As the executive agency of the Isle of Man government, it continues to promote and support research into the issuance and use of digital currency in all its forms, including stablecoins and CBDCs. Soramitsu, A financial technology company that provides blockchain-based solutions to businesses and governments (and currently affiliated with the agency’s acceleration program) recently partnered with the National Bank of Cambodia Creation of a secure and standardized digital currency, as an alternative to cash, on a single payment platform. The Bakong system is based on Hyperledger Iroha, which is built into the traditional banking system, and provides users with easy access through identification document scanning, photo verification and biometric recognition. This international experience gives the island a meaningful insight into a possible future implementation of digital currencies.
Of course, there are 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, that unfortunately exceed the limits of this article.
The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Steve Billinghurst is the head of the Digital Isle of Man regulator and responsible for working with companies and individuals who want to understand how the island’s financial services regulatory framework affects their digital business offerings. Steve’s role has also expanded to maintaining knowledge and understanding of international crypto financing developments in major competing jurisdictions and ensuring the Isle of Man’s competitive position by continuously reviewing and updating its own legal framework.