“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust …”
Satoshi Nakamoto (Unknown person or persons who designed bitcoin and created its original reference implementation, Bitcoin Core)
Fiat currency debasement and failure is why gold has survived and thrived for thousands of years and indeed in recent years. It is why bitcoin is becoming more popular, with its growing market cap and ever-expanding ecosystem.
It is hard for central banks to dictate the value and supply of gold in the long term. Although they have tried and failed. This was seen during and after the London Gold Pool when gold prices surged from $35 to $850 in just 9 years and again in recent years when banks were found to be attempting to fix and manipulate gold prices. Manipulation frequently works in the short term but over the long term, the all powerful forces of supply and demand in the global market place will determine prices.
Similarly, it will be hard for central banks to dictate the value of bitcoin over the long term. Akin to gold, very limited supply and increasing global demand should determine prices rise in the long term.
Thus, both operate almost trust-less monetary policies and have a value in and of themselves, regardless of central bank diktats.
As it is both nature and human nature that supports gold, it is a blockchain that supports bitcoin. The bitcoin blockchain was designed so that no central bank would ever be needed to support the currency.
The bitcoin network is the bitcoin central bank, it creates new bitcoins and processes the transfer and settlement of the cryptocurrency. Monetary policy was set on day zero and its independence comes from its decentralisation.
Today, we take a brief look at why central banks are so keen to embrace the technology that was seemingly designed to render them the dodo of finance. In part two, next week we will address the concerns surrounding these apparent benefits.
Big on blockchain
15% of big banks will be using blockchain by the end of this year, according to the IMF and ‘most’ banks shortly after say the World Economic Forum (WEF). Driven by enthusiasm in the private sector, 2016 was the year the central bankers across the world woke up and began to talk about their explorations into, and the possibilities, of blockchain in the central banking system.
Dong He, who has lead research into digital currencies at the IMF, believes that the switch to digital currencies, by central banks could happen in the next five to ten years But, this depends on the speed at which the banking system moves to using the blockchain for financial transactions.
Deputy governor of the People’s Bank of China, Fan Yifei, wrote for Bloomberg
“Digital currencies have shown considerable promise…[our research] suggests that the best way to take advantage of these innovations is for central banks to take the lead, both in supervising private digital currencies and in developing digital legal tender of their own.”
No more tools in the box
The financial crisis paved the way for the rise of bitcoin and a new awareness and appreciation for gold.
Both assets reawakened something that had been lost in many mindsets – we can hold assets outside of the vulnerable fractional reserve banking system and fiat monetary system, as safe havens and with reduced counter party risk. Banks everywhere were forced to acknowledge that the game would soon be up and innovation was required.
The World Economic Forum recently stated
“Central banks increasingly are under pressure to keep ‘their’ currencies attractive. They should let the general public access electronic central bank money, not just financial institutions. To do this, they should embrace the blockchain.”
Pretty much since 1971, the central banking system has played with every tool available to them. This has become glaringly obvious since the 2008 financial crisis and whilst a further major crash has been averted, the current system is in an extremely fragile position of an unprecedented nature.
The monetary tools are running out, they are blunt, old and tired.
For many central banks, this is where the attraction of a digital currency is. It is not just about catching up with the current trend to go digital but it allows the bank to look beyond exploring new regulations in regard to preventing further financial crises; a digital currency could just put a new set of conditions on the monetary system which, supporters argue, could then prevent a financial crisis.
The power over the banked and the unbanked
Digital currencies, compared to cash, are relatively low cost. Therefore, many central bankers support a move to a fully digital currency as they make it possible to bring more people into the system, at little cost. We have discussed our concerns about cashless societies, previously, raising concerns of how it will pave the way for negative interest rates and bail-ins to be the norm.
Kenneth Rogoff, author of the War of Cash, believes digital currencies will play a key role in the less-cash society, as he advocates
“Eventually, there will be government digital currencies that ordinary people have access to at very low cost…[but] A government digital currency could be many decades away, and there are all sorts of security and regulatory issues that have to be navigated first. That said, many central banks are already thinking about it.”
One area, we do see as a strong advantage but will be explored in more detail in part two, is cybersecurity – the blight of the banking system (see the attack on the Central Bank of Bangladesh for just one example).
In 2017 this will continue to grow as a problem. In a letter to client banks, in November 2016, SWIFT warned of cybersecurity threats “The threat is very persistent, adaptive and sophisticated – and it is here to stay.”
In a blockchain-based banking system, it would be very difficult for data to be stolen and lost forever, each time a change was made the system would update across all banks and users, therefore information would be better protected and retained.
Full article: Blockchain – Central Banks Banking On It (GoldCore)