Despite the interest shown in decentralized ledger technology by central banks, cryptocurrencies continue to be mistrusted by the traditional financial system. This has been made apparent from comments by Andrew Bailey, the upcoming governor of the Bank of England, when addressing members of the United Kingdom Parliament at a Treasury Select Committee hearing on March 4. He stated: “If you want to buy Bitcoin, be prepared to lose all your money… [Bitcoin] has no intrinsic value.”
Despite this, seemingly convoluted efforts to “appropriate” the technology like the launch of the Venezuelan Petro and talks of centralized Central Bank Digital Currencies show that the technology is still either severely misunderstood or that it is considered a threat by the current status quo. Nevertheless, there is still a genuine effort to see the technology applied in a meaningful way while cryptocurrencies continue to establish themselves in the financial sector.
CBDCs: Are they useless?
CBDCs have recently become one of the trendiest subjects in the crypto sphere. The BIS Quarterly Review, published earlier this week, shows that at least 17 governments around the world are exploring the potential uses of CBDCs. For example, earlier this year, the president of the European Central Bank, Christine Lagarde, publicly announced the active involvement in the development of a central bank digital currency in a bid to address the demand for faster and cheaper cross-border payments.
However, the aforementioned report also shows that cross-border payments are not a priority in any of the projects currently underway and that a CBDC would also not address the lack of access to transitional accounts. These two major shortcomings of emerging markets and developing economies — where cryptocurrencies have become a way to escape inflation and economic instability — are often caused by or assisted by central banks.
These efforts also seem to overlook the real value of blockchain technology, its decentralized, immutable and (optional) transparent nature. Centralized payment systems are known for being faster and more scalable than cryptocurrencies like Bitcoin (BTC) due to the way transactions are processed and registered. The BIC Report reads:
“The overhead needed to operate a consensus mechanism is the main reason why DLTs have lower transaction throughput than conventional architectures. Specifically, these limits imply that current DLT could not be used for the direct CBDC except in very small jurisdictions, given the probable volume of data throughput.”
Despite exploring different types of architectures for the creation of a CBDC, there is always some level of centralization that goes against the core values of Bitcoin and cryptocurrencies: decentralization and immutability. The report also mentions: “The central bank is, by definition, the only party issuing and redeeming CBDC.” Arwen Smidt, lead blockchain strategist at MintBit, told Cointelegraph on the sidelines of the London Blockchain Week that:
“CBDC’s could very well become potentially a tool for governments to assert control on crypto. It’s definitely part of the reason why these central banks are looking at it. So, that can go two ways: either the government would do it purely to assert control or to make cryptos fall in line with the future monetary policy and also grant legitimacy to these new forms of private money.”
She went on to add that creating a new digital currency will allow to embed value systems and privacy considerations in this particular currency. In turn, this would mean that everyone who uses or is exposed to that currency automatically accepts those assumptions.
Moreover, while DLT is currently being studied as an option for CBDC development, a different kind of technology may be leveraged. Blockchain technology, or something closely related, may still be used, but decentralization of transaction processing and verification is not bound to happen, which means transfers would not offer the censorless and anonymous features associated with cryptocurrencies. The report states:
“Overall, one needs to weigh carefully the costs and benefits of using DLT. This technology essentially outsources to external validators the authority to adjust claims on the central bank balance sheet, which is advantageous only if one trusts this network to operate more reliably than the central bank. Ongoing assessments of DLT-based proofs-of-concept tend to be negative.”
The history between traditional finance and crypto
Although the traditional financial world has acknowledged the potential behind blockchain technology, some have quickly dismissed cryptocurrencies due to their decentralized and anonymous, or pseudonymous, nature.
Bitcoin has oftentimes been criticized by its association with criminal activity, high volatility and speculation, as well as its lack of regulatory oversight. In short, it is often seen as just another tech fad and/or bubble, and…