Citizens could benefit from vastly improved levels of government transparency if central banks decide to introduce their own cryptocurrency, but there are fears ensuing regulation could curb innovation in the independent crypto space.
Central banks already issue digital currency to commercial banks, and many have been exploring the possibility of extending this to the general population.
Experts have suggested central banks, like the Federal Reserve in the US, could launch a cryptocurrency that is similar to bitcoin but with coins only being created by the bank.
Peter Smith, chief executive of Blockchain, the bitcoin wallet, suggested last August that we are only two years away from a major government issuing a central digital currency.
We spoke to several blockchain industry players to find out what impact this could have on the general public, the government and the wider crypto market. The Bank of Lithuania also shared its views on “central coins”.
The dark side
Marius Jurgilas, member of the board of the Bank of Lithuania, said recent developments in technology make it feasible to provide and access central bank liabilities in electronic form. But he added this would be “no small development” and would immediately reduce demand for commercial bank money.
“Such a change would have fundamental implications on credit growth, financial intermediation, transmission of monetary policy, and role of (central) banks in general,” he warned.
In addition to these economic concerns, people working in the blockchain industry worry that a central bank cryptocurrency would run counter to the philosophy of blockchain, where everything is decentralised.
Rob May, chief executive of Talla, which is behind blockchain platform botchain, said the “crypto-purists” are unlikely to use a blockchain that is controlled by the government. He also warned that it could lead to harmful legislation.
“I think it will definitely bring more regulation on independent crypto coins – probably in a negative way if governments try to make their own crypto more attractive,” he added. “A move like that could do a lot of damage to innovation in the cryptocurrency space.”
The bright side
But there are positive things to mention, also. Some experts think the launch of a central coin would help to legitimise cryptocurrency, whether it is centralised or decentralised.
David Prais, chairman of Cofound.it, a platform for blockchain believers, said: “It would represent a recognition by governments that digital currency is here to stay. It will probably lead to governments bringing in a lot of regulation, but that is something which I fully support because there are still a lot of scams out there.”
Cryptocurrency could even improve government transparency and accountability by enabling citizens to see where money is being spent, according to Talla’s Rob May.
“If you think about a government blockchain as a supply chain of where the money comes and goes, one possible benefit is that citizens could be better informed about where the government spends money,” he explained. “Also, it might make it easier to pay taxes and receive refunds.”
Scott Robinson, founder of start-up innovation platform Plug and Play FinTech, suggested transparency would be particularly beneficial during election campaigns. Citizens could pledge money on an escrow basis so that it only gets sent to the candidate if they follow through on their election promises.
Similarly, if someone donated money to charity they could track their payment all the way through to the recipient, thereby improving the transparency of the donations process.
The idea of a central bank cryptocurrency is certainly gaining momentum. Central banks in China, Japan, Sweden and Estonia have all revealed they are undertaking projects that involve transacting digital currencies with banks. Meanwhile, the Federal Reserve has reportedly stated it is beginning to explore whether it could adopt its own digital currency.
The Bank of England said allowing people to store value and make payments in digital currency could have “wide-ranging implications” for financial stability and is undertaking a multi-year research programme into the subject.
Smaller countries are also getting in on the action. Last autumn, Venezuela’s President Nicolas Maduro announced he intended to launch a digital currency, called the petro, to combat the financial “blockade” by the US. The Central Bank of Uruguay has launched a pilot to transfer 20 million pesos (EUR 570,000) onto the blockchain network.
There is still a great deal of speculation about whether these pilots will result in a true centralised digital currency being launched.
Nicholas Gregory, chief executive of CommerceBlock, a public blockchain infrastructure company, argued that the reason bitcoin works so well is because it is decentralised.
“You could also argue that central banks are already digitised – when was the last time you paid for something with cash? We will probably just end up with something that looks like bitcoin, but isn’t,” he added.