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Damaging them? Block them? Back them?
Governments and central banks have long been exercised by the disgusting nonsense of cryptocurrencies.
Some countries are actively experimenting with cryptocurrencies with rather insignificant results. These include Uruguay, Senegal, Tunisia and Venezuela. Cryptocurrency of Venezuela, the petro, supported by the country's oil reserves, has been variously
described as "a scam on top of a scam", and "the obviously most horrible investment of all time".
Others, like Estonia, Switzerland and Germany, have put aside the idea, at least for now. Today, well-developed payment systems exist at global level that facilitate secure, traceable and reasonably efficient payments between people and businesses.
Why develop a new one that is riskier, more volatile and expensive?
Central bank issued digital currency
Two central banks have the best and brightest task of probing the unexplored monetary frontier of digital (issued) currencies of the Central Bank (CBDC). The Swedish Riksbank and the Bank of England, respectively the oldest and the second oldest central bank in the world
have published articles on the subject that are fairly detailed. They are both out of the way.
The Swedish document is divided into two parts published after just over a year. The second part was published in October 2018. The Bank of England document was published in May 2018.
Both are heavily caved. The Bank of England document is positioned as an "educational exercise" to help researchers in the field of CBDC. The Swedish document makes it clear in its introduction that the document does not provide answers to all the questions
future payment systems.
Serious economic documents inevitably resort to complex mathematical representations to quantify non-quantifiable things. The Bank of England card resists the mathematical calculation for the first 9 pages. But surely, on page 10, an obscure formula appears
which gradually crystallizes and expands to cover the width of the whole page succinctly. The document's focus is on the economic implications of digital currencies. These are important But there is no explanation, not even a suggestion, about how a digital currency
could overcome its most difficult challenges.
The challenges
Counterfeit currency
The first challenge is the most obvious. A token or digital currency unit – let's call it a digital dollar – is made up of bits and bytes like any other digital record, like an app, a song or a movie. Even with the code that makes copying difficult,
it can be hacked, duplicated and used to pay multiple times.
A unique serial number will not help because counterfeiters will create digital dollars that are identical to the original token, making it impossible to distinguish between the true forgery. Software portfolio (or hardware) possibly secure obtainable or approved
from the central bank could store a digital dollar and transfer it to another approved portfolio in a similar way. All this would make a digital money system too complicated, cumbersome and unsustainable as in the case of Mint Chip, a failed digital currency system
developed in 2012 by the Canadian Mint and supported by the Government of Canada.
Property
When a person receives a digital dollar, he must make sure that it is not false and that it has been paid by its rightful owner, not by a hacker, or by someone who has used it before. In real life with physical money, possession is property.
But not so in the cyber world where someone can pretend to be the rightful owner and each transaction must be verified individually.
Working by consensus
Bitcoin has solved these problems, larger for a decentralized system, presenting the idea of a chain of digital blocks that validate transactions "by consensus" through a network of several "distributed" computers. The consent lends legitimacy.
On the other hand, a central bank may not feel comfortable with a consensus-driven approach. Without a decentralized consensus-based system, the issuing authority of the digital currency – a central bank – will have to keep accounts for everyone centrally otherwise
it will be difficult to ascertain the rightful owner.
Stable coins
The cryptocurrency prices subject to the whims of supply and demand of an illiquid market fluctuate significantly in something that can not be characteristic of a CBDC. A new type of cryptography called "stable currency" appeared on the scene where the value of a
the digital dollar is anchored to the value of the real dollar. The company that issues a stable currency maintains a guarantee – 100% (every digital dollar supported by a real dollar in the bank) or partial, say 50% (two digital dollars backed by a real dollar). Central banks
it may have to use some form of cryptography that is anchored to their "fiat" currency.
Off track
The Bank of England card does not even mention the double expense even once. Concerning the traditional economic risks of a centrally managed currency, it only concerns the "sectoral and aggregate balance sheet size" of the central bank issued
digital currencies – entirely academic if you do not even know how your CDBC will be.
The two documents of the Riksbank recognize the double expense, but incredibly offer only the approach of the value book that would require the "bearer of value" as a digital wallet or a stored value card to be registered at the central bank. In another
words every transaction for the possible future currency, the "e-krona" must be between portfolios or accounts approved by the central bank. It may be possible for bank transactions to the bank but not for a system that aims to imitate physical money in digital
world for general use.
Summary
The problem of counterfeiting and double spending has always been the main evidence of crypto-pudding and Bitcoin and now others provide a solution based on blockchain-based consent that works well for at least limited purposes for which cryptocurrencies are
to be used today Even when the cryptic pioneers of the 1990s like David Chaum with his "blind signatures" had offered solutions to overcome this problem.
It is difficult to understand if central banks can ever adopt decentralized approaches or solve the double-expense problem without making the whole system cumbersome and unusable. Unless central banks change their attitude and adapt to at least some form of decentralization
where digital currencies are worth, they will not be able to overcome the main challenges at stake.
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