Terence Zimwara is a fan of cryptocurrency and an economic analyst from Zimbabwe, with direct experience of his country's record hyperinflation. Terence also likes to share his opinions through his blog.
The following is an exclusive contribution for the 2018 year of CoinDesk under consideration.
As digital currencies gradually gain traction, a contradiction has emerged over the course of the year: central banks that have late recognized the value of cryptocurrencies now want to launch their own.
However, some want the prerogative of issuing this currency assigned to them and only them, because central banks & # 39; enjoy trust & # 39; of the public. Speaking at a discussion event organized by the Brookings Institute, Agustin Carstens, General Manager of the Bank of International Settlements, boldly stated at the beginning of this year that technology can not replace everything that central banks do to make reliable currencies.
This kind of pushback against cryptocurrencies has long characterized the debate on bitcoins, blockchains and digital currencies. At the center there are two fundamental questions, control and freedom of choice. Central banks naturally want to perpetuate the status quo because of the obvious advantages that this entails.
However, the popularity of cryptocurrency stems from the ease with which it improves trade and the isolation it offers to investor value when financial markets hit the turmoil. Perhaps the banks would not complain about what they are doing now, if the bitcoins do not threaten to destroy the monopoly that is issuing money and that they currently enjoy.
The power that derives from the monopoly on money creation is unparalleled and that is why virtually all central banks insist on having the only right to print money. On the other hand, blockchain technology is a natural reaction to the years of this unfair state of affairs. Blockchain technology is an attempt to impose radical reforms on the global financial system.
Therefore, it is also important to keep the second perspective when discussing the pros and cons of cryptocurrencies. When central banks say they want to issue their digital currencies, we must invoke the context we have just explained above. In all honesty, the central banks of the advanced economies of the whole EU, the Federal Reserve, the Bank of Japan, etc., sometimes sincerely try to protect their respective citizens from hackers, scammers or other undesirable elements that they may want to hurt.
Central banks also argue that their presence helps to instil confidence in financial systems. For example, banks usually do not trust each other, so the role of intermediary played by central banks ensures the smooth flow of transactions between them. In other words, central banks build and maintain confidence in the financial markets.
It is on this basis that Carstens doubts that any new technology will replace all these centuries of creation of good practices, which in a certain way generates the trust that society has on the currency we know today.
Risks and advantages
However, this assessment is incomplete, if not naive, because it dodges the central theme of bitcoin and cryptocurrencies in general – putting an end to monopolies of unfair currency issuance.
Digital currencies issued privately present risks, but at the same time have important advantages and one of these is competition or choice. Competition makes free markets efficient and when a market is deprived of this, a waste of resources often follows and customers get worse.
The cryptocurrency market is already equipped with an increasing number of digital currencies in addition to bitcoin. The choice of such "altcoin" ranges between ethereum, litecoin, XRP, bitcoin money and many others, and each is an attempt to give the holder a unique advantage that they can not obtain elsewhere.
Here there is no monopoly: different players have been allowed to issue cryptocurrencies, but the market continues to grow. When a central bank issues a currency, you have no choice but to accept that currency, even if you have any doubts about the currency or the issuing process.
Laws have been passed to prevent private entities from printing national currencies because, it seems, competition is not preferred when it comes to money creation. So even when you know that the issuer is incompetent or corrupt, you have no choice but to respect.
Times of crisis
To illustrate, Zimbabwe's central bank, the Reserve Bank of Zimbabwe (RBZ), pursued what became known as quasi-fiscal activity between 2004 and 2008. The RBZ ran parallel spending activities, which many blamed on hyperinflation, reaching a peak of 500 billion and the definitive collapse of the Zimbabwe dollar.
The public has lost faith in this institution and in the banking system in general, as evidenced by the nature of the deposits mobilized by most banks after the period of hyperinflation. It is quite natural that many people now question the legitimacy or the importance of this institution.
So when the same institution announced that it planned to issue a so-called surrogate currency in 2016, there was a predictable protest, with many fearing it was an attempt to bring back the Zim dollar worthless.
The cryptocurrencies give a choice to those who are opposed to a national currency, as was the case in Zimbabwe in November 2016, when the bonds took legal tender. Unfortunately, the levels of ignorance were and still remain very high: the citizens of Zimbabwe did not realize they had an option to switch to cryptocurrencies.
Now, a few years later, the bond notes seem to be on the verge of extinction, as they are losing value quickly and ordinary people will once again be hit hard. So it is quite embarrassing to hear people like Carstens say that people trust central banks. Which central banks? There are obviously better corporate governance standards in Europe where Mr Carstens comes from. There are also strong institutions that help keep central banks under control, something absent in many developing countries.
The competition is healthy
It is unjust that powerful figures from advanced and advanced economies want to stifle innovation, which could lift societies across the continent, just because innovation is not "international best practice".
Africa has had its unfair share of currency crises, from Mozambique to Zambia, from Nigeria to Zimbabwe, and it is evident that the central banking system does not always work well. On the other hand, cryptocurrencies offer an exciting alternative, which we must be able to explore. Private cryptocurrencies must be able to compete with the currencies issued by the central banks of the continent.
This competition will help the continent's central banks improve and reform.
African nations must also resist attempts to adopt the model of Venezuela, where the state would have forbidden others to issue digital currencies before launching its own – the petro.
No one can really predict what will happen to cryptocurrencies in the coming years, but this should not stop us from dreaming about the future. New technology often changes lives in many ways that even those who create technologies could not have imagined. Now it's time for open minds and not for fear.
Image of Zimbabwe dollars through Shutterstock