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With advances in online banking, contactless payments, and recent concerns surrounding the use of physical currency in the days of COVID-19, fewer and fewer people carry cash. And with China leading the way in launching a central bank for digital currencies, this trend is not only set to continue, but to accelerate.
Many in the cryptocurrency community are desperate for wider adoption of bitcoin and other cryptocurrencies. There is a sense that the trends towards digital currencies have been initiated by bitcoin and now that the momentum is growing, bitcoin will benefit. Some experts even claim that bitcoin is responsible for central banks’ exploration of digital currencies.
Unfortunately, while digital currencies are likely to rise, there is little solid evidence that this will benefit bitcoin in any way other than a misleading (and perhaps, misleading hope) advertising campaign. Bitcoin will languish forever and struggle to be used as money due to its slow processing times, complex user experience, unpredictable transaction fees, and price volatility. The next generation of digital currencies has paid great attention to each of these details.
While there are numerous projects to make fiat more digital, none of these projects embrace the core principles of blockchain: decentralized, distributed, and immutable. The systems put in place by central banks will not allow for anonymity. They will certainly be centralized. And in case of need, they will not be immutable.
The next generation of digital currencies will offer near instant transactions, even at peak usage. They will have a simplified user interface in the form of digital wallet apps and services. They will have constant and predictable transaction fees (many assume free transactions). Finally, being tied to fiat currency, they will be much more predictable.
With central banks controlling each of their digital currencies, they can prevent things like capital flight (moving fiat to another jurisdiction without the proper controls), unlike today where cryptocurrencies like Bitcoin and Ether are used by some. to do just that.
While many experts believe this sudden interest in digital currencies has everything to do with bitcoin, most governments have never been anxious (and still aren’t) for bitcoin to play a significant role in day-to-day transactions. What scared governments was Libra.
Libra is a truly disruptive concept that could create a credible alternative to the US dollar as a global reserve currency. It wasn’t just the US government that was scared of Libra. Looking around the world, almost all governments have taken Libra seriously, with many governments standing firmly against the project.
Libra was a bigger threat to central banks than bitcoin ever will be.
Please, never refer to Libra as the “Facebook” currency. It is not, and it never was. Facebook was behind the concept and developed much of the software, but this was never going to be “Zuck-Bucks”. Facebook needed a reliable digital currency. They tried it with bitcoin, but bitcoin wasn’t up to the task (in those four critical areas I reported earlier that kill consumer mass adoption), so they created another and invited numerous companies to join. to the Libra Foundation. I think the project still has legs, but it will take real commitment and a healthy risk appetite to get the project off the ground.
Whether it’s China’s digital Yuan, Libra, or some other digital currency, the abandonment of physical money is on the way.
One troubling aspect of digital currencies that has been obvious to me is the potential negative impact on those who are unable or unwilling to go digital. According to the ONS, 96% of British households have the internet, leaving 4% without internet access. According to the EAB, 21% of British adults don’t use a smartphone. What solutions exist to help fill this gap?
Is it possible to provide non-digital citizens with a QR code and some form of prepaid debit card? The QR code would allow people to quickly and easily send digital currency to their wallet. The funds in the wallet can be accessed via the debit card. ATMs could be updated to provide balances and transaction lists. Merchants would accept cards for purchases, likely using the existing VISA and MasterCard infrastructure.
With the right systems in place, you could still tip your excellent service staff at your favorite restaurant knowing that the funds would go directly to them rather than their employer.
Digital currencies cannot be used to exclude those who are not digital enough.
Sending small amounts of money to artists, from musicians to sculptors (or even journalists!), Is currently not viable in cryptocurrency due to the high cost of transactions. And again not feasible for bitcoin due to the variable cost of transactions. However, with a central bank-backed digital currency, anyone could send digital funds with the same speed and flexibility as cash payments.
For better or worse, cash also offers a certain level of trading where there may be no record of the transaction. And, for better or for worse, digital currencies will make this much less available. Fair and accurate taxation is good for society.
With digital currency comes the ability to maintain access to funds in the same way as physical money, without having to fill the mattress with free bills and coins. If a government ever tried to seize a citizen’s funds, it would have been a death knell for the project. For wide adoption, citizens need to be confident that digital currencies are as safe as paper currency.
As with paper money, the digital currency would be backed by the central bank and the government. Government support means that the value would also be affected by inflation, quantitative easing and similar mechanisms used by central banks. Bitcoin, on the other hand, will only ever have a maximum of 21 million bitcoins in circulation. 21M bitcoin which is not backed by any physical asset or any government. (And if you want to know what I think about bitcoin and its future, you can read it here.)
It is no longer a question of “if”, but of when: digital currencies are coming. Bitcoin and blockchain have laid the foundation and clearly demonstrated consumer appetite. They also outlined all of the various shortcomings that prevented wide adoption. Libra has shown governments the power of a global digital reserve currency and the disruptions it could cause. Right now, many governments and central banks are responding (or planning to) with digital currencies designed for modern consumers and businesses, without the pitfalls of current cryptocurrencies. Make no mistake: the majority have nothing to do with the blockchain and their adoption is unrelated to the future of bitcoin.
Oh, and in case you thought I would write about Blockchain and Elections …
I’ve already written about blockchain voting and how it wouldn’t fix all the delays in counting the votes in the 2020 Biden Trump US presidential election. And while I’m happy with the outcome, the journey was painful and the outcome left a lot to be desired.
Get in touch with us [email protected] / Twitter @igetblockchain.
Troy Norcross, co-founder Blockchain Rookies
Twitter: @troy_norcross
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