“Bitcoin can never survive; banks will just create their own digital currency”
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I first wrote this piece over a year ago, but thought that it was an apt time to have another look at it following the publicity afforded to Nouriel Roubini’s piece “Why central bank digital currencies will destroy bitcoin”.
One of the most oft-repeated and frustrating arguments against Bitcoin is that even if it (or another cryptocurrency) was to by some miracle become the future and predominant cryptocurrency of the world (henceforth ‘CCW’) then it wouldn’t matter anyway, because the governments and central banks would simply issue their own cryptocurrency (henceforth ‘CBC’). Game over. Bitcoin dies, nothing anyone can do about it.
There are a number of reasons why I believe this argument does not necessarily hold up, at least not in democratic societies at one end of the spectrum and in some of the most corrupt and dictatorial at the other.
Firstly; governments and central banks are slow-moving behemoths who (for good reason) will not rush into adopting cryptocurrencies. For developed countries in particular, this need for caution and the accompanying glacial change means that they will always lag the more agile private solutions that will come about. Secondly, even when central banks adopt cryptocurrencies, the result will be a mirroring of current fiat currencies (£, $, € etc) which will act as an extension of the system we already have.
This is important because it means that private solutions will always be the more technologically developed and will remain at the forefront of innovation. It also means that existing issues with fiat currencies will not be eradicated through the new digital GBP, USD or EUR including:
Risk of devaluation of currency, either willfully or through a situation out of the central banks control
Risk of financial haircuts in the event of financial crises, such as witnessed in the 2012–2013 Cypriot financial crisis
No global currency prevents globalised trade and leads to excessive fees, delays and intermediaries
The death of cash will mean all transactions are recorded and accessible by centralised (and untrustworthy) agents — nowhere to hide
Not a solution
The CBC would not just fail to remove some of these issues, they would amplify at least two of them.
Firstly a CBC would by design be centralised and as such seizures (a rather more harsh word than the innocuous sounding ‘haircut’) would be just a buttons click away — and in this event you would not be able to hide your money like you could in the aforementioned Cypriot example (where just one bank’s depositors were affected). With a CBC all wallet holders, regardless of if you stored it in an institution or privately, would be susceptible
Secondly, the death of cash is a cause for celebration for governments, making it far easier to stop tax evasion through undeclared ‘cash in hand’ jobs. Banks are already tasked with monitoring for suspicious behaviour, with tax authorities now able to access far more detailed and readily available banking records than at any point in history. A CBC would make this task even easier, with all transactions recorded on immutable ledgers. Now, cracking down on tax evasion is obviously a positive, particularly with the wave of revelations that continue to unfurl around the world. However, this same ability would also render citizens purchases and transactions for legal but potentially sensitive items open to a centralised authority — going against one of the foremost reasons for the conceiving of the decentralised blockchain.
Seen through the prism of a democratic society that respects the private rights of its citizens this could be seen as a necessary sacrifice. Applied to a society where you can be imprisoned, tortured or executed for purchasing a forbidden good or service it becomes a tool for surveillance unlike any other in history.
This discrepancy between democratic and totalitarian, well ordered and corrupt, large and small is important when discussing why a CBC will never be able to compete with their decentralised counterparts where conditions are weak enough for them to be used. In a country such as China, which is pushing through the Social Credit System, it is easy to imagine that a decentralised currency would be effectively banned by the powerful instruments of state.
However, in countries such as Venezuela or Zimbabwe there are very good reasons why a CCW would prove popular (as indeed Bitcoin already is), to hedge against CBC instability and devaluation, just like there are where regressive conservative attitudes exist. No person in their right mind would wish to purchase ‘sin’ goods such as pornography, alcohol or drugs using a CBC but the desire to avoid transactions being tracked is not just limited to illegal items. There are many situations where a purchase could be sensitive, but perfectly legal. A centralised solution not only replicates current problems, it worsens them.
Change will not be quick
It is difficult to see governments and central banks reaching any swift agreement upon a global currency, especially in the current climate of protectionism and inward nationalistic thinking. The consensus that formed the Euro, which 19 countries use, will not translate into a global currency. In an increasingly globalised world this becomes a bigger issue issue, with people travelling more frequently, purchasing goods from further afield, creating large remittance flows through greater emigration and partaking in a still-developing gig economy which allows hiring from a global talent pool.
A CCW may not replace the fiat currencies of each country — but it does not have to. A decentralised global currency can coexist alongside the centralised digital currencies of each nation. It is not an either/or situation. I might still get paid in GBP or USD if a salaried employee, but accept only CCW for my freelance writing or for all overseas orders on my online store. Furthermore, smaller and more progressive nations may decide it is in their interests to peg themselves to the CCW. Many of them already peg to the USD for example, so this is not an idea without precedent. Why peg yourself to a single country, with all the downsides that entails, if you could peg yourself to a stable and proven CCW?
We are decades away from this situation being resolved. Many in the crypto space believe that just because it makes sense to them, and because the technology is almost there, that it will happen quickly. It will not. A currency is not able to be disrupted in the same way taxis or hotels can be. For a CCW to develop it will need to prove that it is stable and not prone to excessive speculation/volatility, that it is safe and cannot be hacked, that it is free from outside interference. These are not easy assurances to provide.
Currencies are a fundamental part of every society and have taken thousands of years to evolve to this juncture. It may even be that the issues outlined here are solved through auxiliary projects, negating the need for a CCW. Privacy coins, blockchain technologies targeting remittances and store of value coins are already addressing these concerns. However, I believe that a decentralised and global cryptocurrency will eventually rise to the forefront, owing to the ease of use and security it will be able to provide, as well as the potential technological innovations we may not have even thought of.
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