With cryptocurrency making a record breaking amount of headlines this year and bitcoin becoming ever more popular, the concept of central banks issuing cryptocurrency as a replacement for fiat money is being talked about.
Cryptocurrency is efficient. It knows no borders, can be sent instantly on certain networks such as Tron and Ripple, and is drawing widespread attention by some governments who are considering, even if only far down the line, the replacement of the fiat money system with a digital currency backed by reserves and controlled by a government is something being spoken about all over the world.
But what would be the point of this?
Over 90% of fiat money is already “digital” in a sense, because it has not been printed. In fact when governments “print money”, all they are doing physically is replacing damaged banknotes which are collected from banks, destroyed and reissued. Depending on the central regulator’s inflation decisions, some additional notes are issued as well. However the concept of printing money, such as when a government generates new fiat out of thin air to bail out a bank, diluting the value of the currency, happens mostly digitally. It’s numbers on computers that have passwords. When you use your bank cards, or do a bank transfer, you’re already transacting money digitally.
Cash, Yesterday’s Crypto
A government or central bank controlled cryptocurrency would provide nothing new, necessarily. It’s highly unlikely that their crypto would be anything but tied to the same assets as their current fiat, making it the same for the end user as doing a bank payment. Whilst blockchain technology can facilitate this by automating certain functions, it’s unlikely that mass control mechanisms would not exist. Like a stablecoin, the value would be propped up by the government through intervention and the tying of it to assets. This is exactly how the fiat money system works, with the exception of the fact that in today’s fiat system, we still have the option of using cash. Such a system would not be a true cryptocurrency if it had a cash aspect, and that is what sets it apart.
In many countries that emphasise an individual’s right to personal liberty, human rights and privacy, the right to transact freely and privately without a record of this information is one of the last financial freedoms citizens retain. If such a system were to develop and remove cash from the equation, we would be left with a slightly more efficient(in theory) digital money system, yet be stripped of the right to transact privately should we wish to do so. The government would be able to record and monitor, authorize or deny and potentially even seize private assets. Political donations to minority parties would no longer be possible anonymously, even small ones.
Isn’t Cryptocurrency More Private and Secure?
In practice, mostly yes. Bitcoin is entirely decentralised and backed by nothing other than faith in its potential and belief in its value. The tracking of bitcoin is possible, but not an easy task if one wishes to obscure the transaction intentionally. Most bitcoin transactions that get tracked require a great deal of effort, specialised software that struggles to keep up to date with counter-tracking software, and happen for the specific reason of identifying crimes.
Monero on the other hand, a currency similar to bitcoin in its algorithm, is an even more private currency, where only the owner of a specific set of private keys can, at will, publicise their incoming and outgoing transactions. That makes the currency completely private.
A government issued crypto replacing the current fiat system with an entirely digital coin will never have the features inherent in Proof Of Work blockchains like bitcoin and Monero. It would likely resemble a stablecoin version of Ripple, or Tether. Both of these currencies are backed and issued by private companies, and the mismanagement of both has led to criticism from and even lengthy investigations into these companies’ actions. It’s clear that these systems don’t offer the innovation that bitcoin and ethereum’s networks do.
Centralisation Is Counter To Crypto In Many Ways
Decentralised exchanges are a step in the right direction, acknowledging that a user owning their assets directly is important, and that storing assets on centralised servers leaves these assets open to hacking or other theft. If someone else has your private keys, they can control your crypto. However, centralised exchanges for cryptocurrency contribute immensely to the crypto ecosystem by providing certain functionality aspects that do not exist elsewhere, such as accepting fiat for crypto. They also have much higher liquidity as a result of this, and unforeseen fees are rare.
Crypto is built on innovating on top of others’ innovations, not on fancy recycling of old failed ideas.
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