Bitcoin’s wild spins in 2021 did one thing: the future of money will be electronic, but it won’t even remotely resemble a cyberpunk utopia. The power of the people will bow to the power of the sovereigns.
The mania and panic that have gripped decentralized cryptocurrencies add to the appeal of their upcoming rivals: digital cash issued by central banks. These tokens will be stable, centralized and state controlled. This is exactly what users want in a world of the Internet of Things where machines are constantly settling claims with one another, instantly but without contributing to global warming.
Official electronic coins will be a new breed of central bank debt alongside physical cash, although they are not a new asset class for investors betting on the future value of the dollar, yen or euro.
That has clear advantages. In order not to become a lightning rod for new speculation, this means that a global economy driven by FedCoin, the digital euro and China’s e-CNY will place far less burdensome demands on energy resources than cryptocurrencies. In the absence of a trustworthy intermediary, the “mining” or proof-of-work protocol that protects the blockchain from double-spend attacks requires power-hungry hardware. Between Bitcoin and Ethereum, the electricity consumed can light up 16 million American households.
Not so for the distributed ledgers who check the transfers of official coins. These ledgers are only kept by a select group of intermediaries with the approval of the Central Bank. Rather than solving puzzles faster than malicious actors, as we see with decentralized cryptocurrencies, the nodes on the network can lock their own funds to aid legitimate transactions.
This approach, known as proof-of-stake, requires a fraction of the energy proof-of-work requirement. Ethereum intends to switch. The cryptocurrency ether will replace hardware and electricity as a necessary investment to secure the network. Validators earn fees by blocking at least 32 ethers. (That’s a $ 72,000 commitment as I write.) If they misbehave, go offline, or fail to do their job, the processors can lose their securities.
A central authority may be better able to operate such a network. After all, those who cash in transactions have to have a hand in it, as they claim – and someone who can be trusted has to make sure of that. Chi Lo, economist at BNP Paribas Asset Management Asia, says, “The identity of the owner is inevitably required for verification” of balances on a digital ledger.
“Who has the legal identity of coin holders? The government!”
Central banks, not limited by how much fiat money they can create out of nowhere, are taking advantage of this flexibility to avoid disasters, as they did recently during the Covid-19 pandemic. In contrast, a “bitcoinized” economy can be dangerous due to the limited amount of money available. As Lo says, when one sets nominal variables, real production must forcibly adjust to cushion economic shocks.
In addition, perfect anonymity of cryptocurrencies is impractical. It is associated with unacceptably high risks of money laundering and the financing of terrorism. Governments do not want to intervene in all – or even most – online transactions. But they will not give up their right to lift the veil of pseudonyms if they want. Hence the global interest in digital cash. China’s plans are furthest advanced, but other central banks are also in the fight.
If the adoption of cryptocurrencies is a headache for governments, the overwhelming popularity of digital cash could also be a problem. Banks could lose deposits if customers prefer to have a direct claim on their monetary authorities. Lenders financing long-term loans with short-term market liquidity could run into trouble later. These risks are not new. But by ignoring them to the point where mortgage-related losses in subprime banking had to be socialized, the authorities created a trust gap with the public: techno-anarchists burst with the template for an electronic payment system based on cryptographic evidence rather than trust based.
More than a decade later, the success of the cyberpunk movement cannot be measured by the highly volatile, speculative asset class that spawned and popularized it, but by the increasing influence of blockchain technology within the traditional financial system. Digital cash with built-in, self-executing software code will change the future of money in ways that cryptocurrencies never could. Tokens will win. But trust will not lose.
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