Despite the interest shown by central banks in decentralized ledger technology, cryptocurrencies continue to be distrusted by the traditional financial system. This was highlighted by comments by Andrew Bailey, the future governor of the Bank of England, during a speech to members of the United Kingdom Parliament during a Treasury Committee hearing on 4 March. He said, “If you want to buy Bitcoin, be prepared to lose all your money … [Bitcoin] has no intrinsic value. “
Despite this, seemingly complicated efforts to “appropriate” the technology, such as the launch of the Venezuelan Petro and the central bank’s talks on centralized digital currencies, show that the technology is still either gravely misunderstood, or seen as a threat by the current status quo. Nevertheless, there is still a real effort to see the technology applied in a meaningful way while cryptocurrencies continue to prevail in the financial sector.
CBDC: are they useless?
CBDCs have recently become one of the hottest topics in the crypto sphere. The BRI Quarterly Review, published earlier this week, shows that at least 17 governments around the world are exploring the potential uses of CBDCs. For example, earlier this year the President of the European Central Bank, Christine Lagarde, publicly announced her active involvement in the development of a central bank digital currency to meet the demand for faster and cheaper cross-border payments. .
However, the aforementioned report also shows that cross-border payments are not a priority in any of the ongoing projects and that a CBDC would not remedy the lack of access to transitional accounts either. These two major shortcomings of emerging markets and developing economies – where cryptocurrencies have become a means of escaping inflation and economic instability – are often caused by or helped by central banks.
These efforts also seem to ignore the real value of blockchain technology, its decentralized, unchanging and (optional) transparent nature. Centralized payment systems are known to be faster and more scalable than cryptocurrencies like Bitcoin (BTC) due to the way transactions are processed and recorded. The BIC report reads as follows:
“The overhead costs necessary to operate a consensus mechanism are the main reason why DLTs have a lower transaction throughput than conventional architectures. Specifically, these limits imply that the current DLT could not be used for direct CBDC, except in very small jurisdictions, given the likely volume of data throughput. “
Despite the exploration of different types of architecture for the creation of a CBDC, there is still a certain level of centralization that goes against the fundamental values of Bitcoin and cryptocurrencies: decentralization and immutability. The report also mentions: “The central bank is, by definition, the only party to issue and redeem CBDCs.” Arwen Smidt, chief blockchain strategist at MintBit, told Cointelegraph on the sidelines of London Blockchain Week:
“The CBDCs could very well potentially become a tool for governments to assert control over cryptography. This is certainly one of the reasons why these central banks are looking into the matter. So it can go in two ways: either the government would do it only to assert control, or to ensure that the cryptos correspond to future monetary policy and would also give legitimacy to these new forms of private money. “
She added that creating a new digital currency would integrate value systems and privacy considerations into that particular currency. In turn, this would mean that everyone who uses or is exposed to this currency automatically accepts these assumptions.
In addition, while DLT is currently being explored as an option for the development of CBDCs, another type of technology could be exploited. Blockchain technology, or something closely related, can still be used, but decentralization of transaction processing and verification will not necessarily occur, which means that transfers would not offer the functionality without censorship and anonymous associated with cryptocurrencies. The report states:
“Overall, the costs and benefits of using DLT need to be carefully weighed. This technology essentially subcontracts to external validators the power to adjust the claims on the central bank’s balance sheet, which is only advantageous if we trust this network to operate more reliably than the bank. central. Ongoing DLT-based proofs of concept assessments tend to be negative. “
The story between traditional finance and crypto
Although the traditional financial world has recognized the potential of blockchain technology, some have quickly rejected cryptocurrencies due to their decentralized and anonymous, or pseudonymous, nature.
Bitcoin has often been criticized for its association with criminal activity, high volatility and speculation, as well as its lack of regulatory oversight. In short, it is often seen as another fashion and / or technology bubble, and it has also been reported “dead” too many times to be considered – a testament to the strength with which certain individuals and groups wish for the disappearance of Bitcoin.
Regardless of what the world of cryptocurrency has endured, it continues to progress in all areas where it has been criticized. Lately, several financial institutions have begun to recognize the benefits of distributed ledger technologies and are considering integrating them into their operations – as shown by State Street’s announcement of a partnership with Gemini for a “new digital asset pilot” and a partnership announced by IBM with several international banks to allow the issue of stable coins.
Related: WisdomTree Develops Stablecoin Today to Feed a Crypto ETF Tomorrow
Institutional demand for cryptocurrencies as a hedge against economic instability has also increased. Facebook, one of the world’s largest companies, attempted to launch its own cryptocurrency, Libra, but was shut down by regulators. IBM, Walmart, Visa, and the Bank of America now own dozens of blockchain patents, but have yet to fully implement them. Many argue about the usefulness of accumulating patents on a technology that was supposed to be open-source from the start.
In recent years, crypto has been knocking on the door of the financial market, but the door remains closed. A sigh of relief rings out among most financial regulators every time the Securities and Exchange Commission rejects yet another Bitcoin Exchange Traded Fund proposal. Although SEC refusals have become typical, reactions within the commission itself are beginning to change. Recently, one of the SEC commissioners, Hester Peirce, criticized the commission for the Wilshire Phoenix Bitcoin ETF app.
Threatening the status quo
For some people, cryptocurrencies have offered a way and a way to store and trade value outside the traditional financial system. Although some countries have chosen to adopt cryptography, not all countries are compatible with cryptography.
Some governments have chosen to implement either restrictions or absolute bans on cryptocurrencies, including the crackdown on cryptocurrency exchanges by the People’s Bank of China last year. Regulatory oversight is of course not necessarily a bad thing. However, the recent crackdown on initial coin offerings in several countries was certainly a much needed improvement after the discovery of several huge scams.
Despite attempts to prevent people from using cryptography, several new technologies under development threaten the status quo. Bank of England representative Jon Cunliffe recently said that “the emergence of a cryptocurrency economy could weaken or eliminate the issuance of bank credits.” Cunliffe shared his concerns about stablecoins in particular, stating that social media platforms adopting stablecoins can lead users to take money held from banks and place it in stablecoin wallets.
This type of scenario was only one of the reasons why financial regulators decided to take a firm stand against Libra. It would have been a great step forward if Libra had been launched and exposed to the Facebook user base, potentially making cross-border payments faster and cheaper while helping the financial inclusion of millions of unbanked people – this which is one of the main concerns expressed in the aforementioned BIS quarterly report.
Related: Sectors Realizing the Full Potential of DeFi Protocols in 2020
In addition, decentralized finance is becoming a threat to all traditional financial service providers. It allows individuals to access lending, borrowing and other transparent services such as stable coins and decentralized betting markets. DeFi is growing tremendously, recently breaking the barrier of over $ 1 billion in locked value in the DeFi markets. In addition, it also creates space for new financial services while contributing to financial inclusion and transparency.
Is the gap between traditional finance and cryptography closing?
Despite the love / hate relationship, the gap between crypto and traditional finance has narrowed. Regulation seems to be catching up with technology worldwide and the launch of DeFi’s regulated financial instruments and innovative solutions has caught the attention of institutional investors.
Tokenization has also become a buzzword in finance, as companies seek to tokenize their securities using blockchain technology to modify clearing and settlement processes and reduce the $ 17 billion to $ 27 billion spent. processing transactions each year. While most token securities have been issued on private blockchains, these systems are less centralized than the current standard while remaining compliant with regulations.
There are also examples of security tokens issued on decentralized blockchains, such as the first covered bonds issued by Société Générale on the Ethereum blockchain. Central banks and private institutions have also experimented with tokens for the payment and settlement of securities. Examples include proposals such as the JPM coin from JPMorgan Chase and the Utility Settlement Coin (USC) is a proposal from Finality International.
Decentralized stable coins also act as a bridge between these two worlds, providing a more recognizable entry into cryptography and allowing users to get the most out of technology without being exposed to volatility. Cryptography is also becoming easier to use thanks to alternative banking applications that make cryptographic payments and transfers intuitive while providing banking services such as loans and savings accounts.
Still, crypto still has a long way to go, and it’s only a drop in the ocean compared to the size of our current financial system. Bitcoin’s market capitalization is around 4.3% of the U.S. dollar, according to figures from the St. Louis Federal Reserve. In addition, the crypto space is also small compared to the overall investment market.
Arwen Smidt’s interview was carried out by Joseph Birch during London Blockchain Week.