With the advances in online banking, contactless payments, and the recent concerns related to using physical currency in the days of COVID-19, fewer and fewer people carry cash. And with China leading the way to launch a central bank for digital currencies, this trend is not just set to continue, but to accelerate.
Many in the cryptocurrency community are desperate for a broader adoption of bitcoin and other cryptocurrencies. There is a sense that the trends towards digital currencies were started by bitcoin, and now that the momentum is growing, bitcoin will benefit. Some pundits even claim that bitcoin is responsible for central banks exploring digital currencies.
Sadly, whilst digital currencies are likely to grow, there is little factual evidence that this will benefit bitcoin in any way other than misleading hype (and perhaps, misguided hope). Bitcoin will forever languish 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 been paying great attention to each of these details.
Whilst there are numerous projects to make fiat more digital, none of these projects embraces the core tenets of blockchain: decentralised, distributed and immutable. The systems put in place by central banks will not allow for anonymity. They will most definitely be centralised. And should the need arise, they won’t 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 consistent and predictable transaction fees (many assume no-cost transactions). Finally, being tied to fiat currency, they will be far 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 appropriate controls), unlike today where cryptocurrencies like Bitcoin and Ether are used by some to do just that.
While many pundits believe that this sudden interest in digital currencies has everything to do with bitcoin, most governments were never anxious (and they still aren’t) about bitcoin taking any kind of significant role in daily transactions. What scared governments was Libra.
Libra is a genuinely 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 spooked by Libra. Looking across the globe, almost every government took serious notice of Libra, with many governments coming out firmly against the project.
Libra was a bigger threat to central banks than bitcoin will ever be.
Please don’t ever refer to Libra as ‘Facebook’s’ currency. It isn’t, 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 pointed out earlier that kill mass consumer adoption), so they created another one and invited numerous companies to join the Libra Foundation. I think the project still has legs, but it will take real commitment and a healthy appetite for risk to get the project off the ground.
Whether it’s China’s digital Yuan, Libra or some other digital currency, the move away from physical money is on the way.
One troubling aspect to digital currencies that has been obvious to me is the potential for a negative impact on those who are either unable or unwilling to go digital. According to the ONS, 96% of UK households have Internet – leaving 4% without access to the Internet. According to the EAB, 21% of adult Britons do not use a smartphone. What solutions exist to help bridge this gap?
Could non-digital citizens be provided with a QR Code and some form of a prepaid debit card? The QR Code would allow people to quickly and easily send digital currency to their wallet. The funds in the wallet could be accessed via the debit card. Cash machines could be updated to provide balances and transaction lists. Merchants would accept the 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 favourite restaurant knowing the funds would go directly to them rather than to 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 not currently viable in crypto due to the high cost of transactions. And not feasible for bitcoin again 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 affords a certain level of commerce where there may be no record of the transaction. And, for better or worse, digital currencies will make this far less available. Fair and accurate taxation is good for society.
With digital currency comes the ability to keep access to the funds in the same way as physical cash – without needing to stuff your mattress full of notes and pound coins. If a government ever attempted to seize the funds of a citizen, it would be a death knell for the project. For broad adoption, citizens must have confidence that digital currencies are just as safe as paper currency.
As with paper currency, the digital currency would be backed by the central bank and the government. Government backing 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 21M bitcoin in circulation. 21M bitcoin which is not backed by any physical asset nor by any government. (And if you want to know what I think about bitcoin and it’s future, you can read that here.)
It’s no longer a question of ‘if’ but when: Digital currencies are coming. Bitcoin and blockchain laid the foundation and clearly demonstrated consumer appetite. They also illustrated all of the various shortcomings that prevented broad adoption. Libra showed governments the power of a global digital reserve currency – and the disruption it could cause. Right now, many governments and central banks are responding (or have plans 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 blockchain and their adoption does not correlate with the future of bitcoin.
Oh – and in case you thought I’d be writing about Blockchain and Elections…
I’ve already written about blockchain voting and how it wouldn’t have solved all of the delays in counting ballots from the Biden Trump 2020 US Presidential elections. And whilst I am happy about the result, the journey was painful, and the outcome left a lot to be desired.
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Troy Norcross, Co-Founder Blockchain Rookies