Cryptocurrencies are new to the world of finance. This “puzzling” asset class, in theory, has only been in existence since the birth of the internet. Since the onset of the internet, developers have sought to implement cryptography into a digital assets.
The first well-known description of a usable cryptocurrency appeared around 1998, written by Wei Dai. The person (or group) described an anonymous digital currency titled “b-money.” Soon thereafter, a developer named Nick Szabo created what was called at the time “Bit Gold”. Bit Gold used a proof of work function to validate and authenticate each transaction.
Since Szabo’s work, all following cryptocurrencies have used a similar proof of work concept.
Then in 2009 came Satoshi Nakamoto (this may be a person or a pseudonym for a group of programmers), who integrated the existing ideas from the cypherpunk community when he created the world’s most well-known cryptocurrency, Bitcoin.
We’re now at the point to where central banks are interested, and boy are they interested.
Thinking Through the Policy Issues
Before central banks jump into challenging Bitcoin’s dominance, they need to think through the effects their actions might have, highlighted in Figure 1.
On the privacy front, central bank-issued physical cash is anonymous, whereas central bank-issued digital currency is identifiable.
On the tax front, central bank-issued cash is based completely on voluntary declaration. With central bank-issued digital currency, the coins are subject to involuntary declaration.
On the clearing and settlement front, both the cash and digital currency options have clearing happen immediately.
Lastly, on the accounting front, both options leave central banks with the liability covering the transaction.
Will They Jump In?
With this background, would you guess central banks jumping into the cryptocurrency space anytime soon? The answer is probably not because of the privacy and tax considerations. Individuals and businesses that value Bitcoin and other cryptocurrencies place perhaps more weight on privacy and taxes than the general public. They generally would rather not use a central bank digital currency. Indeed, one of the reasons Bitcoin was founded was to avoid central bank control of the money supply.
What’s the bottom line conclusion? Owners of Bitcoin and other cryptocurrencies likely have little to worry about with central banks encroaching on their space. And even if central bank do make the fatal step, Bitcoin is well positioned to keep its claim as the top contender in the cryptocurrency world.
Cryptocurrencies are a target of governments and central banks around the world. Whether governments and central banks will succeed in creating cryptocurrencies that will challenge Bitcoin and other private cryptocurrencies is anyone’s guess, but what appears abundantly clear is that governments and central banks are at least keenly aware of the effect Bitcoin could have on their control of the money supply.
In the end, the usefulness of Bitcoin compared to dollars, euros, Eurocoin, Fedcoin, and other real/potentially created assets will depend upon the decisions of billions of people and how they want to store their wealth and what they want to use for transactions. Decisions now will affect what people use for money for generations to come.