A July 2018 report titled ‘Should Central Banks be Concerned About Virtual Currencies?’ has been presented to an EU conference and will likely form the basis of EU policy. On July 9th, a monetary session was held by ECON (Economic and Monetary Affairs Committee). The conference is associated with the European Central Bank and its monetary policy. The report was requested by ECON and carried out by Karl Whelan of University College Dublin.
Should central banks be concerned about virtual currencies?
The report appears reasoned but relies on some fallacious arguments to arrive at the conclusion that virtual currencies are inferior to legacy fiat. The technological gap is cited as a reason why cryptocurrencies will not replace the current infrastructure. The only present way to make cryptocurrency safe is with 2FA and cold storage devices. This hurdle is likely to deter many from embracing the technology.
However, it is no different from learning about IBAN’s, bank accounts, credit card numbers and SWIFT transfers. It’s just that certain generations are more familiar with them. Younger generations can easily learn to use cryptocurrency instead of fiat. 2FA is as easy as downloading an application and looking at a number. Keeping a cold storage wallet is almost the same as keeping a physical wallet. The wallet receive address can be likened to an IBAN that changes, as it is essentially an identifier.
Additionally, these are essential security practices that are necessary for the coming era where cybercrime will proliferate in line with all current data. Cybercrime is not the exclusive domain of cryptocurrency if Equifax is any indication. The report also ignores the many recent banking scandals, such as the 90,000 compromised accounts at Canadian banks, and the CBA AML scandal.
The report points out that cryptocurrencies are not anonymous as acclaimed. While bitcoin is not anonymous, it is more difficult to trace it. This is because a tracking and monitoring infrastructure has not yet been built by national governments. It is also a bridge cryptocurrency to privacy-based coins like Dash and Monero.
The author further posits that central banks could still function in a world of virtual currencies. But this is shortsighted regarding the changes that are being observed in the blockchain and AI sectors. There is a blockchain project for every industry. Academics seem to be overly reliant on historical models which have no validity in revolutionary eras.
Neutral tone, biased reasoning
The report is ideological in terms of its assessment of the role of money. It adopts a “Chartalist” school of thought, basically taking the position that the state has always been linked to money. Which is obviously true, and what we are trying to get away from by using cryptocurrency. The section outlines the benefits of the state in managing money. This is a stance that is not at all compatible with a libertarian perspective which revolves around the use of cryptocurrency to get rid of an administrative, costly, and bureaucratic nightmare. All governmental operations can be completed by algorithms, minus the corruption and inefficiency.
The report almost seems to infer that the state is somehow responsible for money itself, or intrinsically linked to its acceptance and maintenance. This would mean that without the government, we would still be trading small pieces of silver in bartering marketplaces. The report also conflates bitcoin with private money, which is not at all true. Bitcoin is not owned by anyone.
Overall, the report appears neutral in tone yet relies on some very questionable grounds to arrive at a reasonable conclusion that virtual currencies should be regulated but not banned. But the idea that cryptocurrencies will not overtake central banks is deeply questionable. Despite the opposition, the industry is growing year on year. Should central banks be concerned about virtual currencies? – Most definitely.
Digital Nomad with an interest in Zen and Blockchain technology.
Law graduate with 3 years experience as a consultant in the capital markets industry and 4 years experience freelancing on UpWork as a Creative Writer.