Central Banks are Not Innovators, Bitcoin Threatens

Central Banks are Not Innovators, Bitcoin Threatens

Central Banks are Not Innovators, Bitcoin Threatens


The Big Q: Should central banks embrace cryptocurrencies, or even pioneer their own?

The Big A: No.

Cryptocurrencies aka crypto assets, are a new and unusual financial medium innovation, and to centralize them in a bureaucracy is wrong.

However, the POBC, China’s central bank, says it is working to a blockchain-based digital currency. Singapore has already experimented in this direction.
So far we have seen nothing from the Fed. In its recent Quarterly review, the Bank of International Settlements asked central banks to consider whether cryptocurrencies might make sense for them.

Central banks are very conservative outfits, they do not go out ahead of the curve. Missteps are not in their playbooks. They take few risks, they are cautious non innovators.

The term Cryptocurrency is misleading.

Bitcoin is used only rarely in retail transactions, and for all its success it is not becoming more important as a medium of exchange.

Bitcoin is no much of a currency in the literal sense of that term.

There is a version of Bitcoin, Bitcoin Cash, that changed the initial rules to be better suited as an exchange medium, but it is not as popular yet.

If you think of digital assets as cryptocurrencies, then it seem natural that central bank involvement would be Key. because central banks manage currencies.

Instead, this new class of assets should be thought of as ledger systems, designed to create agreement about some states of the world without the final judgment of a centralized authority, which use a crypto asset to pay participants for maintaining the flow and accuracy of information.

Some argue that such innovations come closer to being substitutes for corporations and legal systems than for currencies.

Put in those terms, an active role for central banks in crypto assets is not the obvious.

Consider other financial innovations.

  1. Does anyone suggest that central banks should run their own versions of ETFs or
  2. High-frequency trading?
  3. Is there a need for central banks to start managing the development of accounting and governance systems?

Notably, Bitcoin and other crypto assets (currencies) are still in the state of rapid evolution, with basic questions still unanswered.

  1. Should Bitcoin “fork” to allow for greater speed in processing transactions?
  2. Is the future going to favor bBitcoin, the Ethereum platform, or something else altogether?
  3. How many initial coin offerings make economic sense, as opposed to being bubbles?
  4. Should ICOs (initial coin offerings) be used to fund startups?
  5. How many crypto assets should survive in the long run?
  6. Can blockchains be used to record and settle the transfer of property titles?
  7. Are there any circumstances when it should be possible to revise transactions on a blockchain?

Consider the Q: Would any central bank have had the inspiration or taken the risk of initiating the Bitcoin protocol in the 1st place?


So then central banks should not be given a commandeering position in steering these evolving innovations going forward.

Have a Happy Weekend.

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