Bitcoin the wild gyrations of 2021 have ensured one thing: the future of money will be electronic, but it will not look like a cyberpunk utopia at all. Popular power will bow to the power of sovereigns.
The madness and panic that have gripped decentralized cryptocurrencies are strengthening the appeal of their next rivals: digital currency, issued by central banks. These tokens will be fixed, centralized and controlled by the State. This is exactly what users will want in an Internet of Things world where machines have to settle their claims among themselves all the time, instantly, but without contributing to global warming.
Official electronic coins will be a new kind of central bank liability alongside physical cash, although for investors betting on the future value of the dollar, yen or euro, they will not constitute a new class of active.
This has obvious advantages. To avoid becoming a lightning rod for further speculation means that a global economy fueled by FedCoin, digital euro and Chinese e-CNY will make much cheaper requests on energy resources than cryptocurrencies. In the absence of a trusted intermediary, the “mining” or proof of work protocol that protects the blockchain from double-spend attacks, requires energy-hungry hardware. Between Bitcoin and Ethereum, the electricity consumed can turn on 16 million American homes.
This is not the case for distributed ledgers which will verify official document transfers. These registers will only be held by a select group of intermediaries with the authorization of the central bank. Instead of being in a race to solve puzzles faster than malicious actors, as we see with decentralized cryptocurrencies, nodes in the network can lock in their own funds to support legitimate transactions.
This approach, known as proof of stake, will require a fraction of the energy requirements for proof of work. Ethereum intends to change. Ether cryptocurrency will replace hardware and electricity as the investment needed to secure the network. Validators will receive fees in lock up at least 32 Ether. (That’s a commitment of $ 72,000 as of this writing.) If they misbehave, go offline, or don’t do their job, processors can lose their warranty.
Perhaps a central authority can better manage such a network. After all, those who vouch for transactions need to have their skin in the game, as they claim – and someone trustworthy needs to make sure they do. Like Chi Lo, economist at BNP Paribas Asset Management Asia, said: “The identity of a bearer is obligatorily required for the verification” of the balances on a digital book. “Who has the legal identity of the coin holders? The government!”
Central banks that are not limited by the amount of fiat money they can create out of thin air are using this flexibility to avert disaster, as they did recently during the Covid-19 pandemic. In contrast, a “bitcoinized” economy can be dangerous due to a limited money supply. As Lo says, if you fix dummy variables, real output has to adjust violently to absorb any economic shock.
In addition, the perfect anonymity of cryptocurrencies is not practical. It comes with unacceptable risks of money laundering and terrorist financing. Governments do not want to interfere in all – or even most – online transactions. But they will not give up their right to lift the veil of pseudonyms whenever they want. Hence the global interest in digital money. China’s plans are the most advanced, but other central banks are also in the fray.
If the adoption of cryptocurrency is a headache for governments, an overwhelming popularity of digital money could also be a problem. Banks could lose deposits if customers prefer to have a direct claim on their monetary authorities. Lenders who fund long-term loans with short-term market liquidity might have problems down the road. These risks are not new. But by ignoring them to a point where bank losses from subprime mortgages had to be socialized, authorities created a wedge of trust with the public: Techno-anarchists broke in with the model of an electronic payment system based on cryptographic proof instead of trust.
More than a decade later, the success of the cyberpunk movement is not measured by the highly volatile speculative asset class it helped spawn and popularize, but by the growing influence of blockchain technology within the traditional financial system. Digital money with embedded, self-executing software code will change the future of money in ways cryptocurrencies never could. The tokens will win. But the confidence will not lose.
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