Eugene Etsebeth is a former central bank technologist with the South African Reserve Bank. There, he notably chaired the virtual currency and distributed ledger working group.
In this opinion piece, Etsebeth outlines why he believes all central banks will attempt to dematerialise notes and coins eventually, and what that means for central banks.
Today, nation states have a monopoly on the issuance of notes and coins, one enforced with acts and regulations.
One just needs to revisit history to see how Liberty Dollar creator Bernard von NotHaus was charged with federal crimes for trying to mint his own private currency. Agents of the U.S. Secret Service and FBI raided the Liberty Dollar offices in 2007 and confiscated all its gold, silver and platinum. Bank accounts were frozen and computers seized.
Fast forward to 2017 and central bank-issued currencies and privately issued cryptocurrencies have been co-existing for almost a decade. Libertarians are acutely aware that it is only the decentralized and cryptographic nature of cryptocurrencies that keep the government agents from the door.
And there is reason for suspicions. A larger drive by central banks to dematerialize money has been ongoing since long before the advent of cryptocurrencies, and it can be said that the technology is emboldening central bank attempts to issue digital money.
Key to this trend is that bitcoin and other decentralized cryptocurrencies have shown a potential answer to how the dematerialization of money may be rolled out by central banks.
Recently, Kaspar Korjus, managing director of Estonia’s e-Residency scheme, posed the forward-thinking question: “Should Estonia begin issuing its own crypto tokens to e-residents (as well as citizens and residents)?” On the flip side, a South African Reserve Bank official made a statement that cryptocurrencies are “too risky.”
Central bankers are interested in the choices and advantages of the dematerialisation of currency.
Here are some of the attributes being considered:
And there is upside here.
Currently, chief cashiers and currency mangers at central banks around the globe are faced with enormous challenges when it comes to issuing physical notes and coins.
- Cost: printing polymer- or cotton paper-based notes is expensive. The minting of coin costs money. This cost affects the seigniorage income of central banks (profit made by a central bank by issuing currency, especially the difference between the face value of note and coins and their production costs).
- Counterfeiting: there has been an increase in technologies to assist criminals in forging notes and coin.
- Market readiness: vending and ticketing machines need template changes when new notes and coins come to market. Citizens must also be educated on the new features.
- Distribution: distributing notes and coins to banks, branches and ATMs is expensive and time consuming.
- Theft: often violent robberies are attempted on cash-in-transit vans. ATMs are blown up and banks robbed.
- Destruction: the lifecycle of notes and coin require the mutilated and marred notes and coin be returned to the central bank depots to be destroyed.
Still, one must remember the removal of costs doesn’t always lead to savings.
When planning for a central bank-issued digital currency (using a centralized model analogous to cash) most of these challenges will be removed or replaced with new challenges.
Specifically, these include:
- Cost: the marginal cost of making digital money will be close to zero. Costs will include purchasing new technology and skilled resources.
- Counterfeiting: The double-spend problem will likely be checked with a notary or other centralized model. Cyber security teams will monitor the system.
- Market readiness: preparing citizens and institutions for a form of electronic legal tender provided over a mobile device is a multi-year initiative. The financial services that become available once citizens can hold digital currency on their wallets will change how financial services are delivered.
- Distribution: distribution will be analogous to physical cash. Central banks will likely issue digital currency to banks cryptographically. Customers will store, send and spend with bank-managed wallets.
- Theft: protecting against theft will require private key infrastructure (PKI), hardware security modules and other layers of cyber-security.
- Destruction: how a central bank will approach destroying money in circulation will need to be defined per central bank, and opens up a few questions of when and why this may be done.
Shining a light
That’s not to say there aren’t other factors that should be considered.
By issuing digital currency, central banks could fulfill their mandate by potentially identifying all transactions. Remember, anonymous transactions are the bugbear of international organizations like the Financial Action Task Force (FATF).
Further, the loss of anonymity and the advent of instant taxation could be significant – and troubling – outcomes of the dematerialization of money.
Still, by releasing a digital currency, central banks would also invite comparison.
Commonly, most private currencies also have baked-in scarcity of money supply. By contrast, central banks have an open cheque book and money supply by committee.
Private currencies are produced, protected and upgraded by the best minds in cryptography. Central banks rely on partnering with large consulting and technology providers.
Private currencies are oblivious to borders – they are global. Central banks ring fence the national currency.
Private currencies morph freely and move into networks to produce tokenized market places. Central bank digital currencies consider allowing licensed participants to build on closed loop (national) financial services.
The differences are overwhelming. The destiny of many nation states will rest on how central banks decide to act. A likely problem for central banks is that once central banks issue their own digital currency, then they will more prominently announce the competition with existing cryptocurrencies.
The light will shine brightly on areas of difference.
News Source : CoinDesk