Center for Strategic Assessment and forecasts

Autonomous non-profit organization

Home / Economy and Finance / The financial system of a new era / Articles
Government test their cryptocurrency
Material posted: Publication date: 14-10-2017

Money resembling bitcoin can occur in countries where cash is in decline, or financial networks require upgrading.

The Swedes are parting with cash. The number of banknotes and coins in circulation fell to its lowest levels in three decades. The Central Bank of Sweden, Riksbank, suggests that cash is not more than 15% of all retail transactions last year, compared with 40% in 2010 – mostly due to the rising popularity of mobile payment services.

In such a situation, the Swedish bankers wonder: whether it is necessary to enter the country purely digital form of money supported by the government? And if so, do I need to use technology similar to that underlying bitcoin?

Riksbank is not the only Central Bank that is seriously eyeing the blockchain technology on which bitcoin and other cryptocurrencies. These systems, also known as distributed database transactions rely on computer networks is a Central authority such as a Bank, to confirm and record transactions on a distributed, practically immune to the damage database. The heads of government banks around the world believe that they have the potential to replace cash and to increase the efficiency of other payment systems.

Cryptocurrency-enabled Central banks will look ironic, given that bitcoin was created as a way to completely get rid of the banks. In addition, the idea raises difficult questions about the design, creation and support of such systems, and how they can affect the financial stability of the country or the whole planet. That is why the Riksbank is hedging bets, exploring not only distributed databases – which he describes as "unofficial, but incredibly fast advancing" technology – but traditional, centralized methods of accounting for its project "e-krona".

Some economists in recent years, saying that the cryptocurrency tied with money by the Central Bank, may give governments the opportunity to issue digital tokens, much like cash. Users of these Federal coins "FedCoin" will be able to enjoy the anonymity that is comparable to bitcoin, and are protected from the volatility plaguing the cryptocurrency. Central banks of different countries are exploring this idea, but Sweden is, apparently, moved on.

However, the cryptocurrency available to everyone, "raises a whole set of problems," and will lead to new challenges for legislators, said Rod Garratt, Professor of Economics at the University of California in Santa Barbara.

First, there is the problem of who must confirm transactions and maintain a distributed database. Even if to resolve this issue, the new system is in some sense too accessible, and in a moment of crisis or panic it can easily be a situation in which depositors rush to withdraw their funds. In most modern financial systems of large-scale withdrawals in a natural way slow down the ability of the Central Bank's issuance of paper money required by the people. But if the currency is purely digital, such brakes will not exist – panicked citizens will be able to withdraw money from their accounts almost instantly, leaving the entire banking system of the country penniless.

A new article published by the Bank for international settlements (it is something like a Central Bank for Central banks) offers a more direct approach than trying to replace the cash cryptocurrency. In the article Garret and Morten Bech, a researcher BMR, carried out an important distinction between "retail" FedCoin and cryptocurrencies like "wholesale" cryptocurrency, which can be used only in banks.

One of the important roles of Central banks in the global financial system – providing large payments passing between commercial banks. Commercial banks make deposits in Central banks and when they need to send a large payment to another Bank, for example, during the sale of the company or at home, they can rely on the payment system managed by Central banks. The Central Bank handles "clearing", update the accounts of all parties involved to reflect the new transaction, and "calculations", i.e. the actual transfer of money.

A wholesale payment system, Central banks face a problem: they work on obsolete programming languages and legacy databases, and governments are looking for ways to upgrade them. The Central banks of Canada and Singapore recently demonstrated a prototype of wholesale payment systems based on a distributed database that handles the clearing and settlement at the same time, with the help of the crypto token. The Chinese are conducting similar tests.

Because such systems will be limited only by the banks, they will not affect monetary policy as consumer, says Garret: "You just replace the current banking financial market infrastructure". But despite working prototypes, the technology is still imperfect, and the current stage of the attempt of modernization is unlikely to result in the use of distributed databases.

Even if these applications were ready for use, they would not solve the problems faced by Sweden. One obvious drawback of the reduce the use of cash is the fact that the increase of confidence in mobile payment systems leads to isolation of people not using them or not having access to them. Also, these systems serve private companies, which means that instead of state institutions, the efficiency of financial systems in the service of people and the economy will define the capitalists.

In the end, the decision of Sweden and other governments about the transition to crypto currencies will depend on whether they want this people, says Garrett: "will the public digital medium of exchange, with like cash? Where such requirements arise, there will be pressure on the government to ensure such environment. Where they are not, the pressure does not appear". In any case, all this will take time.

In Russia, too, are developments in this regard – about the benefits of blockchain talks as the Central Bank and related experts, in particular, members of the working group on risk assessment of turnover cryptocurrency of the state Duma of the Russian Federation – approx. pens.


Source: https://geektimes.ru/post/294327/

Tags: economy , finances


RELATED MATERIALS: Economy and Finance