Aleksander Berentsen and Fabian Schar, famous Blockchain Professors and Researchers from University of Basel, Switzerland, recently characterized various currencies according to their control structure. They are focusing on cryptocurrencies such as Bitcoin and government-issued fiat money in one of their research articles titled, ‘The Case for Central Bank Electronic Money and the Non-case for Central Bank Cryptocurrencies’.
Aleksander Berentsen is also a Research Fellow at Federal Reserve Bank of St. Louis.
The Researchers argued that there is a large unmet demand for a liquid asset that allows households and firms to save outside of the private financial sector. Central banks could offer such an asset by simply allowing households and firms to open accounts with them.
Aleksander Berentsen says:
“A centralized payment framework has many disadvantages: Plenty of user data are collected, users can be locked out of the system, and their funds can be confiscated, which is all too often the case in countries with dubious legal systems. Furthermore, centralization may lead to a systemic dependence and rent-seeking behavior. Additionally, vendors are in constant fear of chargebacks.”
According to the article, the characteristics that differentiate cryptocurrencies is that the decentralized nature of transaction handling, which enables users to remain anonymous and allows permissionless access. These key characteristics are a red flag for central banks. The authors further predicted that no reputable central bank would issue a decentralized virtual currency where users can remain anonymous. The reputational risk would simply be too high. Rather, central banks could issue central bank electronic money. This money would be tightly controlled by them, and users would be subjected to standard Know Your Customer [KYC] and Anti-Money Laundering [AML] procedures.
A few central banks possibly are evaluating the issuance of a central bank cryptocurrency. However, a closer look at these projects reveals that these are not cryptocurrencies according to the definition of cryptocurrency in its true sense. The projects usually are highly centralized.
According to Aleksander and Fabian, the Central Bank should be in the business to satisfy the demand for anonymous payments. They believe that such demands can and will perfectly satisfy the private sector, in particular through cryptocurrencies. History and current political reality show that governments can be bad actors and, at the same time some citizens can be bad actors too. The former justifies an anonymous currency to protect citizens from bad governments, while later calls for transparency of all payments. Reason says that in reality, we must welcome anonymous cryptocurrencies but also disagree with the view that the government should provide one.
The authors of the article added:
“We believe that central bank electronic money for all will increase the stability of the financial system. In fact, there is a need for research that quantifies the effects of this mechanism on the stability of the financial system.”
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