The Strategist

How close are we to sovereign cryptocurrency?

05/16/2016 - 17:05

Rapid development of algorithmic digital currencies (payment systems related to the blockchain technology, primarily Bitcoin) should lead to a tightening of monetary policy of the world central banks. This is stated in a joint review of NBER association by economist David Yermack of Stern business school, and Max Raskin, lawyer from the law school at New York University. The review presents a first academic discussion of a new idea: "national coins", or sovereign digital currency issued by central banks, could be solution to the zero interest rates problem.

namecoin via flickr
namecoin via flickr
The survey named " Digital Currencies, Decentralized Ledgers, and the Future of Central Banking" was published by David Yermack and Max Raskin in working papers of NBER American Economic Association. The idea of an "algorithmic currency" issued by central banks according to formal and well-known rules, was expressed in 1999 and 2002 by Nobel Prize winners Milton Friedman and John Nash. They argued about algorithmization of issuing unsecured money in the current banking system with partial redundant. Simply put, it means central banks’ refusal of any conscious decisions on monetary policy, which, in the sense of Nash and Friedman, should be automatic. Later, advent of the blockchain technology opened up possibility of another type of digital currency. To a certain extent, it is similar to the gold-standard currencies of the second half of the XIX century, as well as refuse of non-fractional reserve banking system. 

The majority of the world’s central banks one way or another regard Bitcoins, the most common digital currency, either as a commodity or as a substitute for illicit money. The developed countries have faced "electronic currency" for the first time in the late 1980s with the boom of "play money" in massively multiplayer online role-playing games (MMORG). Then, the US government and the Bank for International Settlements (BIS) in 1996 discussed problems with the issue of "electronic cash" in payment systems. 

Economists have studied the "electronic currency" problem in Kenya best of all. There, Safaricom telecommunications company launched M-Pesa payment system, a real competitor to the Kenyan Central Bank. But now, we are talking about a more fundamental problem: the blockchain technology may not only compete with the normal currency. It also can also deploy a lending network without fractional reserve, without the need for the Central Bank as a last resort lender, and without insurance costs. 

Yermack and Raskin referred to both historic US examples, appropriate to the situation, and to modern research on the coexistence of Bitcoin and normal money. Based on this, the authors state: in the next few years, new cryptocurrencies growth will cause a significant tightening of central banks’ monetary policies. The most obvious direction of cryptocurrencies’ attacks is payment systems as such. According to the World Bank, average cost of an international money transfer amounted to 7.37% of the total (6.89% - in the G8 countries) in 2015. The bitcoin technology reduces the cost of such transfers by times.

The researchers suggested that central banks may at the same time dramatically change their positions in relation to this type of cryptocurrency. They predict possibility of a "sovereign digital currency", that is, Bitcoin analogs to replace a national currency issued by central banks. Now, the Bank of England got the most closer to it. Its representatives in 2015-2016 spoke about studying the blockchain technology precisely for this purpose.