In an interview with the MIT Technology Review, Rod Garratt, an economics professor at the University of California, Santa Barbara, criticized the efforts of central banks to launch their own state-issued digital currencies.
Since the beginning of 2017, a growing number of central banks including the People’s Bank of China (PBoC) have revealed their intent to develop and deploy state-owned cryptocurrencies, backed by permissioned ledgers.
In June, the academic journal of a Tsinghua University, better known as The Tsinghua Financial Review, released a research paper on the development of a state-owned digital currency by the PBoC. Many analysts suspected that the Chinese government’s abrupt nationwide ban on initial coin offerings (ICOs) and cryptocurrency trading was correlated to the government’s intent to release its own cryptocurrency, as bitcoin and other decentralized cryptocurrencies would be a threat to the existence of a state-backed digital currency.
On September 18, the PBoC’s financial news publication conducted an interview with Huang Zhen, a researcher at China’s Central University of Finance and Economics, and a researcher for the PBOC. During the interview, Zhen stated:
“Cryptocurrencies and other virtual currencies attempt to challenge the sovereign state’s right to issue currency, requiring the nationalization of currency issuance. China has a clear understanding of digital forms of money, and is actively engaging in relevant work. The central bank has set up a research group and a digital money research institute to explore the digitization of sovereign money. After this round of virtual money markets supervision, we expect under the auspices of the Chinese central bank to launch our own sovereign digital currency as soon as possible to help maintain China’s leadership in the development of global digital finance.”
Zhen emphasized that bitcoin and other cryptocurrencies are considered to be threats by the PBOC, as it has been preparing to launch its independent digital currency based on the blockchain, essentially to compete with bitcoin and the rapidly growing cryptocurrency market.
But, professor Garratt explained that the utilization of blockchain technology would lead to unnecessary technical complications for central banks like the PBoC and their development of state-owned digital currencies.
Bitcoin was created with the specific purpose of circumventing governments and to operate as an alternative to the global financial system. As Brian Kelly, an analyst at CNBC, stated:
“Bitcoin is designed to go around governments. That is exactly what it was designed for and you are starting to see that. Jamie [Dimon, the CEO at JPMorgan] even said in his comments that if you are in Venezuela, it might be good to use bitcoin to go around the government, which is exactly the point.”
Blockchain technology is one characteristic of Bitcoin, allowing it to operate as a database to store transactional data and payment history. In order for bitcoin to settle transactions in a purely decentralized manner, it relies on other technologies including Schnorr signatures, advanced elliptic curve applications, and ring signatures.
More importantly, state-owned cryptocurrencies eliminate the necessity of consensus protocols, as the entire financial network and every aspect of the cryptocurrency would be overseen by the central bank. Such centralization also directly contradicts the fundamental and core principles of cryptocurrencies including bitcoin, Ethereum, and others in the global cryptocurrency market.
“You are just replacing the current back-office financial-market infrastructure. Will the public demand a digital medium of exchange with properties similar to cash? In places where it does, maybe there will be pressure for governments to provide it, and in places where it doesn’t, there won’t be,” said Garratt.