Would a central bank ever issue its own cryptocurrency?
While the verdict may still be out, a new report by professional services giant Deloitte explores how it might go about doing so.
Entitled “State-Sponsored Cryptocurrency: Adapting the best of Bitcoin’s Innovation to the Payments Ecosystem”, the report envisions a bitcoin-like system in which financial institutions act as uncompensated miners for a ledger governed by a central bank.
The idea of a central bank-backed cryptocurrency has been floated in the past, as shown by concepts like Fedcoin and comments by the central bank of Singapore.
In such an instance, the central bank would, in theory, have control of the money supply, and the currency on the network would be declared legal tender and linked with whichever fiat currency the central bank issues.
Deloitte suggests that such an experiment would be worth pursuing, particularly as institutions like the US Federal Reserve seek new methods of improving existing digital payment methods, noting:
“The result very well may just be a new method of handling payments that would revolutionize the current system. With the potential to reduce costs, reduce errors, speed the transfer of money, balance privacy with anonymity, and do it without the day-to-day operational need for a centralized organization, whether commercial or federal, the result could truly be transformational.”
Of course, there would be key differences between bitcoin and Deloitte’s hypothetical central bank cryptocurrency. For example, there would be no limit on the number of network tokens, whereas bitcoin is designed with hard cap of 21m BTC.
The central bank would also control development and determine which entities verify transactions. In addition, banks would provide user-facing services like wallets, although according to Deloitte, users would retain control of private keys.
Monetary policy powers
The fact that a hypothetical central bank-backed cryptocurrency would lack a hard limit and be subject to supply increases or decreases represents perhaps the largest departure from bitcoin under the concept.
Deloitte outlines how a central bank might go about controlling the money supply within such a system, explaining:
“To increase the supply of money, a central bank could transfer crypto-dollars, in realtime, from its private key to different financial institutions’ private keys. In order to contract the money supply, a central bank could increase reserve requirements and financial institutions would transfer crypto-dollars to the central bank’s private key, in a manner that would be functionally identical to how this process works today.”
Would such an idea catch on?
Deloitte concludes that while a central bank-backed cryptocurrency “may not replace bitcoin or any other virtual currency or paper fiat currency in its entirety”, the concept could some day form part of a broader ecosystem of digital currencies.
The full Deloitte report can be found below:
Digitization of money image via Shutterstock