The Computer Society of Kenya

Since 1986

moneyDAILY NATION By JOHN WALUBENGO

Tuesday August 27,2019

Ten years ago, when Bitcoin, the first cryptocurrency was created by some anonymous fellow or fellows called 'Satoshi Nakamoto', the established monetary system represented by Central Banks across the world ignored the event.

Today, all central banks are grappling with the reality that Bitcoin and its many variants of other cryptocurrencies are not going away anytime soon.

Whereas the majority use of cryptocurrencies remain in the hands of fringe speculators and other minority groups, the value of assets held and transferred within these groups cannot be ignored.

The International Monetary Fund (IMF), World Bank and other traditional fiat custodians are beginning to explore the possibilities of integrating at least portions of these emerging crypto assets into their existing monetary systems.

Specifically, they have been talking about getting central banks across the world to issue their own version of cryptocurrencies - a central bank cryptocurrency (CBC).

CRYPTO VS FIAT MONEY

But at a philosophical level, a CBC seems to be a contradictory of terms since by definition, a cryptocurrency is not supposed to be issued or controlled by a centralised intermediary or agency.

Bitcoin and other cryptocurrencies are by design, anything and everything that central banks are not. They are decentralised; they are purely virtual, and are issued into the economy through competition.

Fiat money or legal tender on the other hand is highly centralised, mostly cash-based and issued into the economy according to whatever monetary policy the central bank adopts.

In terms of decentralisation, cryptocurrencies have a global record-keeping system that is visible and distributed across the market participants in a peer-to-peer fashion.

On the other hand, the global record-keeping system for fiat or traditional money is highly restricted and visible only to the intermediary banks facilitating exchange between the market participants.

This means that if you get the wrong CBK governor, they can easily mess up the monetary system to suit the whims of the contemporary political leadership of in power.

With regard to the virtual dimension, cyrptos are purely virtual, while fiat money can occur in both physical and virtual forms.

Obviously the virtual or digital form is often preferred given that it is easier and often safer to store and exchange value in digital form.

TRANSPARENCY

The current thinking with regard to a Central Bank Issued cryptocurrency is to have the fiat money equivalent presented in a token or crypto-currency form and used to distribute and record value at the wholesale rather than retail level.

In other words, central banks are exploring the possibility of leveraging on the advanced record-keeping systems and transparency of blockchain in as far as keeping track of the value it creates and distributes to the commercial banks.

As it is now, Central Bank must rely on audited accounts from commercial banks to get a feel of what is happening in those banks and more often than not, what is reported is far from reality – hence the subsequent and sudden collapse of an otherwise healthy looking bank.

With a blockchain system between central banks and commercial banks, the regulatory or oversight role would be much more transparent than it is for now.

Finally, with respect to how money is issued into the economy, fiat or traditional systems depend on the monetary policy as issued by the Central Bank bureaucrats.

MONETARY POLICY

In many cases, they make the right call. But in equal measure, we have had monetary policies that have introduced hyperinflation in the economy and ultimately rendered the fiat currency worthless, as is the case in Zimbabwe, Venezuela and other struggling nations.

For cryptocurrencies, the monetary policy is pre-determined and hard-wired into the software and cannot be changed according the whims of the Central Bank.

Additionally, new crypto money is injected into the financial system through competing entities known variously as miners or validators, who get rewarded in the cryptocurrency by being first to solve a difficult mathematical problem.

It is debatable if this is a good monetary policy, but what is settled is that at least all market participants get into the monetary system knowing the future schedule of the currency and can plan accordingly.

As an example, the Bitcoin cryptocurrency has an all time supply of only 21 million bitcoins. Nothing more, nothing less.

TAKE UP CHALLENGE

Traditional currency on the other hand, has a supply volume that is unpredictable and can rise or fall according to the whims of the respective central bank.

In concluding, the question still remains. Should central banks issue cryptocurrencies?

The answer may very well lie in the fact that cryptos are here to stay and it maybe better to confront this space by participating rather than shying away from the reality.

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