What central banks ought to be doing instead of issuing their own fiat cryptocurrency

Former Blockchain.com CSO Andreas Antonopoulos on the idea of government-issued cryptocurrency like the RBI’s proposed ‘Lakshmi’:

“A private ledger is an oxymoron, it has none of the advantages of a digital open currency like bitcoin but it has disadvantages and brings more along with it. It is a database without the advantages of a database and is not secure. If you centralise control over it, it is corruptible, mutable and not secure,” he said.

Such a hybrid, in Andreas' opinion, would achieve the worst of both of worlds -- as it would have all of the disadvantages of traditional currencies and none of the advantages of cryptocurrencies.

Also, it’s hard to create bid-driven, neutral transaction verification like mining on the Bitcoin blockchain:

For a private cryptocurrency, there will be little incentive for miners to provide hashing power for a currency that could potentially be inflationary.

This will leave the mining operation entirely in the hands of the state or trusted third parties. In which case, hypothetically speaking, they could overwrite the existing entries on the ledger, leading to manipulation.

The idea that a central bank can ‘issue’ a cryptocurrency by fiat – potentially outlawing all others – shows how little banks understand such blockchain-based currencies, leave alone being able to understand and optimise for their benefits and mitigating their risks. It’s a mixture of outright fear of loss of control, and fear of Missing Out.

If anything, central banks should be running a reliable exchange for cryptocurrencies and tokens that they estimate will have real value. Such a central bank exchange’s functions ought to be ensuring liquidity and fair spreads, reducing settlement risk, minimising costs of converting fiat to crypto and back – these nodes between the crypto to the fiat world are going to be extremely important.

Further, central banks ought to spend their time and effort reducing FUD and encouraging participation (instead of the opposite!), drafting legislation around crypto-wallets especially around security, encouraging creation of real use cases for such currencies and tokens so they don’t become purely speculative, including encouraging initial coin offerings from private companies where it truly makes sense.

These are hard things to accomplish, but this is where central banks will find relevance in the future landscape. It’s no use and benefits no one to simply issue one’s own currency without addressing any of this. Correspondingly, none of these requires one’s own cryptocurrency.

Finally, if central banks truly want to continue to be influential, they will need to cooperate far more than they do today. National borders are irrelevant to cryptocurrencies; exchanges and legislation need to span countries, especially those with closely integrated real world trade.

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