Since the publication by Satoshi Nakamoto in November 2008, “Bitcoin: A peer-to-peer electronic cash system,” the term “blockchain” has become synonymous with digital currencies in the sense of the underlying technology that allows peer-to-peer value transfer.
Interestingly, the term “blockchain” is not even used in the official document. The aim of the document was to provide a solution to the main problem of dual-use digital currency, which is to transfer value directly between transactions without using a trusted central third party.
By definition, a currency is a medium of exchange for goods and services, a unit of account, and a store of value. Money in its traditional sense satisfies all three elements.
The digital currency of the central bank
Currently, there is still significant interest in central bank digital currencies or central bank digital currencies – not from the blockchain and crypto community, but actually from the core group of some of the most powerful central banks, including the Bank of England, the Swiss National Bank, and the European Central Bank, the Bank of Japan. The Bank of Canada, the Swedish Riksbank and the Bank for International Settlements.
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Confirmation in late 2020 from the British Chancellor (HM Treasury Head of State) confirmed that the UK would prepare special stablecoin regulations and conduct research at CBDC showing progress on this topic so far. There is no doubt that China has taken the lead in developing digital central bank currencies, and recently proposed a global set of rules that address issues such as interactions between jurisdictions.
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The central element of any national monetary policy and financial stability is the public’s confidence in central banks and their confidence that money as a central bank matches the three main elements of a currency – whether issued in physical or digital form. The digital currency of the central bank is not a currency stacked or a digital asset, but rather a digital representation of cash, that is, the digital pound is worth the same value today tomorrow and its purchasing power (what the owner can buy) does not exceed certain thresholds.
The European Central Bank’s proposal for a digital euro is based on the premise that it complements the existing depository system of monetary central banks and wholesale central banks. This is seen as a way to provide European citizens with access to a secure form of money in a rapidly changing digital world, while actively encouraging innovation in retail payments, supporting vulnerable sectors of society and reducing their potential economic isolation. The digital euro is also seen as an alternative to reducing the overall costs and environmental footprint of existing funds and payment systems.
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In an environment where the economy is currently developing ideas regarding central bank problems, stacked coins, or private digital currencies, the experience was nearly identical to previous monetary innovations: coins, banknotes, checks, and credit cards. Many people see blockchain technology and distributed ledger technology, or DLT, as a mechanism to replace electronic currency in traditional bank accounts. Just as paper money replaced gold and silver, so wire transfers could replace paper money.
The emergence of digital currencies
The current COVID-19 pandemic has gained a spur for cashless transactions and affected the way society interacts financially, which has accelerated people’s understanding of digital currencies. With fewer cash transactions, businesses and consumers are better aware of the features and benefits of digital currencies.
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Central banks are already partnering with other qualified financial institutions, often with clearing banks, through the use of central bank electronic deposits. In addition to this system, they also issue banknotes and coins to the public. The digitization of these banknotes and coins is a natural progression in our more digital world.
However, this trend may have unintended consequences: In a cashless society, where the public can no longer access a government-guaranteed payment system, the private sector will control access to, design, and pricing alternative payment methods. If not, then governments issue digital currencies to the public through their central banks.