Central Banks Archives

What people need to understand as difference between Electronic Fiat and Cryptocurrency

Posted on May 1, 2017 | by [email protected]

With the advent of internet and electronic systems, payments and bank transfers for fiat currencies have gone completely digital. With cryptocurrencies like Bitcoin being advocated as simple, quick peer to peer transfer means, people have come to question how cryptocurrencies like Bitcoin and digital payments for fiat currencies are different. The difference lies in the issuance, means of validation, the speed of transfers and how the storage accounts are maintained. Let’s look into what exactly people need to understand as the differences between Electronic Fiat and cryptocurrencies:

Difference between fiat and cryptocurrency:

One major difference is the fact that cryptocurrency reserves are limited and their scarcity provides them with a deflationary outset. In cases like Bitcoin, the currency is set to produce only 21 million coins by 2040. Hence the programmed scarcity ensures that the currency’s journey is deflationary. In the case of fiat currencies, the purchasing power of the currency depends on how the country’s economy is doing. With traditional fiat reserves be it physical or digital, there is no way to tell how much money is circulating, Central Banks can print money on a whim without backing it up with stored Gold or standard reserves. Economists who are against this type of monetary practice believe that the world’s citizens are experiencing a silent robbery called inflation due to central planners unconditionally printing vast amounts of fiat reserves.

The digital payments system and push for a cashless society:

When it comes to physical currency, it becomes difficult to monitor the cash flow. The government has no way to know the amount of money in circulation. Hence there has been a constant push for cashless society amongst various countries of the world. Especially European countries have banned physical currency transfers over a thousand pounds. This has been taken as a step to proactively stop terrorism funding, to monitor the cash flow and be able to avoid transactions that might prove detrimental to the country. The electronic fiat currencies have come to existence from 1975 and now constitute 92% of world’s fiat reserves.

What advantages does Bitcoin provide:

Fiat electronic transactions where major banks or transfer companies act as a custodian or intermediary, there is a chance of censorship. A very good example is the recent Bitfinex’s lawsuit against Wells Fargo where the bank intervened in the business operations by halting the deposits. By placing the power in the hands of a central bank, we are also bidding good bye to financial freedom. Since Bitcoin transactions are decentralized, they don’t depend on any central authority making it a clear tool for financial independence.

Bank of Korea’s paper says cryptocurrencies and Fiat can develop symbiotic relationship

Posted on April 27, 2017 | by [email protected]

South Korea’s Bitcoin adoption has been on the rise ever since Chinese exchanges stopped withdrawals. While Japan has truly eaten into the Chinese trading volumes, South Korea has secured the fifth spot in terms of trading currencies by volume. The central bank and the financial legislative committee of South Korea have decided to not only adopt cryptocurrencies but also launch a cryptocurrency of their own. While the country is taking a positive yet cautious approach towards digital currencies, they are diverting the good amount of effort in studying them in detail. The result of such research is the recent paper by the Central Bank of Korea that predicts how cryptocurrencies and Fiat currencies would go on to develop a symbiotic relationship. Let’s look into the details of the paper and how they are proposing this would happen:

How cryptocurrencies would be sought after:

Cryptocurrency Art Gallery by Namecoin via Attribution Engine. Licensed under CC BY.

The working draft submitted by the researchers from the Bank of Korea and Seoul’s Hongik University aims to identify factors that could drive the use of a blockchain-based currency over a government-issued one. The paper clearly highlights the cost-effectiveness of cryptocurrencies and point out that it would turn out to be an attractive positive for cross-border transfers. However, while the cryptocurrency’s flagship advantages are being identified as the key factors, we cannot completely rule out the advantages of fiat currencies.

The proposed symbiotic relationship:

The authors proposed that there would likely be a symbiotic relationship if cryptocurrencies like Bitcoin gain a wider user base and good levels of adoption. For example, when the cost of using one currency rises, the other is likely to fall thereby increasing the attractiveness of the other option. While in cases where factors like speed of transfer or any other factor that influences the priority of decisions, either of the currencies might take precedence depending upon the necessity.

The authors wrote:

“High costs of using fiat currency increase the demand for digital currency. Similarly, high costs of using digital currency relative to fiat currency raise the demand for fiat currency. In a world of imperfect currencies with uncertain costs associated with the use of a currency, it is unlikely that the relative costs of using digital currency will be low enough to drive out and accordingly crowd out fiat currency entirely.”

How the findings will assist central banks:

Most of the Central Banks are currently not in a position to regulate or monitor cryptocurrency as the impact of this sphere over the existing monetary system is something beyond speculation. However, the paper gives some insight into how we can expect the future dynamics of crypto and fiat currencies to shape up. The authors believe that the results of their paper can help shape up the future of a composite monetary system across the globe.

Is the world slowly turning towards a #bitcoin oriented economy?

Posted on November 21, 2016 | by [email protected]

When one sees that the applications of a technology are multifold, with time it would impact the legacy systems. When it comes to cryptocurrencies, the legacy system is the existing financial setup. That being said, the important question here is how are cryptocurrencies impacting it? Well, the existing financial system has many loopholes which might be dangerous if not properly monitored. Anyone who witnessed or experienced the brunt of the 2008 housing collapse would understand this really well. Too much control over the purchasing power of money and its manipulation can be hazardous. Even the Governments and the Central Banks have come to realize this off late. This has led to the experimentation of State owned cryptocurrencies that are decentralized and open. Let’s look into how countries are experimenting with them in their nascent stages:

Russia hates Bitcoin but wants to have its own cryptocurrency:

After China, Russia became the second country to ban Bitcoin. But as hypocritical it might sound, Russia is considering the possibility of introducing a national regulated cryptocurrency. The Russian Federal Financial Monitoring Service (Rosfinmonitoring) revealed this according to the Kommersant newspaper. The idea of introducing a cryptocurrency is being discussed with representatives of banks and at meetings in the Finance Ministry. Though it would be a cryptocurrency, Russians are planning to make it a bit centralized as against bitcoin. A Russian regulated cryptocurrency should not be a non-emission currency but it will have its issuer with rights and responsibilities. This issuer can be “financial organizations that will be entrusted with the emission of cryptocurrencies.” This activity is most likely to be subject to licensing, Rosfinmonitoring said.

South Korea’s progressive take:

South Korea can be credited as the most progressive nation when it comes to cryptocurrencies for the variety of applications they provide. From a wide range of vendors accepting Bitcoin to the launch of the first Bitcoin based ETF in the world, Korea has always been ahead.

Recently,the chairman of South Korea’s Financial Services Commission (FSC), Yim Jong-yong came out with an interesting announcement. He said that his department will “Lay the systemic groundwork for the spread of digital currency.” The FSC is the South Korean government office overseeing financial services. In 2008, the department assumed authority over all financial policies regarding the financial market. No details were given about the form or technology that the FSC’s digital currency will use. Basing on the local experimentation, it is believed that they would be using a new cryptocurrency based on Blockchain Technology.

World’s oldest Central Bank is in the race too:

Sweden’s central bank is reportedly considering the issuance of its own digital currency, ekrona. This is primarily to address the significant decline of the use of cash in the country. First revealed in a Financial Times report, Sweden’s Riksbank could introduce and issue its own digital currency before the turn of the decade. Sweden has seen a rapid decline of the use of physical cash – both coins and notes – in recent times. It is estimated that the Circulation has dropped by 40% since 2009, leaving Riksbank little choice. A large number of Swedes have abandoned cash for cards and other forms of digital payments turning it into a cash-free society.

Fiat currencies and Banking technology slowly leading to centralization: Is Bitcoin the savior?

Posted on September 29, 2016 | by [email protected]

Paper currency is a recent man-made or rather bank made concept to facilitate exchange of goods and services. Historically mankind has opted for outright bartering, gold, coins, beads, feathers and finally paper currency for goods and services. Currently, new means of exchange based on technological solutions are slowly replacing fiat currencies. While this might seem positive on the outset, it may lead to a centralized future with central banks in authority. Let’s dive deep into this to see how this is a misleading notion:

How cash is devalued:

When the economy is facing inflation, Government brings in more money into circulation. This leads to devaluation of the currency but control over the levels of inflation. This process of bringing more money into circulation is ‘Quantitative easing’. The opposite process where the central banks offer high interest rates for storing money is ‘Quantitative Tightening’. This tactic increases the value and purchasing power of money for a healthy economy. Alternating these tactics, the central banks try to keep a check on inflation levels.

However most of the times, imbalances of these strategies end up hampering the value of the currency and economy. During high levels of inflation, when the state has generated the maximum amount of money, it might not be adequate. While the currency is anyways devalued, the central banks cannot offer interest for money stored with them and hence interest rates go negative. That means public has to pay for keeping their money with the bank which is highly undesirable. This is the current state of affairs with most of the European Union central banks.

Technology is a solution?

At this point, it might appeal that a technological solution to replace paper currency might be an apt solution. But the paper currency we use for various transactions is a drop in the ocean compared to other channels. Over 90% of all economic transfers done are digital and not in common “cash” currency. Generally wire transfer, debit cards, credit cards, Paypal are used for vast majority of your bill payment and daily purchases.

The problem owing to technology and various mediums of transfers, we are paving way for centralization. By totally relying on technology we are bidding good bye to our privacy. Our card issuing banks have complete access to our personal deals, purchase patterns, history of personal finance. These details can be made available for third parties for marketing and promotions. Banks/the government get complete control over privacy, accounts and access. Everything becomes centralized onto banking/government servers. Tie this together with government monitoring of emails, phone calls, social media and it becomes a web of centralized control. This is undesirable and this motions us for a decentralized solution.

How Bitcoin Fits:

While we are looking at technological solutions to overcome the nightmares of banking strategies, it has to be decentralized. Right from its inception that has been the selling point for Bitcoin. A digital currency that can be transferred over a decentralized network without the presence of a third party. Hence considering how the central banks are slowly edging towards a centralized future for banking, Bitcoin might be our solution to achieve total financial freedom and anonymity.