Disruptive technologies have the potentiality to transform existing technologies in inconceivable ways. Bitcoin and Blockchain Technology represent the kind of technologies that can change the phase of how we know things forever. Blockchain has already picked up applications in numerous fields like financial services, medical services, administration and many other fields that require replacement of conventional databases.
European Central Bank has found another application for cryptocurrencies but this time more aligned to the terms of Fiat currencies. ECB is planning to launch their own Digital Base Money (DBM) is a digital equivalent of banknotes, representing a claim at the central bank. Let’s dive deep into how this currency would work and what this would mean to Bitcoin:
The models for this digital currency system:
Member of the Executive Board of the European Central Bank, Yves Mersch revealed that the they might go ahead with two models for the digital currency: account-based and value-based, both supported by blockchain. For an account-based system, central bank would be directly involved in money transfers between accounts. This wouldn’t require an electronic wallet and the bank could see the whole transaction history.
The value-based DBM design is closer to Bitcoin and is modeled after cash. In this case, the non-banks would have their electronic wallets and the central bank wouldn’t be involved directly. Funds are debited and credited from the electronic wallets creating a traceable transaction history.
What would this move mean to cash:
The reason or motive behind this move was explained as an increasing indirect public demand for a central bank’s digital currency. Mersch stated that as such commercial banks offer various electronic payment methods like credit cards, debit cards, net banking etc. In such cases People may prefer to hold claims on the central bank to avoid the risk that the commercial bank defaults. With the introduction of Blockchain, bringing in this transparency would be far more simpler than anticipated.
As far as cash is concerned, Mersch said that it would co-exist along with the DBM as switching completely to electronic transfers would be difficult.
How would Bitcoin be impacted:
Introduction of ECB’s DBM might have a negative impact on Bitcoin and other cryptocurrencies. Eurozone has been under constant turmoil from last couple of years owing to Greek crisis and lingering after effects of 2008 crisis. Recently Italy added to the pressure by voting bank bail outs. In cases of this Geo-economic crisis, Bitcoin profited with significant fund flows from European commodities. With the introduction of DBM, there is a strong possibility that ECB is shielding their currency from any market impacts. This fund flow would in turn be directed into DBM and Bitcoin might lose out on its share.
However there is another possibility that if Eurozone is losing credibility for investing,people might not even choose DBM for investing and would look for alternatives. How this would exactly pan out, only time will tell.