Last Wednesday, student-run organization Blockchain at UCSB hosted a discussion that UCSB Professor Rod Garratt led about the role central banks could play in the cryptocurrency sector. Garratt described the current relationship between cryptocurrency and centralized banking through an analysis of the different types of currency and the potential of blockchain technology.
In order to fully appreciate Garratt’s talk, it helps to understand some of the underlying technology behind blockchain. According to Forbes, “blockchain can be described as an append-only transaction ledger. What that means is that the ledger can be written onto with new information, but the previous information, stored in blocks, cannot be edited, adjusted or changed.”
Consequently, cryptocurrency utilizes blockchain technology to become a secure, peer-to-peer payment system that does not rely on a central banking authority. Rather, a system of nodes performs the task of validating transactions.
A webpage on Blockgeeks describing cryptocurrencies explains, “every node is an ‘administrator’ of the blockchain, and joins the network voluntarily (in this sense, the network is decentralized).” In other words, anyone with a computer can join the network and start validating transactions.
More than 50 people attended the event at Buchanan Hall 1910; Garratt started introducing his work with the Bank of International Settlements (BIS).
The BIS asked Garrett and his colleague Morten Bech to create a full report on cryptocurrencies. Drawing on this report for his talk, Garratt described the “money flower,” a Venn diagram classifying the various attributes that differentiate kinds of currency.
The “money flower” postulates four possible criteria that define currencies: universally acceptable, electronic, central bank-issued, and peer-to-peer. Different types of currencies fall into different places on the “money flower” depending on which criteria a currency satisfies.
Bitcoin can be classified as electronic, peer-to-peer, and universally accessible but not central bank-issued. Cash is peer-to-peer, central bank-issued, and universally accessible but not electronic.
In fact, Garratt said that much of cryptocurrencies’ success can be attributed to the limitations of cash because it is not electronic. For example, “In Sweden, a lot of businesses don’t accept cash anymore because they don’t want to deal with the hassle of cash registers, depositing money, and getting change in the morning,” Garratt said.
The decline of cash is happening fastest in Sweden; cash is being replaced by alternative electronic payment systems such as Swish, the Swedish equivalent of Venmo.
“Sweden is contemplating what would happen if cash disappears,” Garratt said.
Garratt also pointed out that some banks are already experimenting with a central bank-issued or commercial bank-issued cryptocurrency.
One of these experiments, the Jasper Distributed Ledger Settlement Platform (CAD-Coin), provided central banks with a way to pay each other wholesale using a central bank-issued coin. The Bank of Canada, one of Canada’s central banks, supervised the project in 2016.
However, CAD-coin is only tradable between banks, meaning it is not widely accessible to the open public.
Garratt devoted much of the talk to Fedcoin, a concept that cryptocurrency advocates say would be issued by the Federal Reserve, America’s central bank. Fedcoin, as Garratt described, would be unique from CAD-Coin because it would be available to the public and commercially tradeable.
According to Garratt, “The concept, which was proposed by Koning (2014) and has not been endorsed by the Federal Reserve, is for the central bank to create its own cryptocurrency. The currency could be converted both ways at par with the U.S. dollar and conversion would be managed by the Federal Reserve Banks.”
Garratt emphasized the fact that banks don’t view cryptocurrency and blockchain technology as a philosophical issue or a threat. They simply want to know whether the technology is cheaper and more efficient for use as currency.
Garratt said, “Banks are seeing if blockchain technology can improve market infrastructure. It all comes down to cost efficiency: Is it better?”
Blockchain, the technology behind cryptocurrency, offers a multitude of innovations beyond the currency. Blockchain allows for the use of smart contracts which can facilitate keeping track of legal documents such as real estate holdings.
According to a separate Blockgeeks page, “smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman.”
However, the creation of cryptocurrency — specifically Bitcoin mining, also brings massive environmental impacts.
“In November, the power consumed by the entire bitcoin network was estimated to be higher than that of the Republic of Ireland,” according to The Guardian. “Since then, its demands have only grown. It’s now on pace to use just over 42TWh of electricity in a year.”
After his talk, Garratt opened the floor to open discussion and questions from the audience.
Audience members were mainly interested in the future of cryptocurrencies. However, Garratt reminded everyone that cryptocurrencies are still in their early development process. He cautioned that there are still a host of issues revolving around topics such as privacy, price volatility, and scalability that need to be addressed.