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The Coming US Digital Dollar (Part 1) — What it is, and Why it Matters

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The introduction of a “US digital dollar” — the creation of which just last year seemed far away, but now under serious consideration — represents nothing short of a tectonic reconfiguration of money and the global financial system.

The US dollar is the world’s financial leviathan; a singularly dominant international trade and reserve currency. Any substantive changes to it will significantly alter the global economic landscape and impact billions of people around the world.

A US digital dollar could also have significant ramifications for the cryptoasset industry, particularly cryptocurrencies such as stablecoins and bitcoin that are vying for wider monetary use.

This three-part blog series will:

  • Part 1: Describe the history of the US digital dollar and define central bank digital currency, as well as the essential need to understand how money is created and how a US digital dollar resembles and differs from cryptocurrency and commercial bank money
  • Part 2: Analyse key differences and tradeoffs of leading US digital dollar design proposals currently being debated and considered
  • Part 3: Discuss the role of infrastructure surrounding and supporting a US digital dollar, particularly digital wallets and their various design tradeoffs

Bill Gates famously said we often overestimate the amount of change that occurs in the short-run.¹ But every once in a while seismic shifts can be seen in a single year.

Just over twelve months ago few thought the creation of a new US digital dollar — a broadly held and transacted central bank digital currency (CBDC) — would soon be on the policy and legislative “front burner” in Congress, the Federal Reserve, and other regulatory bodies. And there were good reasons for this skepticism.

In January 2019 the Bank of International Settlements, following a survey of its central bank members, reported there was no rush by most leading central banks to broaden central bank digital currency due to uncertain benefits and risks. Many central banks previously explored technical aspects of implementing broad CBDC by testing blockchain or distributed ledger technology and were left concerned about the maturity and capabilities of the technology for use at scale. And for countries that have already implemented “faster payments”, or were working to do so in the case of the Federal Reserve with FedNow, there were questions about what improvements CBDC would offer in terms of payment efficiencies and other conveniences.

In sum, the state of play last year at the Federal Reserve, as well as many of the world’s other leading central banks, was that they were happy to continue studying the concept of broad CBDC, but they did not see compelling reasons to charge ahead anytime soon.

The “no rush” attitude towards broad CBDC was also not exclusive to central banks.

Many commercial banks have been lukewarm or outright hostile towards the idea of introducing broad CBDC. Banks reasoned that consumer and non-bank business access to CBDC would erode the exclusive, privileged position of commercial banks, which have long been situated advantageously between central banks and all other economic actors.

Concerns over more frequent and larger bank runs have been a key impediment to creating broad central bank digital currency

Another key concern expressed by bankers, and a conundrum that is by no means generally believed to be solved, is the risk that commercial bank customers would “run” with their deposits from relatively more-risky commercial banks into the tender arms of “risk-free” central banks.² In other words, the existence of broad CBDC would risk creating or exacerbating a destabilizing financial panic.

But over the past twelve months there were several major developments that together have radically shifted forward the probability of introducing a broadly held and transacted US digital dollar:

  • Facebook’s ambitious global Libra currency was announced in mid-June 2019, and it would be underpinned by blockchain technology deemed sufficiently robust to service Facebook’s billions of users
  • Purportedly in response to Libra, China accelerated work and began testing in April 2020 its long rumored digital yuan, the DCEP (Digital Currency Electronic Payment)
  • US-China strategic competition and geopolitical tensions escalated
  • The coronavirus pandemic struck, painfully demonstrating the antiquated nature of US monetary and financial infrastructure (eg slow and inefficient physical checks were relied upon to distribute relief funds to ~70 million Americans)
Facebook’s Libra and the coronavirus have catalyzed consideration of a US digital dollar, but the growing strategic rivalry with China arguably provides the most significant and persistent motivation

While the sea change in expectations and timing around a US digital dollar may have been largely driven by the above developments, a fifth factor has also been at play: the ongoing growth in stablecoin and cryptoasset use, which present ever-growing competition to traditional fiat currencies.

In late-March US digital dollar legislation was first introduced in Congress, and a subsequent growing stream of Congressional testimony, policy research papers, and various lobbying initiatives and proposals indicate growing momentum behind the creation of a US digital dollar.

However, there remain very different views on what form a new US digital dollar should take, and many still question whether one should even exist.

To understand this debate it is necessary to first define at a high level what is meant by a US digital dollar beyond its one-line definition: A broadly held and transacted central bank digital currency.

The interest in a US digital dollar, and central bank digital currency more generally, was inspired early-on by the success of cryptocurrencies like bitcoin (BTC) and its underlying technology. Some US digital dollar design proposals would incorporate technology pioneered by bitcoin and other cryptocurrencies.

Understanding the reasons behind bitcoin’s growth, and how a US digital dollar would resemble and differ from bitcoin, is a helpful starting point on the journey to understanding the US digital dollar.

By also understanding the confusion surrounding cryptocurrencies like bitcoin we can shed light on the confusion surrounding the US digital dollar.

Bitcoin has been both wildly successful and confusing

Bitcoin has reliably operated for over 11 years now, and surveys show awareness of bitcoin registering at over 80% in many countries. Tens of millions of people around the world own bitcoin, and it has a market value at present of approximately ~$175 billion USD.

A non-exhaustive list of reasons cited for bitcoin’s success and growth includes:

Which of bitcoin’s features will make their way into the final US digital dollar design is a subject of significant debate and something we will cover more in Part 2 of this series.

What can be confidently forecasted is that most bitcoin design characteristics are highly unlikely to be copy/pasted into a US digital dollar. For example, some feel strongly that a US digital dollar should be similar to bitcoin in one very important way — as a bearer instrument — but there is also significant resistance to this characteristic. (The US digital dollar serving as a bearer instrument is a concept we return to in a later section below)

Overall, limited technical feature overlap and other factors (eg US dollar’s status as legal tender) make it unclear how much direct competition would exist between a US digital dollar and bitcoin.

While it is no longer credible to completely dismiss bitcoin’s extraordinary success, the vast majority of people still (quite understandably) do not yet use bitcoin, and this is due at least in part because they find cryptocurrency to be confusing.

Indeed, the way bitcoin is primarily used today — less as a currency for payments and more as a scarce, “hard” asset that is frequently compared to gold — has led some including former-Bank of England Governor Mark Carney to state that bitcoin is misleadingly labeled when referred to as a currency. Instead of being called “cryptocurrency”, Carney and others believe a more accurate classification label for bitcoin is “cryptoasset”.

In addition to its inconsistent taxonomy, the confusion surrounding cryptocurrency is partly due to the complexity behind the many advanced technologies cryptocurrencies employ, such as cryptography, economic game theory, and distributed ledgers. New jargon (“blockchain technology”) and mumbled explanations probably don’t help either.

But arguably the biggest reason why many find cryptocurrency so confusing is because it relates to money.

But arguably the biggest reason why many find cryptocurrency so confusing is because it relates to money.

In my experience speaking and teaching economics and cryptocurrency in graduate and executive education programs over the past decade to a wide range of audiences across the world, I have found that a significant majority (including many working in financial services) do not fully understand how money comes into existence.

This lack of prior monetary knowledge is not the fault of the general populace; monetary basics are often not only excluded from secondary education, but also inexcusably from some introductory economics classes.³

While the blame for our financial illiteracy across the population largely rests with educators, media, policymakers, and perhaps others in leadership positions, the fact remains that our generally poor financial literacy raises significant challenges for many in understanding both cryptocurrency and central bank digital currency.

In short, if you do not first understand the basics of how money is created it will be very difficult to grasp both bitcoin and the US digital dollar.⁴

Now, it is true that most people generally know that money in the form of the coins and banknotes in our pockets are created (minted and printed, respectively) by governments and central banks. This type of money can be called central bank money.

But only a small fraction of people are aware that central bank money represents a relatively small percentage (often <10%) of the total money supply in a given country.

In fact, the vast majority of money (>90% in many countries) is created when it is lent into existence by commercial banks when they make new loans, such as home loans.

This second type of money — the vast majority of money — can be called commercial bank money.

Commercial banks, which are generally privately owned for-profit institutions, create this new money by simply updating what can be thought of as an internal corporate spreadsheet that records a) how much money the bank has created and b) who owns/owes what.

Understanding that commercial banks create a different type of money from what central banks create is a crucial point in understanding the US digital dollar, and worth repeating.

To recap, there are basically two different types of money:

  • Commercial bank money (eg the electronic money in your online bank account)
  • Central bank money (eg the physical currency and coins in your wallet/pocket⁵)

A US digital dollar would exist alongside banknotes and coins and be another form of central bank money.

The fact that people and businesses can interchangeably use both commercial bank created money and central bank created money in various settings (a principle called fungibility) is another reason why many people are not aware of any distinction between the two.

For example, when you go to most stores and make a payment you can often either pay for your goods with physical cash (central bank money), or with electronic funds using a debit card or contactless mobile phone payment (commercial bank money).

So if the two different types of money can effectively perform identically in the same setting (purchase of most goods and services) what really are the fundamental differences between the two, and are those differences truly important? The short answer to the latter is yes, and addressing the former requires some explanation.

Bearer instruments like banknotes and certain bonds confer ownership and transactional control to the holder irrespective of whether the financial instrument was acquired legitimately

Beyond the tangible differences in their physical (central bank) and electronic (commercial bank) makeup, a key difference is the bearer nature of central bank money.

Similar to bitcoin, if you have possession (legitimate or wrongful) of central bank printed cash or minted coin, then you have the power to spend that money. The holder (bearer) of the central bank money has control, and when bitcoin and cash transactions are completed the transaction can be said to have “settlement finality”.⁶ While a lengthy discussion of this topic is beyond the scope of this post, suffice it to say that settlement finality (or the lack thereof) has massive implications for the financial system.

In contrast, anyone who has had a debit card payment surprisingly blocked at the point of sale, perhaps for anti-fraud reasons, understands that banks must first grant permission for commercial bank money to be spent. With commercial bank money the bank has control, and access to commercial bank money networks have sometimes been controversially revoked.

In contrast, a bearer instrument like cash or bitcoin is permissionless, meaning its use does not require prior approval by a third-party like a bank.

Commercial bank money transactions can also be reversed, sometimes weeks or even months after the point-of-sale transaction, as frequently occurs in merchant chargeback disputes.⁷ The lack of settlement finality inherent in commercial bank money transactions can lead to controversial and painful situations where banks and payment firms withhold customer money that has been paid to businesses for goods and services already rendered.⁸

Just because you have commercial bank money deposited at a bank also does not mean you will be allowed to withdraw all your funds on demand. Related but separate to this point is the earlier mentioned topic of bank runs, which further illustrate important differences between commercial bank and central bank money.

As we saw in the Great Depression, and more recently in 2007 with Northern Rock bank in Britain, 2008 with Bear Stearns and Lehman Brothers, and Cypriot banks in 2013, commercial and investment bank customers occasionally grow concerned the bank will become insolvent and “run out of money”, and rush to withdraw funds. Recently, during the early days of the coronavirus pandemic in March of this year we saw evidence of a “bank jog” in the US, UK (which having recently transitioned to plastic notes had to redeploy paper £20 notes to cope with withdrawal demand), and elsewhere.

In contrast with commercial banks, which maintain a relatively small percentage of central bank money on hand at any given time relative to customer deposits (liabilities), central banks need not run out of money as they have the power to print, in central bankers’ own words, an “infinite” quantity of new money.

Finally, and perhaps most controversially, central bank money offers a much greater degree of accessibility and privacy than commercial bank money. Cash transactions need not be recorded or publicly broadcasted to third parties, and a pre-approved account at a third party institution is not required to transact in physical central bank money.

In contrast, most commercial banks require proof of identity and other information to open a bank account and/or apply for payment cards, and transactions are recorded and screened to ensure compliance with regulations. Commercial banks may share your financial data with others, and data breaches have resulted in private financial data becoming exposed to criminals, hostile nation states, and others.

At a high level, a US digital dollar can simply be thought of as a way to extend the properties of physical central bank cash and coin to a digital instrument.

While using a central bank digital currency like a US digital dollar may feel very familiar and similar to people who already use commercial bank money via debit cards or contactless payments, make no mistake that a US digital dollar presents a radically new proposition. So much so, in fact, that many will attempt to undermine its creation, or vigorously fight for and against various features or design characteristics.

But the benefits of a broadly transacted US digital dollar have not just become harder to ignore.⁹ Increasingly, a US digital dollar is viewed not only as inevitable, but necessarily imminent.

While perhaps too early to pass ultimate judgement on the government’s COVID-19 response, it already is clear that the lack of a US digital dollar had a severe negative impact on the ability of the government and Federal Reserve to address the current pandemic.

A US-government supported digital dollar (and wallet software) would have been extremely helpful in meeting the goal of rapidly deploying financial assistance to hundreds of millions of American citizens during this crisis. Beyond speed, a US digital dollar would also offer a host of other benefits compared to mailing checks and other payment methods, including:

  • Efficiency: Reducing the cost of payment delivery, which may run into the tens of millions with postal costs, etc. for checks.
  • Financial inclusion: Facilitate payment to individuals lacking access to bank accounts or low-cost check-cashing services.
  • Support the most vulnerable: Help ensure payment to some of those most in need who lack a physical mailing address, or those who have relocated recently (eg students).
  • Hygiene: Encouraging digital forms of payment may help reduce the rate of virus transmission as compared to cash and check use.
  • Efficacy: The receipt and use of digital payments can be more easily tracked to ensure individuals have received financial support and solve the significant “lost check” problem.

Such benefits, which are arguably just the tip of the total US digital dollar benefits iceberg (eg helping address unwanted aspects of the informal economy), combined with the need to respond to competitive challengers like the digital yuan, Libra and decentralized cryptocurrencies like bitcoin, make the case in favor of a digital dollar extremely compelling.

But what kind of US digital dollar do we want? And how will the many concerns and political obstacles to its creation be addressed?

The different forms a broad US digital dollar may take is the subject of the forthcoming Part 2 in this series, where we’ll analyze the tradeoffs of the leading US digital dollar design proposals currently under consideration, including already existing US digital dollars that select commercial banks, governments and international institutions already hold on deposit and transact with at the Federal Reserve.

For more insights from our research team, go to our Research page and follow our Head of Research, Garrick Hileman on Twitter.

Source: https://medium.com/blockchain/the-coming-us-digital-dollar-part-1-what-it-is-and-why-it-matters-a8a92d8e4eef?source=rss—-8ac49aa8fe03—4

Blockchain

Canadian VR Company Sells $4.2M of Bitcoin Following the Double-Spending FUD

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NexTech AR Solutions, a Vancouver, Canada-headquartered developer of VR and AR solutions, has booked a $200,000 profit after selling over 130 bitcoins. The firm justified its decision with the double-spending that allegedly occurred on the BTC network yesterday.

  • According to a press release published by the company, NexTech has sold all of its BTC holdings, amounting to 130.187 bitcoins. With today’s prices, this amount is worth north of $4,2 million.
  • The sale has come less than a month after the initial purchase – revealed on December 29th, 2020. Despite the relatively short period, though, BTC’s price has expanded, and the firm managed to realize a profit of $200,000 after the sale. This means a 5% ROI in just a little over three weeks.
  • However, what’s more interesting is the company’s reasoning for the sale. NexTech CEO Evan Cappelberg said that the decision came after reports of a “critical flaw called a ‘double spend’ may have occurred, which, if true, allows someone to spend the same Bitcoin twice.” 
  • The executive argued that such a development would undermine the faith in the BTC network. “If the system is built on scarcity and faith in the system, then a ‘double spend’ would eliminate both – essentially destroying the store of value it was meant to be.”
  • This alleged double-spending accident raised numerous concerns inside and outside of the community. Nevertheless, Andreas Antonopoulos, among the most popular BTC proponents, debunked the rumor with comprehensive tweets and explanations. 
  • He called the rumor an “irresponsible publication” and said that the situation was nothing more than two blocks getting mined almost simultaneously. 
  • Antonopoulos further explained that this was a regular block reorganization instead of a double spend and concluded that “nothing weird or outside the consensus algorithm happened. Bitcoin continues to work exactly as it should.”
  • Similarly, Blockstream CEO Adam Back shared Antonopoulos’s conclusion, saying that “there was no Bitcoin double spend. Stop misreporting stuff, seriously.”
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Source: https://cryptopotato.com/canadian-vr-company-sells-4-2m-of-bitcoin-following-the-double-spending-fud/

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Bitcoin Correction Intact While Altcoins Skyrocket: The Crypto Weekly Recap

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Bitcoin failed to recover in the past seven days and it marked a further decline of about 8%. This has its current price hovering around $32,000 and its dominance has declined to 64.1%. But before we take a look at what this means for the altcoin market, let’s see what happened with BTC.

The cryptocurrency started off trading above $35K and even took a shot at $38K on Saturday. The bears had a mind of their own, however, and prevented this from happening, sending the market in a sideways trajectory for the next few days.

Yesterday, though, things took a turn for the worst as the market tanked and lost about $5K in just a few hours. This continued in today’s trading session as the price hit a low of around $28,800. The bulls regrouped and prevented a 4-hour candle close below $30K and managed to recover to where we currently stand at around $32,000.

In between all this, however, a lot of things happened in the altcoin market. Ethereum breached its former all-time high above $1430, major large-cap coins such as LINK and Polkadot also saw serious increases. Cumulatively, this reduced Bitcoin’s dominance to about 64% and it’s interesting to see how things will develop from here.

What may have triggered the sell-off during the past few days was news that a double-spent had happened on Bitcoin’s network – something which, if true, could undermine the entire credibility of its blockchain. Well-known proponent and industry expert Andreas Antonopoulos took it to Twitter to explain in great detail why this wasn’t the case. He made it clear that nothing that happened was out of the ordinary and that Bitcoin’s network is and has been operating exactly as intended.

Elsewhere, the US Treasury Secretary nominee, Janet Yellen, reiterated that cryptocurrencies have been used for illicit activities but also said that they can improve the current financial system.

“Long Bitcoin” has also become the most crowded trade according to a survey by the Bank of America, which goes on to show that the interest in the cryptocurrency continues to increase.

In any case, it’s interesting to see how the next week will go and if the coveted $30K mark for Bitcoin will hold up.

Market Data

Market Cap: $937B | 24H Vol: 166B | BTC Dominance: 64.1%

BTC: $32,460 (-8.89%) | ETH: $1,237 (+7.53%) | XRP: $0.273 (-1.41%)

Andreas Antonopoulos Fights FUD With Facts: Bitcoin Is Safe And Worked As Expected. Long-term Bitcoin proponent and industry expert Andreas Antonopolous took it to Twitter to bust the recent FUD that a double-spent had taken place on Bitcoin’s network. He reiterated that the protocol is working fine and as intended.

US Treasury Secretary Nominee Yellen: Crypto Can Improve The Financial System. The nominee of President Joe Biden for the US Treasury Secretary, Janet Yellen, has said that the technology behind cryptocurrencies has the potential to improve the efficiency of the financial system.

Largest Asset Manager BlackRock May Start Trading Bitcoin Futures. The world’s largest asset manager, BlackRock, has filed two documents with the SEC, letting the watchdog know that some of its funds may start trading cash-settled Bitcoin futures contracts in a huge move for the entire cryptocurrency industry.

Ethereum 2.0 on Track as Staked ETH Tops $3.6 Billion. According to the latest update from developers who are working on Ethereum 2.0, everything is on track and the network is also growing in terms of the amount staked and its security. This comes as ETH hit a new all-time high this week.

Bitcoin And Tesla Stock The Biggest Market Bubbles According to a Deutsche Bank Survey. According to a survey conducted by the large multinational Deutsche Bank, Bitcoin and Tesla stocks are the biggest market bubbles in the recent month. It indicated that more than half of the investors believe in this narrative.

Long Bitcoin Unseats Tech Stocks as the Most Crowded Trade in January, BofA Reports. Long Bitcoin has become the most popular trade recently, unseating stocks of technology companies. This became clear in a study conducted by the Bank of America. Bitcoin continues to gain interest.

Charts

This week we have a chart analysis of Bitcoin, Ethereum, Ripple, Polkadot, and Chainlink – click here for the full price analysis.

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Disclaimer: Information found on CryptoPotato is those of writers quoted. It does not represent the opinions of CryptoPotato on whether to buy, sell, or hold any investments. You are advised to conduct your own research before making any investment decisions. Use provided information at your own risk. See Disclaimer for more information.

Cryptocurrency charts by TradingView.


Source: https://cryptopotato.com/bitcoin-correction-intact-while-altcoins-skyrocket-the-crypto-weekly-recap/

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Bitcoin as a last resort? Murmurs of crypto as reserve currency abound

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Reserve currency is money held by central banks or treasuries usually for international transactions. Argentina is not going to be able to purchase a Boeing 737 MAX passenger jet, for example, with its highly inflationary peso; it will have to pay with U.S. dollars, which is why Argentina keeps dollars on hand — i.e., in “reserve.”

A second basic function is to support the value of a national currency. If the Brazilian real, for instance, plummets during an economic contraction, Brazil’s central bank could bid it up again by purchasing reals with dollars that it holds in reserve.

Could Bitcoin (BTC) fulfill these key functions of a reserve currency? “I certainly think so, in the future at least,” Franklin Noll, a monetary historian and the president of Noll Historical Consulting, told Cointelegraph. Bitcoin’s electronic nature makes it well suited for settling payments. “If gold was used in the past to do so, this digital gold should do the job as well, if not better.”

Meanwhile, these are unusual times. When markets crashed amid the COVID-19 crisis in March, Bitcoin followed suit. “BTC did not perform well,” Sinjin David Jung, managing director at International Blockchain Monetary Reserve, told Cointelegraph. But in early 2021, the world is facing a different circumstance, one marked by extensive stimulus spending — especially in the United States — and if the dollar falters, according to Jung:

“BTC’s position is almost like the ‘last resort reserve currency’ in holding value if the increase of the U.S. dollar supply becomes the only tool for avoiding financial depression while paradoxically resulting in supercharging the market.”

“The U.S. dollar is still king”

But challenges remain, and Bitcoin probably won’t supplant USD anytime soon. Said Noll: “The current problem with Bitcoin — as with gold — is that few, if any, goods or debts are denominated in Bitcoin.” Furthermore, according to him: “It’s hard to see a future where a significant amount of the world’s trade is denominated in Bitcoin. The U.S. dollar is still king.”

Jonas Gross, project manager at the Frankfurt School Blockchain Center — a think tank associated with the Frankfurt School of Finance & Management — sees little chance that BTC will be used as a reserve currency by any industrialized country in the near future. “Skepticism remains very high,” he told Cointelegraph, referring to a recent statement made by European Central Bank president Christine Lagarde that called for global regulation of BTC because of money laundering concerns, among others.

That said, “the U.S. dollar’s dominance as the world’s reserve currency could indeed be threatened,” continued Gross. China is in advanced testing of its central bank digital currency — i.e., its digital currency/electronic payment project — which could be launched as early as 2022, and foreigners might be allowed to access and use it for transactions. In that event, Gross added:

“It would be possible to use a digital version of the yuan for global payments easily and conveniently — transaction costs could be reduced, and the digital yuan would ‘flow across borders’ quite easily.”

China’s yuan will have to go some distance to catch the dollar, however. USD accounted for 60.46% of the world’s allocated foreign exchange reserves as of Q3 2020, followed by the euro (20.53%), Japanese yen (5.92%) and U.K. pound sterling (4.50%), according to the International Monetary Fund. The yuan was only fifth (2.13%).

Just six dominant reserve currencies since 1450

Campbell Harvey, professor of international business at Duke University, told Cointelegraph that as the rates of borrowing in the United States rise, “the riskier it [USD] becomes as a reserve currency. At some point, it is too risky, and alternatives are sought.” Indeed, economic history teaches that global reserve currencies do not last forever.

In August, business intelligence firm MicroStrategy announced that it had adopted Bitcoin as its primary treasury reserve asset. At the start of 2021, former Canadian prime minister Stephen Harper raised the ante, suggesting that not only companies but governments might use crypto as a reserve, albeit as part of a “basket of things” that also included gold and fiat.

There have been six major world reserve periods since 1450, with an average span of about 94 years. The U.S. dollar has already been the world’s reserve for 100 years, surpassing the average, and is nearly equal to its predecessor, the British pound, which dominated for roughly 105 years.

BTC by itself is unlikely to become a reserve currency because of its extreme volatility, though, Harvey said. “Currently, the USD volatility versus 10 leading currencies is about 3%–4% per year. BTC is in the range of 80%–90%.” Gold, he added, has an annual volatility of about 15%.

Part of a basket?

On the other hand, cryptocurrencies could be used as part of a basket in the future, added Harvey. “It would unlikely be a single cryptocurrency in the basket. By the time this happens, all major central banks will have their version of a cryptocurrency.”

The idea of a diversified basket is not new, continued Harvey, referencing F. A. Hayek’s 1943 Economic Journal paper titled “A Commodity Reserve Currency.” Still, “there are plenty of issues: What assets do you use and what are the weights?” Also, who actually determines the weightings and if and when an asset is to be added or dropped?

“Bitcoin could indeed be used as part of a ‘basket of things’ as a hedge against inflation and political turmoil,” Gross said. One already sees BTC being used as a corporate treasury reserve, he added, mentioning MicroStrategy. Noll, too, viewed some corporations’ recent embrace of Bitcoin as a treasury reserve as a significant development:

“It is a short step from widespread private reserve currency/asset to public reserve currency/asset. If Bitcoin is good enough for banks, insurance companies and cities, it certainly is good enough for a small nation looking to bolster its own reserves.”

José Parra-Moyano, assistant professor at Copenhagen Business School, told Cointelegraph: “It could be that if Bitcoin or other cryptocurrencies establish and continue showing technical security, central banks will incorporate them to their reserves.” But maintaining technical security over time won’t be easy, he suggested.

Is the infrastructure sufficient?

Is BTC’s infrastructure anywhere close to ready? Jung told Cointelegraph: “At this point, only BTC [among cryptos] could be considered a contender for the last resort reserve currency”; its transparency, simplicity and track record “clearly show it to be engineered for this function.”

“There are indeed some hurdles to overcome,” according to Gross. “Lower volatility and higher speed — e.g., implemented through the Lightning Network — would increase BTC’s attractiveness.” Furthermore, he outlined that efforts to educate regulators about cryptocurrencies should be improved so that they understand the potential of the technology “from a portfolio diversification perspective.”

Other potential obstacles are Bitcoin’s “newness” — it has only existed for 12 years — noted Harvey, as well as its still-limited adoption, vulnerability to manipulation — “see the academic evidence on USDT and BTC” — and also vulnerability to algorithmic attacks, “a 51% attack is costly but feasible.” Harvey added:

“Central banks don’t like it because it’s deflationary, and the algorithmic nature of the money creation usurps their economic influence — of course, this last point is also a selling point.”

Jung believes that the often-cited volatility flaw is exaggerated. BTC can’t help but be volatile in the process of its positioning as the last resort reserve currency. It will “continue to be volatile until the conditions are met when the U.S. dollar value starts to consistently drop even as the excess U.S. dollars are fueling greater market gains.”

Finally, in asking about BTC’s potential as a reserve currency, it is assumed that there will always be the need for such a reserve. Harvey, for one, isn’t so sure. “Why do we even need a ‘reserve’ currency?” he asked. “In the future, everything will be tokenized. To pay for something, you will have your choice what to pay in — e.g., BTC, gold, IBM stock, etc. Users will have easy access to millions of cross rates and will be instantly able to ‘pay with whatever asset you choose.’”

“Inherently when you speak about a reserve currency, it is all about long-term stability and competitiveness,” said Jung. “As such, the U.S. dollar will always act as the world’s primary reserve in times of geopolitical uncertainty. But what happens when the world and the U.S. dollar is in a continual state of quantitative easing?”

In that event, all bets are off, and national governments, beginning with smaller countries, might indeed gravitate to a basket of hard and digital assets as their reserve currency of “last resort.” Crypto and blockchain proponents will just have to continue spreading the word and hope that BTC or any other cryptocurrency will eventually become mature and worthy to take up the mantle of a commonly accepted reserve.

Source: https://cointelegraph.com/news/bitcoin-as-a-last-resort-murmurs-of-crypto-as-reserve-currency-abound

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