The rise of cryptocurrencies is rewriting long-standing ideas about how money should work. Eager not to get left behind, central banks around the world are starting to develop their own digital currencies. These new forms of cash could boost financial inclusion, slash payment fees, and make money smarter, say experts, but they also present significant risks.
Volatile prices and regulatory uncertainty have limited [cryptocurrency] adoption as a practical medium of payment, but the underlying technology has led to a major rethink of what money should look like in the digital age. “They proved that there can be a new way to organize money and make payments, and that this can be widely adopted,” says Andreas Veneris, a professor of computer engineering at the University of Toronto, who has advised the Bank of Canada on digital currencies.
Fears have been raised that CBDCs like the digital yuan could destabilize the private banking system by encouraging people to transfer their deposits into safer, central-bank-backed wallets. The design of the digital yuan makes this unlikely, though, says Turrin, because it can’t earn interest and there is a limit to how much people can transfer, which are design choices that similar projects will likely mimic. said Rich Turrin, a Shanghai-based fintech consultant.
One of the beauties of the cryptographic building blocks that underpin digital currencies, though, is the ability to encode rules into the way they work that can be easily audited and verified. This programmability opens the prospect of writing financial regulations directly into digital currencies both to protect citizens and prevent illicit behavior, in a way that enables direct public oversight.
“I can prove to you that the code is correct, I can prove to you that the code represents what I told you it represents, cryptographically,” said Veneris. “If you introduce all these cryptographic principles, the CBDCs are going to always be slightly slower, but it will be more fair.”
Read the full article from Institute of Electrical and Electronics Engineers (IEEE)