Recently there’s a lot of interest in the blockchain technology from central banks and governments from all over the world. The bank of England has put forward a concept of a centralized, bank-issued crypto a while ago, and the idea caught on. Actually a suggestion to create a centralized cryptocurrency seems to be a contradiction in terms — blockchain systems are meant to be decentralized, the whole purpose of blockchain technology is to provide a mechanism for open systems to be stable and resilient. Being a stark proponent of open blockchains, for me it is quite hard to wrap my head around the idea of a centralized cryptocurrency. But I still feel that it is feasible and might make sense, and here’s why –
- Open blockchains are not ready for enterprise/government usage. Blockchain technology is very young, it’s just 8 years old. Research in distributed computing has been moving forward for about 30 years, which is not much either. Decentralization is a paradigm shift that can’t happen immediately, for all technologies humanity has created was centralized up until very recently. Open blockchain consensus algos do not provide necessary guarantees yet. If we want to use blockchain tech for big enterprise-grade systems we have to adjust them somehow.
- Enterprise and government systems can still benefit from blockchain tech RIGHT NOW. Opponents might say that similar systems could be created without using the blockchain at all, for example with older, pre-blockchain Byzantine consensus algorithms. However, most of the research is focused on blockchain tech now, and there’s a great progress with understanding how these systems can eventually become resilient and ready for global usage. We could start creating some kind of intermediary systems that can evolve into open systems as the technology evolves.
- Permissioned blockchain systems with limited access provide a greater degree of transparency then any fully centralized systems. Managing the system nodes by pre-determined players solves the issue of trust between them, since there are cross-checks between all the blockchain participants. Additional layer of transparency can be added if a blockchain operations can be monitored by third-parties without the full access to node software (there can be some mechanism to provide different access levels for different players)
- Implementing a state-wide centralized cryptocurrency can lead to creating a retail e-currency solution for the whole country . Centralized blockchain can handle a substantial amount of transactions, which cannot be achieved by open blockchains yet. Retail systems can be build using the technology, solving the problems of micropayments and providing all the benefits that traditional e-currencies failed to provide.
- Issuing a digital currency at a central bank level can be used as a monetary policy tool. It is feasible to make a free-float digital currency, the price of which is determined at the open market. So there’s a basic, “old”, currency and a new, digital one. This concept is clearly worth a try; in my opinion chances that one of smaller central banks tries this approach in near future are quite high.
- Centralized, central bank-issued cryptocurrencies can provide a legal framework for the whole cryptocurrency market, since it is easier to provide taxation and accounting guidelines for the centralized crypto, and all fiat exchange operations are regulated through it.
- Centralized crypto can provide some kind of balance between unregulated ICO markets and overly regulated traditional securities markets. Token issue may be approved by a centralized agency, and the token can be sold to eneral public, with necessary KYC/AML procedures. This could be an interesting development which could take crowdfunding to a new, state-wide level.
Permissioned blockchains most probably are going to be a temporary solution; as the blockchain tech develops open blockchains will overtake closed systems. But we should be in the clear about the timeline here, it could take decades. So we have to consider closed chains as a stepping stone to completely decentralized systems of the future, and a logical part of the transition to open chains. The world can clearly benefit from permissioned chains now, so we need to give them a try. You can’t underestimate the importance of introduction of big, country-wide distributed ledgers deeply integrated into economy. This can be a game-changer which is going to lead to a smoother adoption of the “true”, open, blockchains.
Let’s wait for a central bank backed crypto fiat, I’m sure it’s going to happen someplace in the world soon.