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The future of crypto-currencies

Thomas Frey //August 21, 2014//

The future of crypto-currencies

Thomas Frey //August 21, 2014//

(Editor’s note: This is the second of two parts. Read Part One.)

Typically, a bank is a financial institution that is involved in borrowing and lending money. Lately, however, the lending side of the equation has turned into more of a bizarre shell game where banks have become so massively risk averse that the only lending happens to government-backed borrowers and over-collateralized businesses and people.

The primary purpose of traditional banks is to:

  1. Keep money safe for customers
  2. Offer customers interest on deposits, helping to protect against money losing value against inflation
  3. Lend money to firms, customers and homebuyers
  4. Offer financial advice and related financial services, such as insurance

Creating a Business Model for the Central Bank of Bitcoin

Most countries have some form of Central Bank serving as the principle authority for their nation’s financial matters. In this role, a Central Bank implements monetary policy, promotes economic stability, manages the production and distribution of the national currency, and keeps the public informed about the overall state of the economy.

However, a Central Bank for crypto-currency will have the latitude of performing an entirely different function. This bank will have neither the accountability of managing, influencing or keeping a specific economy afloat, nor will it have a constituency relying solely on its performance.

From a business standpoint, crypto-currencies need to watch out for their own users and are primarily accountable for their network, the integrity of their system and the technology driving it. But from a global systems perspective, a Central Crypto-Bank governing one or more crypto-currencies will have a completely different charter. 

In a globally competitive banking environment, where crypto-currencies are the new kid on the block, part of the bank’s role will be to establish the ground rules to coexist in today’s global monetary systems. Declaring war against current banking systems is in no one’s best interest.

Operating without the benefit of an existing legal system, the bank will need to establish its own forms of mediation, arbitration and virtual courts for resolving disputes.

It will also need to become the chief evangelist, advocate and enabler of both current and future crypto-currency technology. In this capacity, the bank’s role will be to envision and anticipate future technologies and design systems and architecture that allows for a wide range of implementation strategies.

Today’s Central Banks have ways of lending money into existence, but crypto-currencies typically use a system for “mining” their coins into being. One of the new Central Bank’s mandates could be to discover new and better options for expanding the existing money supply.

Some of the Central Bank’s other roles may be better understood through the following scenarios.

Possible Scenarios

There are many analogies that can be drawn between today’s crypto-currencies and the Arpanet in the 1960s. While we suspect we’re on the verge of something great, we don’t exactly know where it will take us.

Here are a few not-so-obvious questions to help us think through what may be possible.

  • How long before Bitcoin is accepted at our biggest retailers like Wal-Mart, Amazon and Target?
  • How long before a person can live for an entire year using no money other than Bitcoin?
  • How long before someone is able to take out a home loan, car loan, or business loan in cryptocurrencies?
  • How long before we see a political candidate announce that they will only accept donations through Bitcoin or other cryptocurrencies?
  • How long before people can purchase a $10 or $100 Bitcoin card in grocery stores and use it online?
  • How long before a cryptocurrency is formally adopted as an individual nation’s official currency?
  • How long before we see financial instruments and contracts encrypted with a blockchain from Bitcoin or some other cryptocurrency to avoid the prying eyes of governments and industrial espionage?
  • Is the intrusiveness of governments forcing people underground? Is there a point at which crypto-currencies will be considered a threat to national security?

Final Thoughts

Crypto-currencies are an organic technology. Much like planting a thousand new seeds into the ground, a significant percentage of these fledgling new currencies will begin getting traction.

With Bitcoin being the flag bearer for this emerging industry, it will bear the brunt of most of the attempts to control it

The same cryptography that makes crypto-currencies secure, is what makes it anonymous. Even though many think that “fiat” money, based on trust, has no inherent value, the same cryptography that makes every transaction safe, gives it its inherent value.

In a digital age where cash is the only remaining form of anonymous currency, and even cash is being heavily monitored, crypto-currencies have become a solution to “intrusive big government” issues.

Even though many Bitcoin transactions are for nefarious purposes, the advantages still outweigh the disadvantages. Crypto-currencies are on the verge of reinventing our global monetary systems in ways we can’t yet imagine. And the Central Bank of Bitcoin will be one of the key players making that happen.