Home Cryptocurrency The Case of Centralized Digital Currencies

The Case of Centralized Digital Currencies

by Pragati Shrivastava
, The Case of Centralized Digital Currencies

The case for centralized digital currencies is now stronger than ever and with social media and messaging giants like Facebook and Telegram launching their own cryptocurrency, central banks are more inclined to launch their own digital currencies backed by fiat.

To see what might have been the crack in the dam that stopped the mainstreaming of cryptocurrency, one might look at Facebook’s June 2019 announcement that they were launching a digital currency. This caused quite a stir in the global banking community.

The People’s Bank of China (PBoC) reacted to Facebook’s announcement and increased the pace at which its centralized digital currency – Digital RMB is being developed.

Officials of the Swiss National Bank expressed their concerns over stablecoins, like Libra, and their impact on monetary policy. They discussed the possibility of launching a centralized digital currency for safeguarding their monetary policy and financial system.

Most European countries have expressed their disapproval of cryptocurrencies and following their move, leading Asian countries like India and China took a negative stand on Libra. India’s central bank is considering the launch of its own digital currency for speeding up transactions and reducing costs.

In this article, we’ll explore the potential of centralized digital currencies. Centralized digital currencies are similar to cryptocurrencies Bitcoin and Ethereum, in that they provide a digital medium for exchanges of value, without ties to traditional fiat currencies or their associated financial systems. However, as a general rule, they differ from the majority of cryptocurrencies because they are centralized, meaning they are often governed, issued, and managed by the people who create them, rather than by a trustless algorithm spread throughout a decentralized network.

J.P. Morgan’s groundbreaking JPM Coin is a bank-issued digital token built on top of a business-focused version of the Ethereum blockchain called “Quorum”. JPM Coins function very similarly to ETH tokens, but inside of a centrally governed proprietary network of computers belonging to J.P. Morgan, rather than a globally-distributed public network. While the Quorum network is “distributed” amongst various nodes owned by J.P. Morgan, it is not decentralized in the same sense as Ethereum, because all Quorum nodes belong to one centralized authority. Despite this, JPM Coin is simply an application of blockchain technology within a closed ecosystem.

Many centralized digital currencies are promoted as “decentralized” by their creators to piggy-back off the hype surrounding blockchain technology. An example of that is Facebook’s Libra project, a blockchain-based digital currency that is taking over the world with its ease of use and massive payment network. The Libra project has tried its best to appear as though it is decentralized while it isn’t. While Libra can help users exchange value over the internet, and the developers behind the project are creating a powerful digital currency, the Libra network governing the currency consists of nodes solely belonging to a very exclusive group of private companies.

Centralized digital currencies don’t overthrow the existing banking system, instead, they work alongside it. In the present time, individuals cannot access, exchange, or control the value they own without dealing with a long chain of custodians and an array of unrelated payment networks. Despite big decentralized cryptocurrency projects like Bitcoin and Ethereum, it takes a long time to exchange value with peers over the internet in a reliable, stable, safe and efficient manner, no matter which cryptocurrency or fiat payment network they choose. This indicates that cryptocurrencies aren’t yet solving the issue.

While decentralized cryptocurrencies solve the problem of transferring value anonymously, they create other problems like instability in purchasing power, higher security risks, and high transaction costs. This leads us to think that well-designed centralized cryptocurrencies may be better suited to the demands of central banks and global policymakers. Decentralized cryptocurrencies face volatile valuations and questions from policymakers, however, centralized digital currencies can change their parameters to suit supply and demand dynamics and are also much more likely to be efficiently managed because their networks are centralized.

Several centralized digital currencies are being developed and while they might not be the same thing as a decentralized cryptocurrency they have many advantages over decentralization when it comes to efficiency, scalability and regulatory compliance. They function on top of the existing financial system, providing a technologically-superior layer to facilitate transaction settlement. Centralized digital currencies may be the next step in the evolution of cryptocurrencies that are regulated and managed by centralized institutions and enable faster, cheaper and secure transactions across P2P networks.

Content provided by CryptoTraderNews is for informational purposes only, and should not be construed as legal, tax, investment, financial, or other advice. All information is of a general nature. As always, there is risk with any investment. In exchange for using our products and services, you agree not to hold CryptoTraderNews Pro, its affiliates, or any third party service provider liable for any possible claim for damages arising from decisions you make based on information made available to you through our services.

Related Posts