Over the past few years, many central banks, such as the People’s Bank of China and the Bank of England, have discussed the possibility of issuing their own digital currencies in response to the existence of bitcoin. Some have speculated that such a move by central banks would destroy bitcoin’s value proposition, but Bobby Lee, who is the CEO of China-based bitcoin exchange BTCC, sees things differently.
At Fintech Week New York 2017, Lee gave a presentation on the five key differences between bitcoin and other forms of government-issued money.
“If it’s a digital currency distributed by a central bank, most likely, it’s still very much centralized and different than bitcoin,” Lee summarized.
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1. Who Can Use the Money?
The first point made by Lee during his talk was that central bank-issued digital currencies will not be open to everyone to use. But with bitcoin, anyone can create a new address and receive money at the click of a button.
In Lee’s view, governments will not allow anonymous individuals to use their digital currencies because they’ll want to track as much financial activity as possible.
It should be noted that this issue also exists with gold-backed digital currencies, as I pointed out in a recent piece regarding noted gold bug Peter Schiff’s criticisms of bitcoin. Centralized issuers of virtual currencies are easy targets for regulators. If a gold-backed virtual currency issuer is not playing by the rules, the government will come in and shut them down — as was seen in the past with E-gold and Liberty Reserve.
“Most likely, it’s going to be assigned,” Lee said of government-issued digital currencies. “And why is that? Because they want to tie it to your identity. They want to know who has the account and so on and so forth.”
Lee added that bitcoin is more like the wallet in your pocket.
2. Can the Money Be Anonymous?
The second point brought up by Lee is closely tied to the first one. In addition to not allowing open access to digital currency wallets, it’s unlikely that governments will allow anonymous transactions to take place on the internet.
“I’m not making a value judgment on whether [anonymity] is better,” Lee clarified. “I’m just explaining the characteristics of bitcoin in this case.”
It should be noted that the level of privacy offered to Bitcoin users right now is quite poor. However, there are multiple privacy-focused improvement proposals in the works, one example being MimbleWimble. Privacy-conscious altcoins, such as Monero and Zcash, also already exist.
Anyone interested in Bitcoin should see how regulators react when these sorts of privacy improvements are integrated into the protocol.
3. How are Payments and Transactions Handled?
With Bitcoin, transactions are always allowed and always final. This is one of the reasons it has been useful for ransomware payments and shopping on darknet markets. It works like cash.
From Lee’s perspective, governments will still have the ultimate say over whether or not a payment will be reversed on their digital currency platforms.
“It will be a centralized blockchain and not a decentralized blockchain most likely,” Lee noted.
4. Are There Restrictions on Payments?
The one area where Lee believes government-issued digital currencies will likely follow in bitcoin’s footsteps is with the potential limitations related to geography and amounts.
“[Bitcoin] is freedom of money,” said Lee. “You can pay anyone any amount anywhere.”
The current types of online payments available for fiat currencies often come with restrictions as to how much can be sent and where the money can be sent. Lee believes these restrictions may be lifted once governments are issuing their own digital currencies.
5. How is the Value in the Currency Preserved?
One last distinction Lee made between bitcoin and government-issued digital currencies is that there is no central bank deciding on bitcoin’s monetary policy. The issuance of new bitcoin is outlined in the network protocol, and it could only change with the overwhelming support of everyone on the network.
Fiat currencies, obviously, are subject to the monetary policies outlined by central bankers. Government-issued currencies tend to be inflationary over long periods of time, which means the real value of one’s wealth held in that currency also declines.
On a related note, countries that decide to implement negative interest rate policies will be able to enforce that policy through their digital currencies. Bitcoin users will remain unaffected in those scenarios.
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