Corporate Finance, DeFi, Blockchain, Web3 News
Corporate Finance, Fintech, DeFi, Blockchain, Web 3 News

In the mind of central bankers… to create their Bitcoin

by Ilias Louis Hatzis.

Undoubtedly, Libra was a wake-up call for governments and central banks. The demand for fast, reliable and cheap cross-border payments is going to grow even more in the coming years. Countries around the world will be rolling out their own versions of digital money. Governments have gone from dismissing digital currencies, to revealing they are working on their own digital currency. The speed at which these events are unfolding is unbelievable. Germany wants a digital Euro, Switzerland and Sweden are on their way to create their own digital currencies. China has openly embraced blockchain and digital currencies. At the moment the three biggest currencies in the world are racing to make their fiat digital. Should central banks issue digital currency? This is the million-dollar question.

Ilias Louis Hatzis is the Founder at Mercato Blockchain Corporation AG and a weekly columnist at

A few days ago Benoît Cœuré, an executive board member at the European Central Bank (ECB), said that digital currency can become an alternative to cash. He also mentioned that EU’s Central Bank will explore the effect of digital currencies on the current financial system.

It sounds to me like the ECB is planning its foray into the world of digital money. I am not surprised at all.

On November 1st, Christine Lagarde the former Managing Director at the IMF, assumed her new duties as ECB’s President. Since 2016, Lagarde has been very consistent in her stance on digital currencies, when she said that she sees banks adopting digital currencies within 5 years. In October 2018, she talked about the possibility of the IMF adopting its own cryptocurrency. It looks like she’s already putting things in motion at the ECB.

The primary reason we are seeing central banks and governments scramble is Libra. Facebook’s Libra has rattled everyone. But Libra is nothing new, there have been plenty of proposals in the past, to create Libra like projects. The Special Drawing Right (SRD) at the IMF is a similar example, even though it has limited access. Libra like proposals, date back to the pre-internet era. What makes Libra interesting is that we are in the Internet era and that Facebook has vast network in place with more that 2 billion people, that can talk to each other.

Money is information. Moving money is the same thing as moving information. Anyone that opens an account on Facebook will be able to debit their account with Libra and credit someone else’s account on network. Because of Facebook’s massive scale, the impact will be huge and everywhere, potentially affecting payment systems, central banks and weaker economies. That’s exactly the reason that the existing establishment is running scared. It might not only be Facebook they need to deal with, as more big tech companies decide to enter the game.

Right from the start, Germany and France called for a ban on Libra. Now, Spain, Italy and the Netherland have teamed up to block Facebook’s digital money. To counter Libra, the ECB is already thinking about issuing a digital Euro and creating a framework that would ban high-risk cryptocurrency projects. And it not just Libra. A couple of months ago, the former ECB President, Mario Draghi, attacked plans for an Estonian state-operated cryptocurrency, saying: “No member state can introduce its own currency… The currency of the Eurozone is the Euro.”

In the US, lawmakers and Federal Reserve officials are also concerned about Facebook’s plans to launch a new digital currency. They are contemplating of having the FED create a retail competitor. The reality is the FED already has a central digital currency. All retail banks in the US have accounts with the Federal Reserve that are digital currency accounts, and up to now have been restricted only to commercial banks.

In Europe the ECB will work together with national central banks to develop the digital Euro. These efforts could render commercial banks obsolete and drive them to oppose to such a scenario. But in Darwinian world, banks need to wake up and become more vigorous about competing and bringing value to their customers, in payment services and trying to retain customer deposits.

What are the risks posed by private stablecoins?

Besides the standard concerns, that Bitcoin, Libra and other cryptocurrencies can be used to circumvent capital controls, facilitate crime and terrorism, the real concern is whether you can trust a technology company with your money.

Banks have decades of regulation and that regulation makes them a very integral part of every country’s economy. They are backed by governments that guarantee our money… most of the time. But banks, have a big weakness. Banks were built for the Industrial Revolution. They were built for paper and cash. Banks have a business model that is focused on the physical distribution of paper in a localized network of buildings and humans.

In a digital world, the existing banking model doesn’t make sense. Paper money is a relic from another century.

In 2018, in North America and Europe alone, we had 1,300 fintech venture deals worth over $15 billion, according to Pitchbook. During the same period, KPMG estimates that over $52 billion in investment poured into fintech initiatives globally.

When Jamie Dimon said we can’t let Silicon Valley eat our lunch, he was right. Banks needed to become technology companies that do banking, to survive. JP Morgan has gone through a process of reorganizing, to become more like a technology company, automating everything that can be automated. This is the reason why one third of their workforce disappeared in two years and their value increased by 50%. They’re using technologies like artificial intelligence, distributed ledger technology, machine learning apps, APIs and open banking to digitalize financial services, and the results are stunning. Today they have more developers than Facebook and Twitter combined.

I say, If you can trust fiat currencies issued by governments, that are not backed by any tangible assets, why can’t you trust a stablecoin that is issued by a private technology company.

What strikes me about this whole thing, is that central banks want to be the disrupter. The financial system I’ve known and used all my life, was invented two hundred years ago. How can a monopoly change its core and try become something like the challenger fintech startups that are trying to unseat it? That’s a big attitude change and I am not sure that banks can make that leap.

Even if central banks and governments manage to stop Libra in its tracks, to buy time and prepare, they can’t stop Bitcoin. Libra has a company behind it, that needs to be compliant with regulations. Facebook is one of the richest and most powerful companies in the world with resources and connections to do anything it wants, but for now they have hit a brick wall.

CBDCs, are inevitable, and in the coming years we will witness a new race for global reserve currency status. Billions will be allocated to capture the potential global dominance. Not that it really matters. Most countries in the world don’t have a reserve currency and its not critical for the well being of a nation to have a reserve currency. So far, China is winning and set to announce the digital Yuan, early next year. The US and the EU won’t be ready for a while. In my opinion, in order to stay in the game and counter China for now, they would have to back Libra.

On the other hand Bitcoin is a completely different animal, completely decentralized, causing difficulties to any government that want to control it, even if they impose bans to limit its use.

Governments understand that full well and that is why they are looking for ways to make cryptocurrencies like Bitcoin less secure. They are heavily investing in Quantum computing to crack the public-key cryptography and underpin Bitcoin. The Trump administration has committed $1.2 billion to this endeavor. China is active too.

We live in a digital world and we need digital money. The digital distribution of data is the core in everything we do, and money is data. Whether it’s Bitcoin, CBDCs or private stablecoins like Libra, cryptocurrencies represent the struggle between the old and the new, a radical shift in power that is challenging our ideas of what is possible.

Ilias Louis Hatzis
Ilias Louis Hatzis
Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG.
He writes the Blockchain Weekly Front Page each Monday.I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
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I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

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Mardi 3 Décembre 2019