Not Bitcoin. This will be the future of money – Mint

Bitcoins wild gyrations in 2021 have made sure of one thing: The future of money will be electronic, but it wont remotely resembleacyberpunk utopia. Peoples power will bow tosovereignsmight.

The mania and panic that have gripped decentralized cryptocurrencies are heighteningthe attractionof their coming rivals: digital cash, issued by central banks.These tokenswill be staid, centralized and state-controlled. Thats exactly what users will want in an Internet of Things world where machines need to settle claims with one another all the time, instantaneously, but without contributing to global warming.

Official electronic coinswill be a new type of central bank liability alongside physical cash, though for investors betting on the future value of the dollar, yen or the euro, they wont be a novel asset class.

That has clear advantages. To avoid becominga lightning rod for fresh speculationmeans that a global economy powered by FedCoin, digital euro and Chinas e-CNY will make far less onerous demands on energy resources than cryptocurrencies. In the absence of a trusted intermediary, the mining," or proof-of-work protocol that keeps the blockchain secure from double-spending attacks, requires power-guzzling hardware. Between Bitcoin and Ethereum, the electricity consumed can light up 16 million American households.

Not so for the distributed ledgers that will verifytransfers of official coins. These ledgers will only be held by a select group of intermediaries with the central banks permission. Instead of being in a race to solve puzzles faster than malicious actors,as we see with decentralized cryptocurrencies, the nodes in the network can lock their own funds to back legitimate transactions.

This approach, known as proof-of-stake, will require a fraction of the energy proof-of-work needs. Ethereum intends to switch. The cryptocurrency Ether will replace hardware and electricity as the investmentneeded to secure the network. Validators will earn fees by locking up at least 32 Ether. (Thats a $72,000 commitmentas I write.) If they misbehave, go offline or fail to do their job, the processorscan lose their collateral.

A central authority can perhaps run sucha network better. After all, those who are vouchsafing transactions must have skin in the game, as they claim and somebody trustworthy must ensure that theydo. As Chi Lo, an economist at BNP Paribas Asset Management Asia,says: A holders identity is inevitably required for verification" of balances on a digital ledger. Who has the legal identity of coin holders? The government!"

Central banks that arent constrained by how much fiat money they can create out of thin air use that flexibility to avoid catastrophe, asthey did recently during the Covid-19pandemic. By contrast, a bitcoin-ized" economy can bedangerous because of finite money supply. As Losays, if you fix nominal variables, real output has to adjust violently to absorb any economic shocks.

Besides, perfect anonymity of cryptocurrencies is impractical. It comes with unacceptably high risks of money laundering and terror financing. Governments do not want to pry into all or even most online transactions. But theywont give uptheir right to lift the veil of pseudonyms when they want. Hence, theinterest worldwide in digital cash. Chinas plans are most advanced, but othercentral banks are also in the fray.

If cryptocurrency adoptionis a headache for governments, an overwhelming popularity of digital cash could also be an issue. Banks couldlosedepositsshould customers prefer having a direct claim on their monetary authorities. Lenders financinglong-term loans with short-term market liquiditymightget into trouble later. These risks arent new. But byignoring them to a point where subprime mortgage-linked banking losses had to be socialized, authorities created a trust gap with the public: Techno-anarchists burst through it with thetemplate for an electronic payment system based on cryptographic proof instead of trust.

More than a decade later, the cyberpunk movements success is to be measured not by the highly volatile, speculative asset class it has helped spawn and popularize, but by the rising influence of blockchain technology within the traditional financial system. Digital cash with in-built, self-executing software code will alterthe future of money in a way that cryptocurrencies never could. Tokens will win. But trust won't lose.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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Not Bitcoin. This will be the future of money - Mint