Bank of Canada: Digital currencies only work with good regulation

Researchers at the Canadian central bank conclude that private digital currencies such as Bitcoin will not be successful in the long run without some kind of regulator.

In a paper published this week (freely available), the Canadian central bank explains its thesis on almost 35 pages. Time and again, it references historical events and compares them with currencies and financial systems of the past. In particular, the Canadian public “Dominion” notes and the notes of private banks in the 19th and 20th centuries are compared with digital currencies. Sensible, or wrong choice of comparison elements?

Bitcoin secret: Paper out of some self-interest?

If you look at the Bank of Canada study, you might ask why the bank is already addressing the regulatory implications of Bitcoin secret technologies. Looking at the bank’s history, however, it quickly becomes clear that the paper follows the idea of issuing a digital currency that is covered by the bank. Recently, the efforts of the bank, which had apparently been dealing with this issue for some time, became known. For real use, however, the system is not yet scalable enough to meet the demands of a digital currency.

Only a regulator can make cryptosoft secure

The Bank of Canada comes to the conclusion that a cryptosoft currency like the Bitcoin could spread by itself and find a strong acceptance, like this, but without the intervention of a central party it could not offer users enough security. The central bank thus contradicts many supporters of digital currencies, who see them as a unique selling point precisely because of the autonomy of state bodies.

In the past, the bank has indeed already devoted itself to political issues: In November 2015, it stated that growing interest in digital currencies could greatly reduce the impact of monetary policy.

Opinion of the author(Max):

If one thinks in conventional systems, one comes to the conclusion that a currency needs a regulator that offers security, ensures the emission and circulation of money. However, the interest in exploiting this position or the interest of individual groups among the participants in manipulating the system would be too great.

The reason why I disagree with the opinion of the Canadian central bank, however, is the core characteristic of the blockchain (in so far as one talks about crypto currencies): the point is that every participant in the system has the right to vote. This is done both via mining and via forks, by adapting the system via source code changes. In order to manipulate the system, the majority would have to unite (simplified, of course). Since the basic set of decision makers is much larger than with traditional money systems (few regulators), the probability that satisfactory decisions will be made for each participant is theoretically also higher.

Not to forget, however, some special cases: How voting rights are distributed: Proof of Work, Proof of Stake or other? How to deal with questions in which the majority decides in their own favour against a minority (e.g. many low earners want to expropriate a single multi-billionaire).