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Why Central Banks Won’t Bring Down Bitcoin

BTC

It’s question that the bitcoin and crypto community has pondered over long and hard: “Could the world’s central banks create their own ‘safe’ and centralized cryptocurrencies to replace the current decentralized networks?”

It’s not just an idle musing, either. Digital payments are expected to hit a record 726 billion transactions by 2020 as digital rapidly establishes itself as rival to cash due to convenience and low transaction costs.

These legacy banks would no doubt love to be at the helm of digital payments the same way they have dominated the fiat currency market.

And now the European Union has sounded the alarm to the bitcoin and crypto community by declaring that decentralized currencies could find themselves in serious trouble if central banks decide to launch their own cryptocurrencies.

A report on fintech competition commissioned by Econ, an organization that oversees decisions by the ECB (European Central Bank), warns: "The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the cryptocurrency market, broadening the number of competitors."

Related: Wall Street Expert Predicts Citi Shares Will Double By 2020

The report theorizes that banks could use their power in traditional banking to limit competition from other cryptocurrencies through predatory pricing schemes and pre-emptive acquisitions. Banks would not only price out bitcoin and other crypto but also institute denial of service, including to exchange wallets by users.

The report also points out that bitcoin’s vulnerability stems from how the mining industry is structured, with only five mining pools controlling nearly 80 percent of bitcoin mining.

Source: Blockchain.com

A Contrarian View

It’s perfectly understandable why the ECB would be worried about cryptos. Europe is the world’s leading crypto hub with 42 percent of bitcoin wallet supply, 37 percent of leading players and 33 percent of payments. Despite its outsized role, the region controls only 13 percent of mining activity.

But honestly, that Econ report leaves more questions than it answers.

While the controversial idea of Fedcoin and cryptos by central banks was floated a couple of years ago, it has never received wide support. In fact, Bengt Holmstrom, 2016 Nobel Prize winner in Economic Sciences, has warned that such a move would introduce considerable risks in the money markets and hamper central banks’ ability to control black swan events.

In any case, the feasibility of any government or private institution trying to block bitcoin and other altcoins is highly doubtful at best.

While banks could conceivably control or ban crypto movements in hot wallets, they would be virtually powerless to do the same to cold wallets where 98 percent of bitcoins lie. Further, the massive crypto black markets that reside in the dark web would easily keep the industry alive and kicking. Related: BMW’s Car-Sharing Stumble Doesn’t Mean It’s Game Over

It’s more likely that central and commercial banks will eventually start viewing cryptos as an alternative asset class like gold, equities and bonds. Cryptos could one day play a pivotal role in helping central banks control inflation.

If you want to get an idea how that would work, look no further than Switzerland’s central bank, the Swiss National Bank, which reported record profits of 54 billion francs ($55 billion) for 2017, translating into 8 percent of Switzerland’s GDP and more than what Apple, JPMorgan or Berkshire Hathaway could muster.

SNB’s stupendous profits resulted from a simple yet elegant playbook: Print more francs and infuse them into global markets to  purchase stock and bonds so as to avoid inflation back at home.

It’s pretty much what the Fed, ECB and BOJ did with gold in 2016. Instead of buying gold, stocks or bonds, banks could one day dump their excess cash in crypto markets to shore their foreign reserves.

At least one central banker thinks along the same lines.

By Alex Kimani for Safehaven.com

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