A 44-page report commissioned by CPA Australia looks at the state of the central bank’s global development of digital currencies and examines viable blockchain candidates for hosting CBDCs in the years to come.
The report provides ratings of the three most widely transacted cryptocurrencies in Bitcoin (BTC), Ethereum (ETH), and XRP (XRP) and analyzes their suitability (or lack thereof) for central bank use.
Bitcoin’s decentralized network and lack of control by banks or governments generally make it unsuitable for use on a national CBDC network, the report said. Although Bitcoin is still accepted as a medium of exchange around the world, its volatility and unpredictability has resulted in a lack of confidence among central banks. The report states:
“Although Bitcoin is not legal tender, it is popular and widely accepted as a medium of exchange. The price of Bitcoin has seen spectacular volatility in recent years, and this volatility has resulted in a lack of confidence in Bitcoin as a medium of exchange or store of value and raised concerns among central banks about the profitability of cryptocurrencies as CBDCs. “
While Bitcoin continues to confuse and confuse lawmakers in most countries, the report also notes that its legal status as a currency is changing. The report cites a 2020 decision by the Commercial Court of Nanterre in France which found that “Bitcoin is an intangible asset with an exchange value equal to legal fiat money.”
“Along with a January 2020 ruling by the UK High Court recognizing digital currency as property and a February 2020 ruling by the NSW District Court recognizing digital currency as a store of value, the legitimacy of digital currencies and cryptocurrencies is gaining ground legal and economic importance in terms of credibility point of view, “says the report.
According to the report, Ethereum suffers from many of the same pitfalls as Bitcoin when it comes to hosting CBDCs. Although Ethereum allows for “programmable money” through its use of smart contracts, its decentralization and inability to be controlled by a state actor make it an unlikely candidate for hosting CBDCs. The report states:
“ETH is like Bitcoin in that it is purely digital and completely decentralized outside of any state control. An important differentiator of the Ethereum platform compared to the Bitcoin blockchain is that it enables the operation of smart contracts and thus programmable money and payments. “
Contrary to Ethereum’s perceived inadequacy for use in government systems, the Reserve Bank of Australia deployed Ethereum-based technology in November 2020 to develop a proof-of-concept for a tokenized CBDC.
A slightly more optimistic view is offered regarding the use of Ripple and XRP. According to the report, the Ripple Network and the XRP coin are viewed more favorably by banks and governments due to their centralized nature. The report states:
“Ripple and XRP are trusted by many banks as models for CBDCs because they are highly centralized and based on an authorized network in which only certain network nodes can validate transactions, in contrast to decentralized and permissionless Bitcoin and Ether.”
According to the report, Ripple is similar to central banks because of its centralization, as developers can control the “timing and amount of delivery” of its tokens. It states, “Ripple also enables the creation of new currencies, and Ripple developers can set the timing and amount of supply in a manner similar to current central bank operations.”
The report also notes that Ripple “does not operate on a blockchain network per se,” referring to the Ripple Protocol Consensus Algorithm (RPCA), which is rightly claimed to be Ripple’s own patented technology .
The report notes that the French central bank, Banque de France, has already expressed an interest in exploring Ripple as a possible platform for hosting a pan-European CBDC.
In summary, the report notes that the COVID-19 pandemic has accelerated digital transformation and accelerated the development of digital payment systems, blockchain projects and the entire financial technology sector.
Between the rise of Bitcoin and the advent of company-run financial infrastructures like Facebook’s Libra (now Diem), central banks have been forced to keep a close eye on the ongoing development of blockchain and cryptocurrency projects.