Central banks worldwide are now looking into blockchain technology to plug this security lapse and explore whether it can be used as an efficient means of processing payments. Moreover, platforms have unique features like a user-friendly interface, suitability for all traders, and unique trading tools for bitcoin traders. If you are a newbie, here are the Top 5 genuine ways to make money with bitcoin.
While introducing cryptocurrencies is still a long way off, blockchain does have the potential to significantly reduce transaction times and costs for international payments of all sizes – from small remittances made by migrant workers to large transfers between multinational corporations – while providing greater transparency over transactions currently processed through traditional methods that rely on intermediaries such as SWIFT or Western Union.
One potential use case for blockchain is moving international payment processes from intermediaries, such as banks, to the central bank. It would enable the transfer of funds to and from the central bank settlement system directly through electronic channels. Unlike current electronic payment methods, blockchain transactions would be final and irreversible.
A third party (in this instance, a SWIFT-like intermediary) would not have access to transaction details, which could potentially be manipulated in the future by other parties (for instance, for money laundering) or shared with authorities without consent. People could also erode the trust between financial institutions and regulators without recourse for either partner involved in a transaction.
How can the central bank use blockchain?
A central bank can use the distributed ledger technology of blockchain to register payment transactions on its account, in contrast to the current process of executing these through commercial banks. It would allow for a more transparent and highly secure system for recording payments. There are several uses for a central bank-based system that could be implemented by fintech start-ups or existing banks, both existing and new.
The obvious is to record/track/monitor payments made between member banks, international organizations and public sector institutions. Governments could also use such a tool to monitor the costs and benefits of their banking policies (for instance, interest rate policy) across different economies and sectors.
Another use case of blockchain that the central bank could potentially use is to process domestic payments without the involvement of commercial banks. For instance, if a government decides that banks are too expensive or unstable, it could decide to have a blockchain-based system linked to the central bank’s accounts and have all transactions processed by itself.
However, such a technological solution would be open to abuse by the government or other state-owned institutions. So it is because once records are made on such a system, they can never be changed or deleted unless itself is hacked or altered through legislation – something that is not impossible in countries with solid security forces and weak democratic checks and balances.
Central bank-specific platform:
As the technology is still in development and not widely adopted, central banks could consider approaching fintech start-ups to develop solutions that meet their requirements. One option could be to use the full capabilities of blockchain on a central bank-specific platform, implying that any service offered by a third party on its blockchain would only work for that third party. It will enable central banks to interact with fintech start-ups and develop their solutions within the system, if feasible, without the risks associated with merging both organizations’ systems.
Store of value:
Central banks may also decide to introduce a cryptocurrency, but this is not without its drawbacks. Several problems need to be addressed, including volatility. Even bitcoin prices have fluctuated significantly in the past, and it is difficult for non-specialists to understand why and make informed decisions on when to buy or sell.
Central banks will also need to decide at what level the cryptocurrency should be introduced – from individual countries or internationally. A Eurozone-wide cryptocurrency would be relatively straightforward, given the existing legal framework for the single currency area. But launching a global currency would require some international agreement between key players in the global economy. Fees:
Also, while central banks may want to make the currency more usable and popular, introducing fees could undermine the usefulness of a fiat currency. This is because users will be less willing to carry around currencies that cost them money. For example, in China, the government introduced a two per cent transaction fee on bank card transactions in response to too much spending.
If central banks decide to introduce cryptocurrencies, they need to ensure that these are not linked to their existing currencies or issued at a fixed rate against them. So it is because a fixed rate could undermine the value of the central bank’s currency and lead to a greater demand for that currency or deflation if it is too low.
The digital currency issued in such cases would also have to be limited. One option could be to only release 20 percent of the total fiat currency supply as digital money, with the remainder stored in digital accounts linked to the central bank reserve system.
Central banks should also consider whether people can use their domestic payments systems to manage international payments.