Rod Garratt, an economics professor at UC Santa Barbara, has voiced skepticism toward the push by central banks to develop their own digital currencies. Throughout 2017, central banks from multiple co
Rod Garratt, an economics professor at UC Santa Barbara, has voiced skepticism toward the push by central banks to develop their own digital currencies. Throughout 2017, central banks from multiple countries, particularly China's PBoC, announced intentions to create state-backed cryptocurrencies operating on permissioned blockchain networks. In June, the Tsinghua Financial Review published research examining how the PBoC could build such a currency.
The timing raised obvious questions. Observers drew connections between China's decision to crack down on initial coin offerings and cryptocurrency trading to the government's broader ambitions around digital money. The suspicion among analysts was straightforward: decentralized cryptocurrencies like bitcoin posed a threat to any state-controlled currency that the government sought to introduce into the market.
On September 18, a publication affiliated with the PBoC conducted an interview with Huang Zhen, a researcher at China's Central University of Finance and Economics who also works with the PBOC. In that conversation, Zhen laid out the government's position on cryptocurrencies: "Cryptocurrencies and other virtual currencies attempt to challenge the sovereign state's right to issue currency, requiring the nationalization of currency issuance. China has a clear understanding of digital forms of money, and is actively engaging in relevant work. The central bank has set up a research group and a digital money research institute to explore the digitization of sovereign money. After this round of virtual money markets supervision, we expect under the auspices of the Chinese central bank to launch our own sovereign digital currency as soon as possible to help maintain China's leadership in the development of global digital finance."
For Zhen, the matter was clear: bitcoin and other cryptocurrencies represented direct threats to the PBOC's plans. The goal was to deploy a blockchain-based digital currency that would position the central bank to dominate this emerging market.
Garratt approached the issue from a different angle. He contends that relying on blockchain technology would introduce unnecessary technical burdens for central banks attempting to construct their own digital currencies. Bitcoin was engineered to operate without government oversight, functioning as a counter to the existing financial system.
CNBC analyst Brian Kelly articulated this tension: "Bitcoin is designed to go around governments. That is exactly what it was designed for and you are starting to see that. Jamie [Dimon, the CEO at JPMorgan] even said in his comments that if you are in Venezuela, it might be good to use bitcoin to go around the government, which is exactly the point."
Bitcoin handles decentralized settlement through various technological mechanisms: Schnorr signatures, advanced elliptic curve applications, and ring signatures. These components allow transactions to settle across a distributed network with no single controlling entity.
Central bank digital currencies operate on a different principle. These systems require no consensus mechanisms because a single central bank maintains control over all transactions and every aspect of the network. This concentration of authority contradicts the fundamental design of bitcoin, Ethereum, and the broader cryptocurrency movement.
Garratt assessed the core problem this way: "You are just replacing the current back-office financial-market infrastructure. Will the public demand a digital medium of exchange with properties similar to cash? In places where it does, maybe there will be pressure for governments to provide it, and in places where it doesn't, there won't be."
