Any technological innovation is as reliable as the technology itself. The block chain technology, which is the basis of cryptocurrency, runs on a decentralised distributed ledger system which technically promises immunity from any government interference. The popularity of this notion and its variations have forced governments to think about a central bank digital currency. This chapter has been written with the objective of identifying whether lesser reliability of cryptocurrencies can be overcome by central bank digital currencies and issues involved with anonymity. While cryptocurrency ensures no counterfeiting, the feature of anonymity still carries the risk of being used for illegal activities. However, it is now perceived as the future of money. Cryptocurrencies do not create any financial liability but have been adopted as a store of value and medium of exchange. They are also used for micro-payments and decentralised applications. All these issues require a critical assessment of the reliability of cryptocurrencies as against the digital currency backed by central banks.
TopThe Blockchain Genesis
The blockchain technology was conceptualised by Stuart Haber and W. Scott Stornetta way back in 1991. Their first work involved working on a cryptographically secured chain of blocks whereby no one could tamper with timestamps of documents. While they continued their work, in 2008 the Blockchain technology started to gain relevance under pseudonym of Satoshi Nakamoto. The first whitepaper about the technology was released in 2009 where all details were provided of how the technology was well equipped to enhance digital trust given the decentralization aspect that and hinted that nobody would ever be in control of the entirety. The new technology was discussed with lot of apprehension and many investors were not very clear about the working mechanism. Amidst the apprehension, Bitcoin came into being in 2008 as the first application of Blockchain technology. The whitepaper detailed the electronic peer-to-peer system. Nakamoto formed the genesis block, from which other blocks were mined, interconnected resulting in one of the largest chains of blocks carrying different pieces of information and transactions. In the next phase of blockchain innovation, Ethereum was conceptualised to overcome the limitations of Bitcoins. The Blockchain history and evolution did not stop with Ethereum and Bitcoin. In recent years, a number of projects have cropped up all leveraging blockchain technology capabilities. New projects have sought to address some of the deficiencies of Bitcoin and Ethereum in addition to coming up with new features leveraging blockchain capabilities. At this point a comparison between fiat currency and cryptocurrency can be drawn under the following points:
Tracking: While fiat currencies can be easily monitored and recognized by the issuer and recipient, crypto promises anonymity.
Medium of Exchange: The traditional fiat currency is a tangible cashable medium of exchange, whereas cryptocurrency is essentially digital.
Safety: While Fiat currency is safer when backed by the Government and the transfer of money can be tracked, the risk of devaluation always stays. As for cryptocurrencies, the limited supply ensures protection against devaluation.
Supply: Fiat money has a limitless supply, meaning that central banks have no limit to how much money they can print. Many cryptocurrencies have a supply limit, which ensures that only a limited number of coins will ever be accessible.