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Analysis | With Crypto in retreat, central banks are taking a giant leap forward


In the chaos surrounding the collapse of Sam Bankman-Fried’s empire, it’s easy to lose track of what perished in the crypto carnage this year and what lives on. Its main victim is “anarcho-capitalism,” championed in the 1990s by engineer Timothy May as cyberspace interactions unconstrained by external regulation, taxation, or interference—in short, an absence of government.

That libertarian zeal, encoded in the DNA of Bitcoin and every other virtual token, will not survive the recent turmoil in the blockchain world. If investors have to turn to courts to recover their FTX losses, they want intermediaries and protocols supervised and made safe to use. Risky shadow banking under the guise of letting people exchange their fiat currency for digital assets is coming to an end.

However, what will thrive even after this year’s crisis is crypto money.

The idea of ​​security without identification came from privacy pioneer David Chaum, who invented the so-called blind signature in 1982. Ten years later, eCash, the world’s first digital currency, would deploy the technique. The anarcho-capitalists loved cryptography for its promise to “make Big Brother obsolete” – half the title of a celebrated 1985 article by Chaum. But in 2022, the biggest potential customer of these tools is none other than central banks, entities at the top of the financial power of states. What appeared to May’s cypherpunk movement as a weapon of anarchy has been repurposed as a technology for preserving and updating the existing monetary order.

Chaum himself is working with a Swiss National Bank official on a blueprint for eCash 2.0, envisioning it as “demonstrably protected against counterfeiting, even by a quantum computer” and “an ideal candidate for central bank digital currencies.” If the protocol proves to be roadworthy, the brutal public sector will reinvent itself as the 21st century’s leading provider of a token that’s more private than cash yet less criminal-friendly. The private sector crypto industry will have to play second fiddle to this better money.

The Bank for International Settlements is running a project around the ideas proposed by Chaum and his co-author, Thomas Moser, a deputy member of the SNB’s board of directors. Project Tourbillon explores the best possible mix of resiliency, scalability and privacy in a prototype central bank digital currency.

As Ethereum co-founder Vitalik Buterin shows, blockchain-based payment systems are facing a trilemma. Everyone wants more secure networks. But the more complex the cryptography, the slower the system’s scalability or capacity to handle a large number of transactions. To keep things moving quickly when there is both a technical and an economic limit to the number of consensus-based decisions that can be made and driven per second, you may need to skimp on decentralization, which leaves the network vulnerable to attack by bad actors or guarantee privacy.

Chaum and Moser have a solution. To increase the speed to the level of Visa Inc. and PayPal Holdings Inc., they propose a network that is not based on distributed ledger technology, although it is possible to connect eCash 2.0 to a public blockchain. To increase privacy, they make the currency anonymous. But all money senders will have the irrevocable right to undo the anonymity of any value debited from their account: Malware will not be able to hide behind small users to pool and move large amounts of money. (Even banks find it a difficult problem to solve. Think of the Commonwealth Bank of Australia ATM scandal, which was used by drug syndicate mules to launder millions of dollars.)

Finally, to increase security, the researchers pledge to deploy what the U.S. Department of Commerce’s National Institute of Standards and Technology believes is the strongest known type of quantum-resistant cryptography. No wonder the steadfast central banking world is excited about the prototype that will emerge from Project Tourbillon. It could be the digital money everyone has been waiting for — one that doesn’t scare people off with the threat of 24×7 surveillance. “If you choose to use government-issued money, the government should not be able to see how you spend it,” Chaum told CoinDesk. However, users should be able to protect themselves against scams.

If Tourbillon becomes a success, it could be used both wholesale and retail. For end users, the experience of transacting in central bank digital currencies will be the same as withdrawing physical money from their bank accounts – except their phones will act as ATMs. Where there is no internet, payments are secured using an additional card. On the back end, freedom from the speed limits of distributed ledger technology could allow banks to use eCash 2.0, issued by their monetary authorities, to move money across borders in seconds, leading to huge cost savings for small businesses and consumers worldwide.

It was Mark Zuckerberg’s now-abandoned idea of ​​Libra, a new global currency to meet the “daily financial needs of billions of people,” that shocked the authorities: their monopoly on money was under siege. But now that they have joined the fray, central banks are in no mood to leave any corner of the financial world entirely in the hands of the private sector. The monetary authorities of Switzerland, Singapore and France are exploring ways to automate currency exchange via smart contracts. These self-executing computer codes are the basis of decentralized finance, based on the utopian premise of freedom of both governments and large guardianship organizations. After this year’s debacles in the digital asset world, it’s clear that the state is here to stay – not by suppressing consumer choice, but by using cryptography to provide a superior alternative.

More from Bloomberg Opinion:

• The Wild West of Crypto claims another victim: Lionel Laurent

• Matt Levine’s Money Matters: FTX was not very careful

• Central banks can save DeFi. Really: Andy Mukherjee

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist on industrial companies and financial services in Asia. He previously worked for Reuters, the Straits Times and Bloomberg News.

More stories like this are available at bloomberg.com/opinion

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