Most central banks view cryptocurrencies (such as Bitcoin) with suspicion but are fairly receptive to the underlying technology – Blockchain. Chapter V of Annual Economic Report (AER) of Bank of International Settlements (BIS) titled ‘Cryptocurrencies: looking beyond the hype’1 which was released on June 17th observes that ‘…… cryptocurrencies suffer from a range of shortcomings. The main inefficiencies arise from the extreme degree of decentralisation: creating the required trust in such a setting wastes huge amounts of computing power, decentralised storage of a transaction ledger is inefficient, and the decentralised consensus is vulnerable.’ However, it agrees that ‘While cryptocurrencies do not work as money, the underlying technology may have promise in other fields. A notable example is in low-volume cross-border payment services’ and adds ‘More important use cases are likely to combine cryptopayments with sophisticated self-executing codes and data permission systems.’
At first sight, it seems a paradox. An analogy from a different field will help resolve this paradox. In 1942, a team led by Enrico Fermi produced the first artificial self-sustaining nuclear chain reaction at the University of Chicago under the famous Manhattan Project, and three years later in 1945 the world witnessed unprecedented destruction by nuclear bombs dropped on Hiroshima and Nagasaki. The same nuclear chain reaction was exploited to generate clean power in the 1950s.
Bitcoin, the first cryptocurrency was the first use case of Blockchain Technology (BCT) just as the nuclear bomb was the first application of nuclear chain reaction. As nuclear technology could be applied to various peaceful uses, so can be Blockchain in various legitimate banking and financial applications. The appearance of the word ‘chain’ in the two technologies is purely coincidental!
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