With Crypto in Retreat, Central Banks Take a Quantum Leap
Monetary authorities are road-testing a new electronic currency that’s fast and anonymous, yet unfriendly to criminals and impervious to hacking by powerful computers.
(Bloomberg Opinion) -- In the chaos surrounding the collapse of Sam Bankman-Fried’s empire, it’s easy to lose sight of what has died in this year’s crypto carnage and what lives on. The biggest casualty is “anarcho-capitalism,” championed by engineer Timothy May in the 1990s as cyberspace interactions unconstrained by external regulation, taxation or interference — in short, an absence of government.
That libertarian zeal, coded in the DNA of Bitcoin and every other virtual token, won’t survive the recent turmoil in the blockchain world. If investors must turn to courts to recover their FTX losses, they’ll want intermediaries and protocols to be supervised and made safe to use. Risky shadow banking in the garb of letting people swap their fiat currency for digital assets is coming to an end.
What will thrive even after this year's meltdown, however, is cryptographic money.
The idea of security without identification had come from privacy pioneer David Chaum, who invented the so-called blind signature in 1982. A decade later, eCash, the world’s first digital currency, would deploy the technique. The anarcho-capitalists liked cryptography for its promise “to make Big Brother obsolete” — half the title of a celebrated 1985 paper by Chaum. Yet, in 2022, the biggest potential customer of these tools is none other than central banks, entities at the apex of states’ financial power. What looked like a weapon of anarchy to May’s cypherpunk movement has been repurposed as a technology for preserving and updating the existing monetary order.
Chaum is himself collaborating with a Swiss National Bank official on a blueprint for eCash 2.0, pitching it as “provably protected against counterfeiting even by a quantum computer” and “an ideal candidate for central bank digital currency.” If the protocol proves roadworthy, the curmudgeonly public sector will reinvent itself as the the 21st-century’s leading provider of a token more private than cash and yet more unfriendly to criminals. 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, an alternate member on the SNB governing board. Project Tourbillon will explore the best possible mix of resiliency, scalability and privacy in a prototype central bank digital currency.
As shown by Ethereum co-founder Vitalik Buterin, blockchain-based payment systems face 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 make things go fast when there is both a technical and an economic limit on how many consensus-based decisions can be made and incentivized per second, you may need to skimp on decentralization, leaving the network vulnerable to attacks by bad actors or diluting the privacy guarantees.
Chaum and Moser have a solution. To boost speed to the levels of Visa Inc. and PayPal Holdings Inc., they’re proposing a network that isn’t based on distributed ledger technology, though it’s possible to connect eCash 2.0 to a public blockchain. To enhance privacy, they’re making the currency anonymous. But all senders of money will have an irrevocable right to undo the anonymity of any value withdrawn from their accounts: Malware won’t be able to hide behind small users to aggregate and move large sums. (Even banks find it a tough problem to solve. Recall the scandal around Commonwealth Bank of Australia’s cash machines, used by mules of a drug syndicate to launder millions of dollars.)
Finally, to boost security, the researchers are promising to deploy what the U.S. Department of Commerce’s National Institute of Standards and Technology has found to be the strongest-known type of quantum-resistant cryptography. No wonder the staid world of central banking is excited about the prototype that will emerge from Project Tourbillon. It could well be the digital money everyone’s waiting for — one that doesn’t scare people away with the threat of 24x7 surveillance. “If you choose to use government-issued money, the government should not be able to see how you spend it,” Chaum told CoinDesk. Users, however, should be able to protect themselves from being scammed.
If Tourbillon is a success, it could have both wholesale and retail applications. For end-consumers, the experience of transacting in central bank digital currency will be just like withdrawing physical cash from their bank accounts — except their phones will act as ATMs. Where there’s no internet, payments will be secured with the help of an additional card. On the back end, freedom from the speed limits of distributed ledger technology could enable 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 firms and consumers globally.
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 shook authorities: Their monopoly on money was under siege. But now that they have joined the fight, central banks are in no mood to leave any corner of finance fully in the sway 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 bedrock of decentralized finance, founded on the utopian premise of freedom from both governments and large custodial organizations. After this year’s debacles in the world of digital assets, it’s clear that the state is here to stay — not by repressing consumer choice but by using cryptography to offer a superior alternative.
More from Bloomberg Opinion:
- The Wild West of Crypto Claims Another Victim: Lionel Laurent
- Matt Levine's Money Stuff: FTX Was Not Very Careful
- Central Banks Can Save DeFi. Really: Andy Mukherjee
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Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.
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