Compile | Baize Research Institute

Compile | Baize Research Institute

This would be an ideal article for someone from a non-technical background to better understand, predict, and understand the technical principles and hurdles of central banks in the world of cryptocurrencies.

There was a time when central banks had a monopoly on money issuance and monetary policy, and the world was looking for something more flexible, secure, and privacy-friendly. As a result, Bitcoin broke out in front of the public for the first time with the concept of cryptocurrency and blockchain technology. This is a great relief for many people. At the same time, when so many tech commentators and influencers started to speak positively about it, ordinary people took an interest in it and started seeing it as an alternative to central banks in the near future.

But how did people trust it so quickly when no one claimed authority over it when it first came out? Can the masses really understand the actual concept of this new digital currency and the terminology of decentralized/distributed ledger technology (DLT)? And most importantly:

Do we really need to understand how cryptocurrencies are traded?

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The Possibility of a New World Currency Standard

So, before discussing the concept of cryptocurrencies, let’s take a brief history of the trade and monetary system in the world today. The practical roles and responsibilities of central banks. The use of cryptography in our current banking system and Mobile Financial Services (MFT) services will also be discussed.

The concept of "commodity money," the general concept of product exchange, has been established since the dawn of civilization. But the main problem is valuing the product in terms of exchange volume and demand. Swapping is not easy. The practice of documentation is then gradually introduced. Where the concept of "representative money" was introduced, people used to trade using precious materials, which were actually a finite resource (gold, silver) collected mostly from the ground. "Representing money" is actually a paper document provided by the central authority of a country/state, which is actually a proof of having a certain amount of assets. This became very popular in the early days for its safety and carrying facility. It's more like a bond or a check and has no value in itself. Just to supplement money. Perhaps this is where the tinkerbell effect first occurs in monetary standards. In that order, the "gold standard" was widely used from the 19th century to 1930. In some cases, the "gold standard" is less of a change than our current fiat currencies.

So at this stage, it can be seen that the quality of service and trust in the banking system is growing.

But when World War II broke out, most of the major countries in Europe felt insecure about their gold reserves. At the same time, people are converting paper certificates to gold in large numbers. As a result, most countries were facing economic uncertainty at the time.

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Bretton Woods structure

But since the US is playing the caretaker role, only they cannot produce money according to their own needs. Because only they have to rely on the stock of gold. So, as mentioned earlier, the Federal Reserve Bank of the United States has become the center of the system, and former President Nixon (USA) announced a new standard in 1971, fiat currency.

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Cryptography Basics

Now that we have virtually entered the digital age of finance and economics, cybersecurity has taken on a major responsibility. Because digital transactions don't mean encoded paper money just floats on the network layer. These are just numbers and numbers used to confirm financial intuitions in different places to confirm successful transactions and current available balances.

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Are cryptocurrencies the only financial systems protected by cryptography?

Since cryptocurrency is such a buzzword right now, even large parts of third world countries have internet users who account for more than 50% of their population. People from all general backgrounds know about this new currency and its VIX. Everyone is so excited about it. But because this is the first time people are hearing everyone talking about cryptographic security to prove the acceptance of cryptocurrencies. People are starting to think that maybe this new currency is the only cryptographically secure currency in the internet platform.

But as I made clear before, cryptography is nothing new in the industry. It has been widely used in military, banking and mobile financial services. Since current currencies are also transacted using digital platforms, these transactions are also cryptographically secure in almost all financial applications around the world.

On the Internet, as we already know, these transactions are nothing more than numbers in plain text. Cryptography is just a mechanism for keeping this information private. So in short, we can say that our current currency is also safe in the internet world. But the difference is that it is a currency that exists, and the online service just holds ledgers and log tables of transaction histories for proper distribution by financial institutions and central authorities.

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What is the relationship between cryptocurrencies and blockchain?

Perhaps this is the best part of explaining "Why do cryptocurrencies gain more trust than any other state-authorized currency?" and "How does blockchain technology get mixed into this?" Blockchain has become a trend.

I have explained how our current/traditional financial system works in the internet world. Although cryptocurrencies are also floating on the surface of the Internet, their concepts of valuation, production and existence are different. In the fiat currency standard, each government's central bank determines the value of its own currency, which directly relies on the U.S. dollar for global trade. Here, any government can't just produce/print their money according to their will. The country's GDP is directly involved here. Otherwise an inflection point will occur. There may even be a risk of hyperinflation.

But in the case of cryptocurrencies there is a big difference. This difference can be found from its inception or production. Because cryptocurrencies are not governed by any government or central bank. There are no manual processes or changes of any control to break the sequence or sequence. This is how the importance and need of blockchain technology emerged and became the current buzzword. Blockchain is a technology that puts all operational and execution processes under the hood. The technology transmits all its data in a specific set of protocols, performs operations in well-shaped data structures and follows standard architectures. This is why cryptocurrencies become a possibility to bring the digital financial system into a single framework.

Most cryptocurrencies are developed on public blockchains. Therefore, in the case of generating/producing a new cryptocurrency, a large number of contributors participate in the network to share their hardware resources to run a special mechanism called "consensus mechanism". The neutral sharing of hardware resources from different places is called "mining", and the people who play the role are called "miners", and they actually get a certain percentage of commissions from their contributions in the system. This is the general concept of blockchain in cryptocurrencies.

Now the question “What is DLT?” may arise. Distributed ledger technology (DLT) is a technology in which multiple ledgers are kept in distributed machines, but remain connected to each other and kept updated. It can also be kept on a single machine with multiple virtual machine (VM) hosts. If I try to explain the concept with my experience with private blockchain technology, a blockchain is a technology that keeps its distributed ledger in its distributed anchor nodes and After the "heartbeat", these ledgers are kept updated with the help of its Gossiping Peers. Only in this way can the authenticity of the data be guaranteed. If any intruder manages to compromise the ledgers and manages to change any data in a single ledger, that data will be updated to its actual form by other ledgers with the help of blockchain technology. Finally, real data can be retrieved from the DLT when the main ordering nodes run the consensus mechanism to generate new blocks in the blockchain. This is why blockchain is also known as immutable ledger technology.

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What will be the new shape of the economy in the coming digital age?

After breaking down all the principles of cryptocurrency and the stability of the paper money system, we can assume that a silent revolution has begun against the Monolith behavior of central banks and the expectation of a neutral service of money and flexible global trade with security, transparency and trust. But there are some issues everyone should be aware of. The first is the behavior of cryptocurrencies. Despite its popularity as a name for money, it still acts like an asset in most cases. Everyone is talking about it. But we have to keep in mind that most of them are interested in their excessively growing exponents. We have witnessed that a simple twitter activity could also be responsible for the currency's sudden drop. So patronizing a new idea and technique is good. But just to try, we must never get bogged down with bank loans or put our tangible assets like our house or land at risk.

At the same time, if any third world country has to approve a new currency for this revolution before gaining proper understanding and expertise on it. That would lead to a collapse of monetary policy. This can also cause global problems. 9/11 is a good example.

Finally, I would like to remember that if we witness another world war break out, many believe it will start in the online world on a massive scale. The war on cyber or financial domination doesn't really matter. Both are now on one domain. So it wouldn't be a good idea if we kept only those assets that can only exist in the virtual world by replacing our physical assets. Because, no matter what kind of modern era we live in. We have to remember that the internet is just a network of undersea cables all over the world, some of which are supported by satellites.

So global leaders must be aware that the concept of a cashless economy could make a difference in any country. People everywhere should not always follow the crowd. Before we can reshape the new digital economy, we must better understand and develop strong regulatory policies on a global scale.

Awareness, understanding, and the habit of investing wisely must be developed among people. The madness of the masses based on trends and hype can destroy any new opportunities that are common in the stock market. Even savvy investors can suffer from the average person's duck-testing mentality.

Blockchain is a technology that is not only useful for cryptocurrencies. We have already witnessed its new revolution. From healthcare to grid companies, it's growing massively. Therefore, in the near future, the security of the entire Internet application layer can be brought under a single framework. In this revelation of the blockchain, even "non-fungible tokens" (NFTs) are a perfect example of document verification and copyright protection.

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Can Central Banks Adopt Blockchain Technology for Fiat Currencies?

When we talk about finances, there must be a need for authority. So when we live in a world where humanity is divided into nations and people ideologies. As a result, every central bank or Federal Reserve bank has to get more serious about advancing its services. In the digital age, when people have alternatives, these banks must move away from the legacy of capitalism and the accumulation process.

Central banks must maintain public trust in fiat currencies and remain in the game of digital sharing and the decentralized services economy.

Because as the cryptocurrency world becomes competitive. Uncertainty and bubble fears are being resolved day by day. Even Bitcoin, which has been labeled as a bubble, has gained nearly $7 billion as an institutional hedge.

Polygon, the framework of Ethereum, is also becoming a game-changer to prove the sustainability of cryptocurrencies in the new era of the digital economy. So the central bank has to figure out something. This is despite the fact that the Federal Reserve and the European Central Bank are collaborating to study the implementation of a central bank digital currency (CBDC). But like most other times, China has been leading the way, actively experimenting with its own DCEP (Digital Yuan). Thus, the game has begun for the upcoming new shape of our digital economy. Although the concept of CBDC is different from that of cryptocurrency. A CBDC is more of an asset where the central bank will maintain clear regulatory authority and tax monitoring standards. But as cryptocurrencies grow, central banks have to come up with monetary solutions like cryptocurrencies.

As all the principles of cryptography have been explained. We can assume that it is not difficult for central banks to adopt blockchain technology for fiat currencies to bring back people’s confidence in it and consolidate the sustainability of fiat currencies and the authority of central banks. Because at the end of the day, monetary policy has to be in place for people’s safety and to prevent money laundering. And for a country, a strong central bank is an important reason, and the central bank is a kind of fund collector for the government.