This article comes fromcointelegraph, original author: António Madeira

Odaily Translator |

Odaily Translator |

Perhaps from today, no one will regard Bitcoin as a "digital gold" that can be hedged.

At the time of writing, according to data from CoinMarketCap, the price of Bitcoin was $5,182.97, a 24-hour drop of up to 31.43%.

Despite the strong interest shown by central banks in decentralized ledger technology, cryptocurrencies are still distrusted by the traditional financial system due to high volatility.

Earlier this month, Andrew Bailey, who will soon be the governor of the Bank of England, the Bank of England, said when he attended the hearing of the Treasury Select Committee of the British Parliament:

But even so, the central banks of various countries have not given up exploring digital currencies. For example, Venezuela launched the national digital currency "petro" very early (of course, the petro itself has many problems). However, the centralization of central bank digital currencies has also attracted the attention of the crypto community. For now, distributed ledger technology is either seriously underestimated or seen as a threat to the current fiat currency system. While cryptocurrencies have established some status in the financial sector, more needs to be done before more people see the potential of the technology.

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The "tangle" between traditional finance and cryptocurrencies

Although the traditional financial world has recognized the great potential behind blockchain technology, some cryptocurrencies cannot be legally recognized due to a series of risks such as decentralization, anonymity or pseudonymity.

At the same time, Bitcoin remains associated with criminal activity, high volatility, and market manipulation, and has been criticized for lack of regulation. To put it simply, Bitcoin is still regarded as a "bubble" and has "died" many times. From this perspective, the market does not show much trust in this emerging asset.

However, along the way, although cryptocurrency has been questioned, its underlying technology has not stopped improving. Recently, some financial institutions have begun to realize the benefits of distributed ledgers and are considering incorporating them into their respective business modules, such as:

1. State Street Bank has announced that it has reached a cooperation with the Gemini Exchange to carry out the "new digital asset" pilot project;

2. IBM has reached a partnership with a number of international banks and is expected to jointly explore the issuance of stable coins.

Another reason why institutions are eager to own cryptocurrency businesses is to hedge against a sluggish economy, and this motivation has also stimulated the development of the cryptocurrency industry. Facebook, one of the world's largest social networking companies, tried to launch its own cryptocurrency, Libra, but was blocked by regulators; IBM, Walmart, Visa and Bank of America now have dozens of blockchain patents, but the No meaningful technology deployment projects have yet been undertaken.Most traditional financial institutions breathe a sigh of relief every time the SEC rejects a Bitcoin exchange-traded fund (BTC ETF) — however, changes are afoot within regulators, such as the SEC commissioner, “crypto veteran "Mom" Hester Peirce has criticized the SEC's rejection of Wilshire Phoenix's application for a bitcoin exchange-traded fund.

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It must be acknowledged that cryptocurrencies are already a threat to the financial status quo

For some, cryptocurrencies are a way out and a means of being able to hold value, exchange value outside of the traditional financial system. Although a few countries have chosen to accept cryptocurrencies, not all of them are friendly to cryptocurrencies, and the vast majority of governments have chosen to impose restrictions or outright bans on cryptocurrencies, including the People's Bank of China's comprehensive crackdown on domestic cryptocurrency exchanges in 2019. ban.

In fact, the regulatory move is not a bad thing, the cryptocurrency market is full of huge scams, and many initial coin offering (ICO) projects do not meet the requirements of securities laws. However, the fact that traditional financial markets have been trying to keep people from using cryptocurrencies shows at least one thing: this emerging technology has begun to threaten the status quo!

Bank of England – Bank of England representative Jon Cunliffe recently expressed concern about stablecoins, and he backed the adoption of stablecoins by social media platforms such as Facebook, which could lead to users taking money out of bank accounts , and stored in a stablecoin wallet, he explained:

"The rise of the crypto economy may weaken bank credit issuance, and may even lead to the complete demise of bank credit business."

It is undeniable that decentralized finance has gradually begun to threaten all traditional financial service providers, allowing individuals to obtain loans, loans and other financial services more transparently. Decentralized finance has shown huge growth potential. Recently, its total lock-up value has exceeded 1 billion US dollars, and it has also contributed to the improvement of financial service innovation, financial inclusion, and financial service transparency.

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Central bank digital currency: is it useful?

Central bank digital currency has become one of the hottest topics in the current encryption industry. According to a recent quarterly research report released by the Bank of International Settlements, the "central bank's central bank", at least 17 governments around the world are exploring the potential of central bank digital currency. use. At the beginning of 2020, Christine Lagarde, who just took office as the president of the European Central Bank, publicly stated that the European Central Bank is willing to actively participate in the development of the central bank's digital currency to meet the market's demand for faster and cheaper cross-border payments.

But the Bank for International Settlements also pointed out in its report that cross-border payments do not appear to be a priority in some of the ongoing central bank digital currency projects, and central bank digital currencies do not seem to solve the problem of unusable transitional accounts. In fact, cross-border payments and transition accounts have always been two financial problems that emerging markets and developing countries need to solve. Although these problems are usually assisted by the central bank, they are actually caused by the central bank, and cryptocurrencies have become today. A way out of inflation and economic instability.

For central banks, their digital currency efforts may overlook the true value of blockchain technology, namely decentralization, immutability, and transparency. Centralized payment systems have their advantages, though, and are often faster and more scalable than cryptocurrency transactions due to how transactions are processed and registered. As the BIS points out:

"Compared with the traditional payment architecture, the distributed ledger technology that needs to run the consensus mechanism is prone to the problem of low transaction throughput, and this is the main reason why this technology cannot be directly used for the central bank's digital currency. Unless in some very Small jurisdictions, otherwise current distributed ledger technology cannot be directly used for central bank digital currency.”

In fact, some central bank digital currency projects have explored many different types of architectures, but the centralized model is certainly contrary to the core values ​​​​of Bitcoin and cryptocurrencies - decentralization and immutability. According to the definition, the central bank will be the sole administrator of the central bank's digital currency issuance and redemption. Arwen Smit, chief blockchain strategist at MintBit, said at the London Blockchain Week event:

"Central bank digital currency is very likely to be a tool for governments to control cryptocurrencies. These are definitely part of the reason why central banks are studying digital currencies. They may adopt two management methods: first, completely controlled by the government; second, make fiat Monetary policy aligns with cryptocurrency policy and lends legitimacy to these new forms of privacy money.”

Arwen Smit believes that creating a new digital currency means embedding a value system and privacy elements in that particular currency, and everyone who uses or comes into contact with this currency needs to "automatically" accept these elements. It should be noted that the distributed ledger technology currently being explored is actually only an option for the development of the central bank's digital currency. The central bank's digital currency can also use other technologies, including blockchain technology or technologies closely related to blockchain, but Virtually no decentralized technology will be used to process and verify transactions—that is, central bank digital currencies will definitely not offer the censorship resistance and anonymity similar to cryptocurrencies.

“In general, central bank digital currencies need to carefully weigh the costs and benefits of using distributed ledger technology. In essence, this technology actually outsources the authority to adjust claims on the central bank’s balance sheet to external validators , which means you need to trust the digital currency network a lot, even trust it to be more reliable than the central banking system, but at this stage a lot of assessments of distributed ledger technology proofs of concept are mostly negative.”

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Has the gap between traditional finance and cryptocurrencies narrowed?

For all its love-hate relationship, the gap between cryptocurrencies and traditional finance has narrowed. On the other hand, regulators also seem to be "self-improving" in the hope of catching up with the pace of new technological developments, and the launch of regulated financial instruments and innovative decentralized financial solutions has attracted many institutional investors. s concern.

Today, Tokenization has also become a buzzword in the financial world, as more and more companies are turning to blockchain technology to tokenize their securities. Under this innovative model, enterprises can not only optimize the clearing and settlement process, but even reduce the cost of transaction processing by about 17-27 billion US dollars per year. At present, the vast majority of tokenized securities are issued on private chains. The degree of centralization of these systems is lower than current standards, and it also meets regulatory requirements.

In fact, banking institutions have already begun issuing security tokens on decentralized blockchains, such as Societe Generale, which launched the first covered bond on the Ethereum blockchain. Central banks and private banks are also exploring the use of tokens for payment and securities settlement. For example, JPMorgan Chase has issued a stable currency JPM Coin, and Finality International has also launched a utility settlement token.

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epilogue

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The volatility of the cryptocurrency market is indeed a concern. Just as this article is about to end, CoinMarketCap data shows that the price of Bitcoin has risen to $5,503.12, and the market value has returned to $100 billion.

Perhaps many people have begun to question the "digital gold" attribute of Bitcoin, thinking that this time Bitcoin has plummeted along with the plunge of the financial market, and its correlation with traditional industries is getting higher and higher. But if we look at it from another angle, the higher the correlation between cryptocurrencies and traditional markets, doesn’t it just mean that more and more traditional institutional investors are beginning to add digital assets to their portfolios?