Friday, September 26, 2014

Consequences of Digital Currency

In theory any entity can issue a digital currency but practically only a financial institution (FI) has the trust of the public at large to issue wholesale stored value to personal electronic devices (PED). However once issued, there is nothing preventing the purchaser of digital currency from reissuing it, and that dear reader(s) will attract the attention of smugglers, terrorist groups, legitimate commercial sectors, and financial crime investigators.   

FI can know their customers quite well, but will never know the difference between a reissuance and a legitimate purchase, especially if digital currency freely circulates for years or decades without returning to the issuing FI. If the security for stored monetary value makes successful conventional attacks too expensive then the values stored on PED will increase dramatically; people will think nothing of purchasing houses, cars, or jumbo passenger jets with currency stored on their PED.

I can read your thoughts dear reader(s); I am channeling “Farfetched”, “impossible”, or “not in this century”. Yet we already see the demand for the semi-anonymous bitcoin, regardless of its fatal flaws. Consider stored values with associated currency able for exchange or validation instantly. FI or digital currency insurers can add multiple features to data associated with the value stored on PEDs. Customers will demand anonymous transfers or interest payments and FI will respond if not constrained by regulators.

The initiation of secure and speedy movement of large values by PED may make gross real time payment systems obsolete and central banks as relevant as buggy whips in the near future. After all why let FI know the destination of your payments if it is not required. Why would FI need a discount window or to tie up funds in reserves if people purchase digital currency and never redeem it until the accrued interest has increased the purchased value exponentially?

Next Blog: The importance of digital currency logs

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