With Crypto in Retreat, Central Banks Take a Quantum Leap


In the chaos surrounding the collapse of Sam Bankman-Fried’s empire, it’s easy to lose sight of what died in this year’s crypto carnage and what lives on. The greatest casualty is “anarcho-capitalism“, championed by engineer Timothy May in the 1990s, as interactions in cyberspace unconstrained by external regulation, taxation or interference – in short, the absence of government.

This libertarian zeal, encoded in the DNA of Bitcoin and all other virtual tokens, will not survive the recent turmoil in the blockchain world. If investors have to turn to the courts to recoup their FTX losses, they will want intermediaries and protocols to be supervised and secure. The risky shadow banking of allowing people to exchange their fiat currency for digital assets is coming to an end.

What will thrive even after this year’s crash, however, is crypto money.

The idea for credential-less security came 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 roll out the technique. Anarcho-capitalists loved crypto for its promise to “make Big Brother obsolete” – half the title of a famous 1985 article by Chaum. However, in 2022, the biggest potential client of these tools is none other than the central banks, entities at the peak of the financial power of States. What looked like a weapon of anarchy for May’s cypherpunk movement has been repurposed as technology to preserve and update the existing monetary order.

Chaum himself is collaborating with a Swiss National Bank official on a plan for eCash 2.0, touting it as “provably secure against counterfeiting even by a quantum computer” and “an ideal candidate for central bank digital currency.” If the protocol proves to be in working order, the grumpy public sector will reinvent itself as the leading 21st century provider of a token that is more private than money and yet more hostile to criminals. The private sector crypto industry will have to play second fiddle to this better money.

The Bank for International Settlements is carrying out a project around the ideas proposed by Chaum and his co-author, Thomas Moser, deputy member of the board of directors of the SNB. The Tourbillon project will explore the best possible combination of resilience, scalability and privacy in a prototype central bank digital currency.

As Ethereum co-founder Vitalik Buterin has shown, blockchain-based payment systems face a trilemma. Everyone wants more secure networks. But the more complex the cryptography, the slower the scalability of the system or its ability to handle a large number of transactions. To get things done quickly when there is both a technical and economic limit on the number of consensus decisions that can be made and encouraged per second, you may have to skimp on decentralization, leaving the network vulnerable to attacks from malicious actors or diluting the guarantees of confidentiality.

Chaum and Moser have a solution. To increase speed to the levels of Visa Inc. and PayPal Holdings Inc., they offer a network that is not based on distributed ledger technology, although it is possible to connect eCash 2.0 to a public blockchain. To improve privacy, they make the currency anonymous. But all money senders will have an irrevocable right to nullify the anonymity of any value withdrawn from their accounts: malware will not be able to hide behind small users to aggregate and move large sums. (Even the banks find this a difficult problem to solve. Remember the scandal around the Commonwealth Bank of Australia’s ATMs, used by the mules of a drug syndicate to launder millions of dollars? .)

Finally, to bolster security, the researchers promise to deploy what the U.S. Department of Commerce’s National Institute of Standards and Technology has found to be the most well-known type of quantum-resistant cryptography. No wonder the quiet world of central banking is excited about the prototype that will emerge from the Tourbillon project. This might just be the digital money everyone’s been waiting for – one that doesn’t scare people away with the threat of 24/7 surveillance. “If you choose to use government-issued money, the government shouldn’t be able to see how you’re spending it,” Chaum told CoinDesk. Users, however, should be able to protect themselves against scams.

If Tourbillon is successful, it could have wholesale and retail applications. For end consumers, the experience of transacting in central bank digital currency will be like withdrawing physical cash from their bank accounts – except their phones will act as ATMs. In the absence of internet, payments will be secured using an additional card. Ultimately, the release of distributed ledger technology speed limits could allow banks to use eCash 2.0 issued by their monetary authorities to transfer money across borders in seconds, resulting in huge savings for small businesses and consumers around the world.

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 the authorities: their monopoly on money was under siege. But now that they’ve joined the fight, central banks are in no mood to leave a swathe of finance entirely in the thrall of the private sector. Monetary authorities in Switzerland, Singapore and France are exploring ways to automate currency exchange via smart contracts. These self-executing computer codes are the foundation of decentralized finance, based on the utopian principle of freedom from governments and large custodian organizations. After this year’s debacles in the world of digital assets, it’s clear that the state is here to stay, not by suppressing consumer choice, but by using crypto to provide a superior alternative.

More from Bloomberg Opinion:

• The Far West of crypto claims another victim: Lionel Laurent

• Matt Levine’s money tricks: FTX wasn’t very careful

• Central banks can save DeFi. Really: Andy Mukherjee

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

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.

More stories like this are available at bloomberg.com/opinion

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