Mbf843 International Banking | Discussion Assessment Answers

With the rise of crypto assets and wider adoption of distributed ledger technologies, what will be the future role of Central banks in a digital, sharing, and decentralized service economy? Discuss. 

The assignment has been divided into these sections

1.Introduction on the issue
2.Discussion on crypto assets and distributed ledger technologies 
3.How to connect the traditional role of the Central bank and the new digitally serviced economy 
4.Charts/Figures/ Graphs 

Answer:

Introduction on the issue

Crypto currencies are the response to monetary destruction and the currency wars that are implemented by the central banks (Focus Economics, 2017).  Crypto currencies are attracting the people for investment and storing a value although, the risks are high and the penetration for payment is low. The adoption of the crypto assets and the distributed ledger technologies can change the financial system to a great extent and can also increase the speed of the cross border and domestic transactions, and can also reduce the cost of the transactions. Along with this, it can broaden the access to financial system.  The records of the transactions of the crypto currencies can be recorded with the help of DLT. The rise in adoption of DLT and crypto assets can reduce the role of the central banks in the future. The central bank works on the basis of the regulations and recording the transactions in an effective manner. The emergence of crypto currencies can decrease the role of central banks, which can bring the challenges. The central banks have to focus more on ensuring that the ties linking the real currencies and crypto currencies should not be parasitic. It is important for the central banks to apply same regulations and risk for the crypto currencies as well although, this can result in increased challenges for the central banks (Carstens, 2018).

Discussion on crypto assets and distributed ledger technologies 

In the present time, the crypto coins have gained the attention of the people and, an asset in the form of cryptocurrency is considered as crypto asset. They are utilized as money and can be used for other application apart from payment purposes. Crypto currency is a type of digital asset that helps in providing with the medium of decentralized exchange through utilizing the cryptography for facilitating the transactions. The crypto currency is different from larger monetary environment apart from being supported by government or central bank. The usage of these currencies has increased as it provides with the advantages (Knutson, Liu, & Schlenker, 2018). These currencies offer anonymity of cash and also allow the transactions at long distances as well as unit of transaction is divisible. These things make the crypto assets more attractive for the micro payments in the service- based and new sharing digital economy. The transaction of the crypto assets could be settled and cleared quickly. The cross- border payments are more advantageous and quicker with the help of the crypto assets. On the other hand, crypto currencies have no such cash flows, historical dividend payments or the financial statements for the purpose to analyse unlike the corporate investment. It also lack metrics that is utilized for value fiat currencies like official fiscal, economic indicators, monetary policies, discernable political climates, international trade records and such others (He, 2018). In the recent time, Ether and Bitcoin have emerged as clear leaders in the market of cryptocurrency. Both are mined by using the distributed ledger technology (DLT) that is a shared record of the transactions which is considered as block chain. The computer resources are used by these currencies for running trillions of computations. The computer resources process the computations and catalogue transactions, which are processed and become the next block in block chain. After the processing of the block, the currency is awarded to miner. This process is considered as a Proof of Work (Richards, 2018).  The technological challenges in the peer-to-peer digital exchange are known as double spending problem. The digital form of the money is replicable which can result in fraudulently spent. It is possible to reproduce the digital information easily in comparison to the physical bank notes. It is important to keep the record of the transactions of the digital transactions for solving the issue of double spending. The crypto currencies overcome the issue of double spending through decentralised record keeping with the help of distributed ledger. Ledger is considered as a file that includes the initial distribution of the records of all the transactions and the cryptocurrency. Every user can store the up-to-date copy of ledger. The verification of the ledger is possible by every user with the help of distributed ledger related to the transactions. All the crypto currencies depend on distributed ledger, but they differ in the manner the ledger is updated. The permissioned DLT are used to stop the abuse. The updates in the ledger can be made by the trusted participants. The participants are selected by central authority. The permissioned system is different from that of the conventional money, as it differs in terms of storing the records of transactions. Permissionless DLT is used for establishing trust in decentralised setting. The recording of the transactions in the ledger can be changed by considering the participants in currency (BIS, 2018).

References

BIS. (2018). V. Cryptocurrencies: looking beyond the hype. Retrieved from Bis.org: https://www.bis.org/publ/arpdf/ar2018e5.pdf

Carstens, A. (2018). Money in the digital age: what role for central banks? Retrieved from Bis.org: https://www.bis.org/speeches/sp180206.pdf

Focus Economics. (2017). 21 experts tell us what the future looks like for cryptocurrencies and blockchain. Retrieved from Focus-economics.com: https://www.focus-economics.com/blog/cryptocurrencies-block-chain-future

He, D. (2018). Monetary Policy in the Digital Age. Finance & Development, 55(2), 13-16.

Knutson, A., Liu, M., & Schlenker, D. (2018). The Digital Asset of the Future. Retrieved from www.economist.com: https://www.economist.com/sites/default/files/the_digital_asset_of_the_future__team_byu.pdf

Richards, T. (2018). Cryptocurrencies and Distributed Ledger Technology. Retrieved from www.rba.gov.au: https://www.rba.gov.au/speeches/2018/sp-so-2018-06-26.htm