Monday, October 10, 2016

Distributed Ledgers (1)

Some critics of government fiat money have suggested that Bitcoin is a better alternative. I have never accepted this claim.

Bitcoin has some advantages, gut it is designed to imitate government money by increasing gradually very time. This creates wealth for those who get the new money first.

The technology behind Bitcoin is called Blockchain. It has contains some excellent cryptographic elements that make it very secure and impossible to break.

The most important part of the Blockchain technology is the distributed ledger. I believe that this concept is the key to a more stable money system.

Blockchain is a peer-to-peer distributed ledger technology for a new generation of transactional applications that establishes trust, accountability and transparency while streamlining business processes (Hyper Ledger Project).
The so-called “distributed ledger allows transfers to be verifiably recorded without the need for a trusted third party. It is potentially valuable when there is no such institution and when verifying such information on a multilateral basis is costly (Ben Broadbent Central banks and Digital Currencies).
Instead of relying on an independent third party to process and record transactions, holders of bitcoin use a decentralised computer system called the “distributed ledger”. The distributed ledger works by encouraging users to verify for themselves, and others, blocks of transactions made over time. As everyone in the system has the right to do this, and everyone can see the results, there is no need for a trusted, centralised clearer (Ben Broadbent Central banks and Digital Currencies).
The distributed register records all transactions on numerous databases. These databases operate independently in numerous places. All transactions are recorded on all databases. Before a new transaction can be added, it must be validated by every database. This makes fraud impossible, because a record can only be changed if all the databases agree that it is valid.

They Bank of England has discussed the possibility of establishing a central bank digital currency by putting reserve deposits on a digital register. If all citizens and business had access to this ledger, paper money would disappear and demand deposits at banks would become redundant.

I can see that the Bank of England is interested, because the want the ability to introduce negative interest rates. In my view that would be dishonest, because it allows borrower to steal from lenders. Fortunately, the Bank of England has just announced that they will not be pursuing this option.

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