Why Central Banks Will Never Be Able to Issue E-Currencies

Why All Central Banks’ E-Currencies Will Fail Horribly

Imagine a prize of $1 trillion. Let’s say it’s not legal to claim it, but what if nobody could trace it? Would you do it? If not you, then I’m sure there would be plenty of people waiting in line behind you. Keep that in mind.

Also read: The Fraud of Intellectual Property

From time to time I hear “central banks could issue e-currencies on blockchains!”. Before dwelling on the details on why that isn’t possible, let’s consider an “Einsteinian thought experiment.”

What is Secure?

Let’s begin by asking ourselves the question: How do we know that a computer system is secure and not being tampered with?

A system consists of several components: software, hardware and networks, each component being vulnerable to attacks. Software means that something is programmable. We all know what malware is and how difficult it is to detect whether malware is present in your computer. Yes, we have anti-virus protection, but that is by no means a foolproof method, especially if you are being targeted.


Hardware can be specialized and “sealed” so it is not programmable. Then the trust of that hardware is left to its manufacturer.

Why All Central Banks’ E-Currencies Will Fail HorriblyIn the late 90s I was working with PKIs (Public Key Infrastructures) and with smart cards that had the ability to generate private-public key pairs, so that the private key never left the smart card. The randomized private key was internal only to the smart card itself. Some great effort was put in place so that the smart card didn’t leak the private key (protecting itself with tamper-proof technology.)

But if I have a black box with the capability of randomized internal keys, how can I know it’s truly random? What if the hardware manufacturer, in this case the smart card manufacturer, after a certain time (say after a year) suddenly swaps the random generated numbers with something deterministic? You could even imagine planting a Trojan horse consisting of a piezoelectric microphone triggered by some special sequence of snapping fingers. It would then switch from “random” to “apparently random.” You could then could bribe someone with physical access to the device to snap their fingers. There are millions of similar ideas. If you can “win” $1 trillion, I promise you that this will happen sooner or later. The “black box” hardware approach is inherently insecure; it’s a dead end.

Why All Central Banks’ E-Currencies Will Fail HorriblyWhat about general purpose programmable hardware? Possibly running the same software from multiple hardware vendors. That’s a much better approach, but there’s a catch. Private keys are now no longer private. At least not as private as in the case of the “black box” approach. This means that the private keys must be transported between two general computing devices. That by itself is accessible to attacks. If it’s possible to transfer private keys, so can malware.

The Importance of Consensus

When you think hard about this problem, there are only two joint mechanisms that together can protect you from all such attacks. The answer? Consensus AND decentralization.

Consensus means that the rules are set in stone and that they are publicly accessible to anyone who can choose to independently verify that the rules are being followed. Decentralization is important so that many independent checks of consensus can be done consistently. If the number of devices that checks consensus is small (and/or centrally controlled) then again, it is vulnerable to attacks.

Thus, anything with private keys is not tamper-proof. As explained above, custom/specialized hardware does not solve this problem. Bitcoin shows how vulnerable private keys can be. We have witnessed multiple thefts on bitcoin exchanges, but the theft of bitcoin funds does not mean the integrity of the network itself is at stake. Quite the contrary. Why is that?

Why All Central Banks’ E-Currencies Will Fail HorriblyIt is because the integrity of the bitcoin network is never secured by any secrets / private keys. The money supply of bitcoin is based on a consensus rule. Validating the authenticity of your bitcoin is achieved by tracing all previous transactions back to their respective coinbases. The coinbases themselves are just the first transactions of every block whose amount is a mathematical function of the block number; a consensus rule easy to publicly check for violations.

In contrast, a central bank, who must mint new coins at will, cannot rely on a consensus rule. Presumably there must be some “secret” that can be used to prove that an “e-coin” is valid. No matter what that is, it is open for attacks. Note that even if the “e-coin” itself does not carry a signature, the central bank can still not ensure the integrity of their own systems: how do you know that the “money at the servers” are not being tampered with?

What if…

This is yet not an ironclad argument. There’s one more possibility. What if the central bank would publicly announce every time it changed the money supply? This means the consensus rules are changed at every such instant (this would correspond to a hard fork.) However, there are multiple problems with such an approach:

When changing the money supply, you still need to tell where the money should go. If the central bank is using it to buy bonds (a.k.a. “quantitative easing”) then those funds can also be stolen by an insider, or the buyers must be part of the consensus rule changes.
Base money supply is changed w.r.t. interest rates if the base money is kept at the central bank. Every day the base money supply (M0) is changed.

If we need to change the consensus rules every time (with (1) & (2)) it yields “consensus rules breaking fatigue;” it just becomes too difficult to keep track. If the rules keep changing they aren’t rules.

Full Independent Validation

Why All Central Banks’ E-Currencies Will Fail HorriblyThe only foolproof mechanism is the ability to do full independent validation. Something which is only possible to do if there are no secrets protecting the system itself. It is the only known mechanism that is secure enough. It was invented 2008-2009 by Satoshi Nakamoto. Before that, it was largely believed that it was a problem that could not be solved. This is also why I was very dismissive towards bitcoin when I first heard about it. I was utterly shocked when I realized that Satoshi had solved this problem.

Any attempt to modify this setup by adding “private keys for controlling something” essentially destroys network security. It’s like the Born rule in quantum mechanics; the interference pattern is lost and there’s no way around it.

Bitcoin Block Size Debate

This is the same reason why the block size debate of bitcoin is so contentious. If the ability of “full independent validation” is lost, for example, only a small number of resourceful entities can “verify the rules,” then those can be bribed and/or coerced. I have no idea what block size should be considered safe. As technology progresses in both hardware and software bigger block sizes can be tolerated, but it is a delicate issue that shouldn’t be taken lightly. I hope that all participators of the bitcoin community can sit together and reason sensibly about these matters. Personally, I’m very neutral to the “bigger blocks” debate.

Once upon a time, rich people and the government joined forces for the regulatory capture of money. It happened in 1694 when the Central Bank of England was created. Let’s ensure this does not happen with bitcoin. It’s such a masterpiece of technology, which happens maybe only every 10th generation. I’m forever grateful that it happened during my lifetime.

Do you think central banks will be able to issue and manage e-currencies successfully? Let us know in the comments section below.

Images via Shutterstock.

This is an Op-ed article. The opinions expressed in this article are the author’s own. Bitcoin.com does not endorse nor support views, opinions or conclusions drawn in this post. Bitcoin.com is not responsible for or liable for any content, accuracy or quality within the Op-ed article. Readers should do their own due diligence before taking any actions related to the content. Bitcoin.com is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any information in this Op-ed article.

  • Jacques Rinck

    Hi I found your article very interesting and helpful. I have a question : in this matter do you consider that trezor wallet is not secure?

    • datavetaren

      Trezor is pretty good, because it’s not based on closed secrets. You can openly and independently verify that the keys being generated are correct. (They are all generated from a seed of 12 words, which can be verified with open software.) Furthermore, even if a Trezor could be tampered with (using some hidden back door) that would only mean that funds could stolen from a specific individual; not the entire network is at risk.

      • Jacques Rinck

        Thank you for your answer I would be glad to stay in touch with you if you don’t mind

  • Mattyoung

    The central bank has e currencies, Fedwire, We already have e dollars, called the ATM card. And we have a perfectly fine ledger service called legislatively powered armed tax agents. Bitcoin relies on central bankers to price anything, so bitcoin is not yet money. What makes money is flexible pricing. What converts e currencies into money is auto pricing in savings and loans so robotic trades work. Until bitcoin, litecoin, or all the rest have auto pricing they are simple ledger services, not money. Manual pricing does not work in the e currency world.

    • datavetaren

      Central bank does not have anonymous E-currencies (“anonymous” being the implicit word here.)
      Non-anonymous accounts at the central bank exists for private banks. And you can imagine the central bank could do the same for citizens. But this is not what I would call an E-currency.

      • Mattyoung

        Paper cash is anonymous. Now, technically I can buy a pre-filled, anonymous, ATM card. How is that not e currency in tax dollars then? Tax dollar guarantee anonymity, until taxes are due.

        It is pricing technologies working that big central banks have; a pricing theory that works, bitcoiners and e currency developers are so far clueless. Bitcoiners have to figure out how savings and loan technology effect the price of eggs when denominated in bitcoin. There is real theory about how we haggle price, and it is being automated in central bank dollars, and the technology will run circles around bitcoin until bitcoiners figure it out.

        • Jacques Rinck

          the price stability will happen even if denominated in crypto currency as the market will take care of it better then any central authority. Our short economic history has shown that centralised money and economy can work only a short period of time and then it comes out of control and breaks down anyway

          • Jacques Rinck

            By the way a lot of crypto currencies including bitcoin have anonymity embedded or it can possibly be developed. We as individuals should keep our sovereignty and not leave it to a third party. We will recover this privilege agin within a decentralised economy. We needed a trusted third party to keep trust in every aspect of our life but now with such a decentralised technology we get trust without help of a third party

          • Jacques Rinck

            Digital cash can always be anonymous, technology development has reached this point in cryptocurrency era.

          • Jacques Rinck

            paper cash is anonymous but unfortunately it will disappear as governments and central bank will suppress it all over the world. Hopefully digital cash will help us keep anonymity and confidentiality.

          • Mattyoung

            Once a generation central bank money breaks via government default. 1913,1932,1972,and next year.

            But default is part of pricing theory,the current generational default is being priced, right now. Defaults is not the issue, defaults are part of bitcoin, bitcoin banks and traders will go bankrupt with finite probability, it is the science of money that requires free entry and exit; the theory works via defaults.

            What is it if not defaults? If I want to open an import/export bank for Canadian lumber, I have to use tax dollars, there is simply no viable savings and loan tech in the crypto world at the moment, it is all tax dollars.

        • sukramko

          “Paper cash is anonymous. ” True but paper cash is also limited. India disqualified 1000 ruppie notes. Now you have anonymous worthless ruppies to convert by given time. Not anonymous any more right/?

    • sukramko

      gold and silver was once considered money, so why did gold/silver loose that tittle? So do you think of possibility happening to FIAT?

      • Darey Olushina

        Fiat currency will be too premitive for generations ahead, infact they will consider paper money absurd, the same way some of us cant wrap our head around commodity money used in the past like feather and beads, the technology in the future cant cope with our current money system, in the future not just humans will be spending money, machines will be spending money too

        • sukramko

          FIAT in digital term or paper makes no difference. The question is why did people fall for paper value rather then stick to gold and silver. The paper value to any educated person looks ridiculously foolish.

          So why will people choose decentralized currency vs centralized block chain fiat? If law will dictate that you may not purchase anything with different currency, then you will have a problem to solve.

          • Darey Olushina

            Your first question, Because fiat currency has advantages over gold and other commodity money, infact so many advantages

            Your second question is a really mistaken one, since no government can dictate how or on what i spend my money, nothing stops me from using my money to buy some bitcoin and even storing large portion of my money in bitcoin, it will really require a tyrant government to monitor people to the extent that they cant buy whatever they wish to buy, we live in the 21st century, we must move on to the next phase of advancement, decentralization is the mainstream amd quote me Nothing can stop it, good innovation is self selling and needs no advertisememt

          • Blake Lucas

            I think you hit the nail on the head when you said “…to any educated person…”. The laws put in place to take us from the Gold Standard to simply ‘Legal Tender’ were done in the early 20th century. Not that the current populous is much smarter, but the people in that era had no idea what kind of ramifications this would have.

            That one piece of legislation changed the course of human history, creating the age of the Corporatocracy, where the rich get richer, natural resources are squandered, war is insanely profitable, and poor people are blamed for everything.

            I really hope Bitcoin can start to tip the playing field back to somewhat level ground. I’m wondering if there’s any way the big banks and billionaires, controlling the world today, could be so naive that they would let the rest of the world move to a decentralized currency and dilute all of their wealth through hyper-inflation.

    • Darey Olushina

      What exactly are you talking about, better go back and do your research on what bitcoin really is

  • Darey Olushina

    The truth is digital money in form of cryptocurrencies are just too transparent for what any government and central bank can fully embrace, they will try to create a centralized, non-public consensus digital money, they will disguise it as cryptocurrency, but them the same problem that we see today in government issued money will still persist and the more people keep finding safe haven in cryptocurrencies, the weaker the central banks becomes and society will begin to see the next level of flourishing and prosperity, it doesnt bother me if bitcoin or any other cryptocurrency become hijacked by some powerful people or even government, there are several options now that we can safely move to and more are being invented, decentralized consensus based money has come to stay and there is no goin back.

    • Datavetaren

      Yes, you could argue that decentralized cryptocurrencies will succeed regardless if central banks create E-currencies. However, I’m arguing here that central banks cannot create E-currencies that are safe enough. At least if the E-currency is anonymous (like physcial bank notes.)

      • Darey Olushina

        I fully understand your argument, your article did a justice in that regard, and i think you intelligently used the word E-currency instead of cryptocurrency, that retains my point that, Yes they can create any form of E-currency, and still put all the pegs that the current fiat currency have, but looking at how the government of the world currently operates, cryptocurrency in its full glory is a hard pill for them to swallow, and this is a side question for you, whats your take on decentralized governance ? I do tell people that real democracy can be deployed on the blockchain

  • cseverance

    I have several thoughts on this, first I am not sure I agree with Mattyoung (comment below) because I think money is determined by most real world consumers is anything that most people consider valuable. It does not have to come from a bank to be of value and I surely would not like the banks or anyone else take over bitcoin or any other currency for the obvious reasons. If bitcoin is not money then how is it that I am translating my buys and sells into profit in my traditional bank? There must be value already built into the system or I would not be making money on these transactions at this time. I see the best scenario for bitcoin and other cryptos to be fully independent and without any government intervention and allow them to develop their own DNA that ultimately spawns an entirely new way of doing business. We already know what will happen when government gets its nasty paws on it but we have no idea what kind of creature will ultimately develop from something that was created purely on the idea that we are creators and if you just give it a chance to live it will thrive on its own terms. That is the real beauty of the creation of life, not what can be metastasized after it is zapped with government mad science.

  • sukramko

    It will not fail as its acting same as visa or mc fassion. Just because the backbone is running on private blockchain makes no difference to the users as it makes no difference to them now on how VISA or MC is processing their payments.

    Blockchain is a form of database that enables self authority based on % of agreement and undercuts the underwriter.

    • Darey Olushina

      U are mistaking in your comment, the system before bitcoin was a monopolised one, you either use it or fuck off, but now people now have better option to choose a currency that will not be manipulated by power holders, then you will realise that decentralization make the big difference