Can, in not too distant future, the European Central Bank become a decentralized autonomous organization?
In Part 1 of the article “How the European Parliament Views Blockchain” we looked into how Euro Parliament has taken on cryptocurrencies in its latest report. Here, in Part 2, we continue to analyse it.
The European Parliament is looking at cryptocurrencies as a means to conduct transactions faster and cheaper, assuming that cryptocurrencies can help lower borders within the European market.
Diminishing role of banks
But this assessment ignores how Bitcoin redesigns and diminishes the role of banks and central banks. The euro could draw inspiration from Bitcoin’s decentralized approach.
The European Parliament, similarly to banks, sees in cryptocurrencies a new technology to run cross border transactions faster and cheaper. Next to this positive outlook a major point of concern, however. is the governance of cryptocurrencies. The ‘Bitcoin Model’ of a community-driven system with miners, users, developers and merchants deciding on future directions doesn’t seem a satisfactory framework for Europe’s citizens.
The report says:
‘… Bitcoin ...creates uncertainty and consumer or – more broadly – user protection problems, especially in the event of challenges unforeseen by the original software designers.’
Beyond central banks
Many citizens and end users might, on the contrary, find an appealing concept in cryptocurrency being out of the control of banks and central banks. Especially in periods of inflation, cryptocurrencies offer an attractive alternative.
Throughout the report of the European Parliament, there is little to find onvmacro-economic and monetary aspects of cryptocurrencies. Where it is mentioned clearly there is a concern as it assumes that cryptocurrencies could diminish the role of politics in the financial sector:
‘the potential long-run future limitations on the effectiveness of monetary policy if private VC schemes were to be widely used as a substitute for official fiat currency;’
Such statements suggest, the ‘old’ way of doing things is after all ‘quite good’ – hence worth protecting. For many citizens whom the European Parliament wants to protect, this would not be a statement they necessarily subscribe to.
Even many euro enthusiasts who look at a common European currency as an attempt to secure peace on a historically war-shattered continent will have doubts that the monetary union is sustainable as it is. And the immediate outcome many fear is that the European central bank will stimulate the economy by printing money, which in the long run will cause more financial bubbles, turmoil on the financial markets and inflation.
Europe is not as uniform as the US
This is a pattern many foremost powerful central banks like the U.S. Federation follow.
There is, however, an important difference for Europe. The continent is as diverse in mentality and economic strength as few other regions in the world, having independent and often conflicting governmental and financial strategies. Yet still, there is one central bank which is responsible for the entire euro zone. The European Central Bank has to strike a balance between southern European countries’ need for stimulating economy and lowering their debt service and northern countries with their concerns with inflation and financial instabilities.
As a result, we can see entire countries and its populations getting stirred up against each other. Seemingly long overcome, yet lasting, stereotypes of ‘lazy southern Europeans’ and the puritan hard-working northern countries (or even worse, Germany taking Europe finally, after two lost world wars, onto its currency) are all over the media.
Notwithstanding the fact that a significant part of the money, which was used to ‘bail out Greece’, actually goes back to European banks, which handed out loans too easily to southern Europe. How can cryptocurrencies help us in this dilemma?
Decentralization of the European Central Bank
Imagine, we could replace the concept of a central bank deciding on European Currency Policy – a board which is appointed by legislation but not directly elected - with a version of a decentralized autonomous organization, backed up by the mechanisms of a democracy.
At the core of the DAO would be an algorithm, about whose functioning different bodies would need to agree. Such a model would democratize monetary policy in a very direct way. Members of such a DAO would need to be voted in. This is obviously against today’s practice, but with regards to the importance of central banks – one of the few really powerful European institutions - it’s a logical step. Cryptocurrencies could be grounded much deeper in the principles of democracy than current super national currency policy in Europe allows.
Bitcoin will bring predictability
The second effect would be that monetary policy would be much more predictable, because change would be slow, requiring the agreement of many participants. For many short term prospectives one would need to see the monetary policy as ‘immutable’.
It would be treated as a given, changing it could be as cumbersome as changing the constitution. Currently no one knows what central banks will do within the next month. As for Bitcoin, its money supply is written in the code and anyone can certainly predict what the situation will be in the years ahead.
The third consequence of placing an algorithm and a distributed autonomous organization with democratic checks at the center of monetary policy would be that algorithms are inherently less corruptible than centralized boards. In a decentralized DAO with an algorithm, there is no single phone number lobbyists could call or bank accounts they could leverage.
And the next result of following the Bitcoin model would be redefining the role of banks in two ways. They wouldn’t have a monopoly in organizing payment transactions. Proof of Work could do this, Bitcoin has proven just that.
Also, banks wouldn’t need to play a role in currency generation, neither do central banks. Isn’t it a pure dogma that there have to be organizations in an economy, banks , that get money for free from a central bank and then lend out the very money to citizens, for a considerable interest. Citizens can better mine and create money via a Proof of Work
Eventually to some degree, following Bitcoin would mean giving up the existing monetary policy within the Eurozone. At least one would make monetary policy less agile (some might say less volatile or even less chaotic) and more predictable. That paradigm shift could force Europe to revert to other means of stimulating economic growth. This means investing in infrastructure, education, environment protection and technology in specific parts of the continent, which would give the opportunity for a more sustainable and more targeted development than the ‘one size fits all’ approach of the European Central Bank.
At the end of its report the European Parliament advises the European Commission to set up a task force and build more intelligence around cryptocurrencies. It is wished that this task force will research such ‘moonshot’ suggestions as described here.