Why We Should Never Hope For A Central Bank Of Bitcoin

Bitcoin economist, Tuur Demeester, explains why the idea of a ‘Central Bank’ of Bitcoin would create more problems than it would solve.


Bitcoin Exchanges Similar To Early US Banking System

In the wake of the Binance hack and Bitfinex/Tether debacle, are crypto exchanges becoming ‘too big to bail’? And if so, should we be looking towards a ‘Central Bank Of Bitcoin’ as a solution?

Bitcoin economist, Tuur Demeester, explains why he thinks that would be a particularly bad idea.

federal reserve bitcoin

As cryptocurrency exchanges and custodians grow in size they risk becoming too big to bail out. Without a ‘lender of last resort’, the only option is to consider private insurance solutions.

Some are setting up their own insurance funds, such as BitMex, which has over 25,000 BTC reserved.

Bitfinex decided that it could use the US dollar reserves of Tether as its personal slush fund, with predictable results. If custodians become over-leveraged we can expect to see more ‘bank-runs’ similar to that we witnessed on Tether at Bitfinex.

Demeester notes the similarity to the situation with the pre-Federal Reserve era gold-backed banks of 1913. Although ultimately, for HODLers, the lack of socialization of risk is a positive aspect. Assuming, that is, you choose the right custodian.

A ‘Bitcoin Fed’ Would Back The Exchanges

Bitcoin-skeptics who see centralization as an important and desirable quality may call for such an entity as BTC becomes more pervasive. But a federal reserve requires an army to defend it, and cryptocurrency doesn’t really work like that.

Demeester points out that a ‘Bitcoin Fed’ would face a systemic risk of being hacked or facing a bank run. Also, the desire for private profits and the socialization of the risk would inevitably lead to bureaucracy. And finally, the ‘Bitcoin banknotes’ would only be fractionally backed, at the expense of savers.

Plus, why on earth would a decentralized currency benefit from a centralized bank?

And according to…

Source Link