MAGAZINE 17.03.2021, 17:31 19.03.2021, 17:11

We live in a period in which we feel the effects of digital transformation in many aspects of our daily lives. Then the pandemic came, and we started using digital solutions not only in education, seminars, meetings, and business life but also almost in our whole social life and financial activities as never before. On one hand, we hear new information every day on Bitcoin and cryptocurrencies, on the other hand, we hear how central banks are preparing their own "digital money". Today, we see the plans of technology companies such as Facebook, Tesla, Apple, Alibaba, Google, and Samsung to issue digital payment solutions and even their own money with excitement and concern to some extent.

Let us not forget the conditions how Bitcoin was announced through an article in 2008. The world was going through a financial turmoil triggered by the "mortgage" crisis in the USA at that time. 2008 was a year in which the US Federal Reserve (FED) announced a trillion-dollar relief package to save the giant financial institutions, which could be held responsible for the crisis, from bankruptcy, and there was a very serious confidence shake. At that period, a paper titled “Interpersonal Cash Transfer Protocol: Bitcoin” was published anonymously (Satoshi Nakamoto), and it was literally a manifesto with a message that said, "It is possible to reconstruct and sustain the entire financial system through individuals and software systems instead of institutions". This process starting in 2008 moved to a new level in 2015 with Ethereum. With "Smart contract" tools, the Ethereum platform offered the "Decentralised Organisations", a technological infrastructure that allows all digital processes to operate through software instead of institutions and not just in the financial sector but in almost all sectors. Decentralised Organisations were operating with the principle of "Software is law"; these new administrative structures accepted the pieces of "code" as their legal grounds instead of constitutions. The "decentralisation" trend that started with Bitcoin and Ethereum continues with more than 6,200 "coin" projects.

The Cryptocurrency ecosystem was ignored at first. Later, the authorities tried to get them banned with harsh statements or accused them of being fraudulent tools. These accusations still continue with the "balloon" concern that the rising prices may create. On the other hand, first the IMF, and then the central banks of Sweden, Europe, and China established working groups and started to research, prepare reports on the Blockchain Technology, which is the infrastructure of Bitcoin and Ethereum, and finally announced their own "digital money" projects.It was not easy to combine decentralised infrastructures with the functioning means of "central" institutions, especially when the necessary regulations were not yet in sight. Therefore, all these developments were progressing very slowly and quietly.

An important development in June 2019 attracted the attention of all financial institutions, especially central banks. With 2.8 billion users, Facebook announced that it will issue its own digital currency called "Libra". The announcement that a technology giant with more than a third of the world's population will use its own money with a consortium that it has formed with other very important companies received many responses, of course. First of all, the Central Bank of France brought up the damaging effect that the Libra project would make on financial stability. After Brazil and several central banks expressed their concerns about the project, the issue came to a point that Mark Zuckerberg was even questioned in the US Senate. The project was put aside until it was announced in December 2020 that it would be revived in 2021 under the name "Diem" with different features.

At this point, it is necessary to clarify the concepts of "cryptocurrency", "digital money" and "stablecoin", which are the hottest discussion topics on legal grounds. Cryptocurrencies such as Bitcoin and Ethereum are digital assets on the blockchain network, in which any person and institution that fulfils the necessary hardware and software obligations to the money supply can participate. Digital money, on the other hand, is a digital asset class that was inspired by cryptocurrencies in terms of features such as ease of use, instant transfer, programmability, and security but designed especially for payment systems whose production and distribution policies are decided by a central institution or group. Everyone knows how the value of cryptocurrencies, which have their own market mechanisms, is changing easily. And that is when the stablecoin comes into play; it is a digital money version whose value is indexed to a fiat currency such as Dollar, Euro, or TRY, and sometimes to an asset such as gold and silver, whose price does not fluctuate at least as much as cryptocurrencies. In this respect, stablecoins are the bridge between traditional financial assets and digital financial assets. On the other hand, stablecoins are mostly centralised as digital money, albeit with exceptions.

The pandemic has been a period in which effective and quick monetary policies are highly needed for urgent interventions in the markets. On the other hand, according to the "The Block" report, currently, 80% of the world's banks have formed a digital currency working group. In China, the "digital yuan" project was started as a pilot, and it was even distributed to the people with bonuses to test its use and make it widespread. Mr. Naci Ağbal, the President of T.R. Central Bank, gave the good news that the efforts towards "digital money" will reach the pilot stage in the second half of 2021. However, the "Instant and Continuous Transfer of Funds" (FAST) system, with the increasing number of banks using it every day, will remove the separation of transfer and EFT and be applied first nationwide for the instant transfer of cryptocurrencies to all parts of the world 24/7. In this period, when organisations such as MasterCard and Visa have announced their plans to integrate cryptocurrencies into payment systems, central and investment institutions are more interested in financial technologies than ever before. We hope that the days when all actors of the "digital money-cryptocurrency" ecosystem on a global scale are in cooperation will come and the growth of this ecosystem will be facilitated with proper regulations.

Ph.D., Director of BlockchainIST Centre Bora Erdamar

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