Reject Digital Currency: Why the Digital Pound is NOT Cryptocurrency

Governments worldwide are exploring how cash and technology can be combined into a digital currency. However, it appears that digital currencies are being conflated with cryptocurrencies, and the dangers of digital currency are not being fully reported.

What is the difference between cryptocurrency and digital currencies?

Whether or not you believe in the hype around cryptocurrency, feel that it is a scam, or maybe the next major investment, the impact of cryptocurrency has been significant. Initially, cryptocurrencies were an ideal means of monetary transaction for illicit activities thanks to their lack of regulations and disconnect between individuals and wallet owners. As their potential for legitimate use became more widely known, millions of investors bought into crypto markets with the hope of making incredible gains. There are many stories of investors making millions and those who lost millions after losing their private keys that allow access to their untapped hoard.

Recognising the popularity of digitised currencies, governments worldwide have started to develop their own digital currencies, including the Chinese Digital Yuan, the UK’s Digital Pound, and even rumoured Digital Dollars. However, the term “Digital Currency” is often being used interchangeably with “Cryptocurrency”, leading to confusion as to what each is and how they differ.

The biggest difference between cryptocurrencies and digital currency is that cryptocurrencies use encryption on blockchains to verify transactions and protect wallets. In contrast, a digital currency is nothing more than a digital representation of a currency. Furthermore, most cryptocurrencies use public ledgers (blockchains) and decentralised networks to ensure that no one part can make unauthorised changes to the blockchain.

For example, a digital pound would be nothing more than a number stored on a bank’s server, and the use of that digital pound is not made public. The bank would have complete control over that digital pound, and only the bank, the sender, and the receiver of a transaction would be the involved parties. For a cryptocurrency, everyone can see a transaction between two parties. The entire network must agree that the transaction can take place. Only the sender can initiate a transaction with a private key only known to them.

What advantages do digitised currencies present with future devices?

Some cryptocurrencies (such as Ethereum) are designed with smart contracts in mind. Such contracts are automated software routines that agree to exchange money after a set of conditions have been met. The decentralised network is used to verify that these conditions have indeed been met, and this helps to ensure that funds are available for a smart contract as well as process payments.

One area that could heavily benefit from smart contracts is IoT devices. Data is an extremely valuable commodity, and devices that gather data (such as sensors) could utilise smart contracts to receive payment from companies looking to purchase their data. These payments would be entirely automated, and the network would be used to authenticate the data and payment.

Another use of cryptocurrency that has already been deployed is paying for services. Specifically, the Helium Network is a LoRaWAN network that pays access points when servicing connected clients. This encourages users to establish access points while simultaneously improving network coverage for LoRaWAN devices. The blockchain is used to authorise that connected devices have the needed funds to send a message, and this entire process is automated.

Why should digital currencies be rejected?

If there is one fact that you may have noticed in the previous section, it’s that digital currencies were never mentioned. All of the advantages of digitised currencies come from cryptocurrency thanks to their transparency, use of a public ledger, and use of a decentralised network to process transactions.

Digital currencies, however, come with some major issues that, if implemented, could have severe impacts on privacy and freedoms. The first is that digital currencies, being centrally controlled, do not offer the same level of protection from theft that decentralised networks present. There are only two ways in which cryptocurrency can be stolen; the private key of a wallet is obtained, or more than 50% of the network is controlled by a single entity. Considering that it is highly unlikely for one entity to have majority control over millions of connected computers, the only remaining option is to obtain the private key of a user, and this difficulty depends on the user’s ability to protect that key.

In the case of a digital currency, using a centralised system means that a single entity has control over the currency and, as such, the entity in power can make changes at will. Instead of attacking an entire distributed network, an attacker can focus their attention on a single server. If the security of that server is not absolutely watertight (which is never the case), databases of transactions can be viewed, money moved around, and even outright transferred with no need for private keys or authentication from an entire network.

However, the biggest issue by far with digital currencies is that their centralised control allows for restrictions to be placed on them. There has been talk from governments worldwide about how digital currencies can be coded with spending restrictions which means that the owner can only purchase from authorised suppliers. This could be taken further by restricting an owner’s ability to purchase specific items in stores which would be an outright violation of personal monetary freedom.

It would seem that those looking to obtain more control over financial decisions made by individuals are conflating digital currencies with cryptocurrencies to make them appealing (as everyone knows about crypto owners driving Ferraris and living in giant mansions). But the two couldn’t be more different, and it is essential that you know the difference!

The insightful talk below from Together Declaration discusses some of the themes mentioned in this post and the real threat to privacy and freedom posed by digital ID’s.