Digital Cash using blockchain technology

Bitcoin can be difficult for users to understand.

Alternative is to create digital ‘fiat’ (government) cash using blockchain technology.

There are a few alternatives: one is a digital bearer asset so that it performs exactly like a cryptocurrency or the other way is for the digital cash to be created but the digital cash is registered against users meaning there is end-to-end compliance on transfer. Most of the current initiatives technically act like bearer instruments.

The idea is as follows:

Consumer sends fiat money to issuer. Issuer creates digital ‘fiat’ cash that is pegged against the fiat money provided. Digital cash is redeemable against Issuer for ‘fiat’ money.

Advantages

Transfer costs are minimal due to use of blockchain technology. Access to unbanked individuals as transactions outside of banking system. Processing costs are minimal so reduces fees payable by merchants. Potential alternative to pre-pay electronic money like PayPal or card based money.

Problems

AML risk for bearer assets. Regulatory issues surrounding the definition of instrument. Dependency on blockchain. Issuer risk – you have to trust that the Issuer will be in a position to redeem the value. Questionable legal tender.

Use-cases

Bitt

A group based in Barbados are using Coloured Coins to issue digital Barbados dollars. Bitt have obtained clearance from the Central Bank of Barbados.

We spoke to Oliver Gale from Bitt and he said:

With the support of Overstock Bitt is now fully focused on completion of the blockchain driven ecosystem and our mission to offer more affordable financial access to the people of the Caribbean, starting in Barbados. With digital dollars, mobile wallets and an exchange we are at an advanced stage of development, in the next year we will expand this suite to include merchant processing, teller and money transfer applications.

Tether.to
Tether is a similar to the Bitt project. Tether however uses Omni as the protocol for the issuance of the digital cash.

LHV
LHV provided something similar for which they won the Estonian Banking Association’s 2016 Innovation Award in Estonia. The Cuber Wallet works with Coloured Coins. Fiat money is received and then LHV issues fiat tokens in the Cuber Wallet representing Certificates of Deposit. These are then transferable between anyone who has downloaded the Cuber Wallet.

Regulatory Matters

With fiat digital cash it is easier to understand but now you have to trust the issuer of the tokens. These tokens are oftentimes simply defined as another type of cryptocurrency, for instance in the UK the FCA does not regulate fiat pegged cryptocurrency, however, in the US the issuer would be defined as an MSB. There may be other regulatory consequences, depending on how interpreted by Courts, such as banknote regulations which prevent any actor from creating banknotes.