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What would be the implications if the European Central Bank created a clone of BitCoin?

Assume that the ECB-coin has an exchange rate of 1-to-1 with the Euro, and that ECB keeps around 80% of all ECB-coins in a vault (to keep the exchange rate at the wanted level).

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closed as unclear what you're asking by Philipp, HDE 226868, Dronz, Vincent, bowlturner Apr 4 '15 at 2:19

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    $\begingroup$ When you say "clone of bitcoin", do you mean a cryptocurrency based on the same algorithm? Because if so, then there is no mechanism to prevent just about anyone from "minting" new ones. If you want ECB to maintain exclusive control over emission, then you're not really creating a new crypto-currency; you're just making another clone of the current banking system, where virtual tokens stored somewhere on a server can be exchanged for Euros in your bank. $\endgroup$ – Mike L. Apr 2 '15 at 13:16
  • $\begingroup$ I want the last 20% to be minted by others (similar to bitcoins), but I want banks to have no role for payments that could be done in cash. $\endgroup$ – Ole Tange Apr 2 '15 at 14:00
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    $\begingroup$ Well, that can't very well be done with cryptocurrencies as they are. Either anyone can mint them, or just one party can. Anyway, the amount of ECBCs that ECB has in a vault would have to fluctuate in order to maintain the exchange rate; or you could legislate the value, but then you're in trouble because suddenly everyone can "mint" Euros and ECB is no longer in control of its value (aka a Keynesian's worst nightmare). $\endgroup$ – Mike L. Apr 2 '15 at 14:04
  • $\begingroup$ @mikeL. Agreed. This question is basically a contradiction in terms. There's no such thing as monetary control in a decentralized currency. That's the whole point behind things like BitCoin. $\endgroup$ – Isaac Kotlicky Apr 2 '15 at 14:11
  • $\begingroup$ @MikeL. I do not get, how distributed minting 20% of a currency will mean complete loss of control. Can you illustrate that with a scenario? $\endgroup$ – Ole Tange Apr 2 '15 at 14:20
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The ECB would test the concept of "too big to fail."

Bitcoin is highly susceptible to many 19th century currency manipulation schemes because it has no intelligence behind it (it only has logic and algorithms). Much of bitcoin's volatility comes from the echoes and ripples from currency manipulation attempts.

If the ECB were to peg the Euro to the Bitcoin, they would have to begin manipulating the Bitcoin market to keep it stable. Otherwise they'd need an unstable Euro, which would fail in no more than a few days. This would be a battle of wits. If anyone could successfully out-manipulate the ECB, they could literally steal value directly out of Europe.

Eventually the ECB would have to admit that the currency pegging failed, and allow the exchange rate to fluctuate normally.

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The entire reason to create cryptocurrency is to have a currency which cannot be manipulated by governments and central banks. This is supposed to be a form of "sound currency" rather than "fiat money", although as noted in another answer, cryptocurrency can be manipulated through other means.

Since governments and central banks actually desire a currency that they can manipulate (for example debasing currency [inflation] lowers the relative costs of carrying debt, something to think about next time you look at the size of the debts nations and political units like States or Provinces carry), a form of "sound money" is actually detrimental to currency debasement and other manipulations that governments might try to do. If you have a choice of keeping your value in fiat money or sound money, which would you choose to do business in?

This also explains the rather ferocious response of many governments to crypto currencies like Bitcoin, since the widespread adoption would have negative consequences in may areas, both from preference (people migrating to cryptocurrency), to taxation (cryptocurrency would be hard to find records of, making many types of taxation difficult) to data and record keeping, particularly when trying to record econometric data like GDP, the amount of money in circulation ("M" numbers) and so on.

So if the EU or any other political unit were to make cryptocurrency their unit of value, then there would be a great deal of instability during the period of changeover, and other effects (like a vast flow of "hot money" into the polity) would also take place. Eventually there would have to be a normal market mechanism to compare the value of the Euro (or whatever unit of currency we are talking about) to the Bitcoin analogue.

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