China has committed itself to digital money. The world, looking upon China as the second-biggest market on the planet, is watching—and following suit. The step is colossal and risky, as it can catapult national economies in a spectacular way. The announcement in June of Facebook Inc.’s Libra project spurred this effort, and now most countries are looking into rushing into digital money with their fiat currency. The Federal Reserve is not far behind.
Having lived in this space for some time now, I sense a race motivated by prestige and unhindered by caution. So I choose to dedicate this month’s column to a description of what I see as the four main risk factors that must be negotiated before the dollar can become a digital entity per se.
Risk #1: Mathematical Collapse. A cryptocurrency lives by math and dies by math. Its developers, brilliant as they are, see no pathway for a mathematical breach of the integrity of their currency. But that conclusion is not a mathematical proof. Rather, it is a statement of confidence. It is subject to surprises sprung by a more-developed insight that could occur to a single mind anywhere in the world and at any time.
A mathematical breach of a cryptocurrency is catastrophic. The entire wealth of the nation, if captured in the breached currency, would come to naught at once. And this would happen without warning. It could happen to Bitcoin, Ethereum, and all other cryptocurrencies, where the valuation of the digital coin hinges on a mathematical riddle deemed too difficult to solve in a timely manner.
Risk #2: Quantum Computing. Turing machines are considered too slow and ineffective to breach the leading cryptocurrencies on the market today. Common computers (Turing machines) are based on Maxwell classic electrodynamics. They take no advantage of the immense computing capacity of the microcosm where a selection among competing possibilities can be carried out in a guided parallel mode, replacing the classic case-after-case (slow) resolution.
So it is amply clear that quantum computers are many orders of magnitude faster than today’s classic machines. What is not yet clear is what problems these computers will solve right away, which ones a bit later, and which perhaps they will never solve.
The research into quantum computing started in the open but today is shrouded in secrecy. This casts an unacceptable shadow of doubt on any cryptocurrency that hinges on the assumption that standard computers are too slow to void it.
Risk #3: An Ill-Performing Internet. The Internet is so omnipresent globally that we are tempted to assume it’s as permanent as gravity or the seasons. In fact, the Internet is vulnerable to natural disasters and to man-made assaults.
If the existence and performance of a national digital currency hinges totally on the expectation of uninterrupted connectivity across the full expanse of trade, then we are inviting payment paralysis and trade interferences of unacceptable proportions.
Risk #4: Massive Identity Theft. Digital money is held and transacted by traders who represent themselves by means of a small digital signature. These digital identities are kept en masse in banks and other financial institutions that are vulnerable to sweeping attacks that could void the financial well-being of tens or even hundreds of millions of traders overnight.
How to deal with these risks? We propose the honored cyber tradition of public exposure. AES, RSA, and ECC are highly credited ciphers because they are completely in the public domain. They can be analyzed and evaluated by any interested party. There’s no better way to flush out hidden flaws.
The same principal should apply to the finalists in the national digital-money context. The stakes are high. A nation cannot survive a collapse of its currency.