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The current monetary system dates back to the 20th century. It uses paper to regulate trust. That system no longer suffices. We need a new system.

Book money is being used less and less. Consumers are more and more living cashless. Without the need for cash book money, the age of the internet has given rise to new technologies like Blockchain. This technological innovation has led to the global adoption of digital currencies: cryptocurrencies. Currently, cryptocurrencies such as bitcoin are not an asset class, but they will become more robust over time, writes Christian Nolting, Chief Investment Officer at Deutsche Bank, in a special report (Nolting, 2021).

Other countries’ governments are already working on a digital currency (Kiderlin, 2021). Russia, for example, wants to introduce a digital rouble, partly to circumvent sanctions. Sweden is perhaps the most advanced and may introduce the e-Krona as early as this year, according to analysts at the investment bank HSBC. The use of cash is declining rapidly in Sweden. Residents of the country are therefore almost entirely dependent on private banks for their money. Therefore, the central bank wants to offer them an alternative.

Therefore, the question is, is the Netherlands taking any steps towards creating a digital currency? The Dutch Central Bank (DNB) announced during a hearing that a number of experiments with digital coins are underway (Kiderlin, 2021). DNB’s preliminary conclusion is that the currency is not yet functioning properly from a technical point of view. Among other things, the transaction speed is too low. We are looking into it with our fellow central banks’, says head of payments Petra Hielkema.

In my view, if central banks don’t intervene in a timely manner, they are allowing unregulated cryptocurrencies to become ‘mainstream. This is shifting the power of the government over currencies, towards a decentralized entity. Governments are in danger of losing control over parts of monetary policy in this way. Therefore, an intervention is necessary.

Nevertheless, there are also concerns over the use of digital currencies for criminal activities, these will have to be taken into account when governments aim to initiate a digital currency.

References

Nolting , C. (2021). Deutschebank April 2021 CIO special . deutschewealth.com. Retrieved October 8, 2021, from https://deutschewealth.com/content/dam/deutschewealth/cio-perspectives/cio-special-assets/a-tale-of-two-siblings-cryptocurrencies-and-cbdc/CIO%20Special%20-%20Eine%20Geschichte%20von%20zwei%20Geschwistern%20-%20Kryptow%C3%A4hrungen%20und%20CBDC.pdf.

Kiderlin, S. (2021, April 27). Gebruik van Cryptomunten Zal afnemen door komst digitaal Geld Van Centrale Banken, zegt Deutsche Bank. Business Insider Nederland. Retrieved October 8, 2021, from https://www.businessinsider.nl/gebruik-cryptomunten-bitcoin-afname-digitaal-geld-centrale-banken/.

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Imagine that you could use your reputation from Airbnb to create an account on platforms like eBay or Vinted. You could forego the tiresome process of building up a reputation by simply transferring your trusted reputation from other platforms. 

On peer-to-peer platforms like Airbnb and eBay, reputation can be a very valuable commodity. Users can expect to get higher prices for the resources that they offer if they have a good reputation (Dennis & Owen, 2015). 

Problems related to centralized reputation systems

A problem related to the traditional centralized reputation systems for peer-to-peer platforms is a lack of trust in peers. Lack of trust is often an issue that prevents peers from entering transactions with other peers (Gai et al., 2018). After all, trusting people on the internet whom you don’t know has become increasingly difficult as nobody knows who you are and if you are to be trusted, all of us must have seen a show like Catfish once upon a time illustrating this. 

Another problem on platforms that implement traditional centralized reputation systems, is extensive networks of fake peers that can work together to generate trustworthy reputations on that specific platform. And lastly, in centrally organized reputation systems, employees inside organizations that manage the platform can alter the reputations of peers.

Solving the problems of centralized reputation systems

To solve these issues, Dennis and Owen (2015) propose the implementation of the novel Blockchain Technology to enable a decentralized reputation system for integrating reputations across multiple peer-to-peer networks. This technology could solve the aforementioned issues by offering decentralization and immutability of records.

However, the remaining challenges for these reputation systems would be the interoperability between various platforms. Consider the following: one platform might operate with a numerical rating whilst others might operate on a review basis only. Making these reputation systems interoperable is therefore one of the biggest challenges that this system may face. 

A solution for interoperability may be to not try to merge varying reputation criteria, but only consider the number of reviews combined with whether the reviewee has a good reputation. To prevent organized networks of users voting each other up, reviews from users in a similar network could be given less weight whilst reviews from users in dissimilar networks could be given more weight. 

One thing is for sure, a decentralized reputation system would disrupt peer-to-peer platforms as we currently know them tremendously, by reducing opportunities for criminal behavior and enhancing trust between peers. The only question that now remains is, why hasn’t the technology been widely employed yet? 

What could be influencing this is the market position that peer-to-peer platforms have. For the technology to be effective, a collaboration between platforms would be crucial. The value for peer-to-peer platforms is in the number of users that they have. Sharing reputation systems with multiple platforms might compromise their position as it would be easier for users to switch to another platform. 

To conclude, for the user experience, it would be very desirable if a decentralized reputation system was deployed. Nevertheless, the peer-to-peer networks themselves will likely not collaborate to develop the decentralized reputation system unless given some very convincing incentive. 

Figure

National Digital Library of the United States Fish and Wildlife Service. (2006, December 3). Drawing of a Black Bullhead (Ameiurus melas), a species of Catfish. [Illustration]. https://en.wikipedia.org/wiki/Catfish#/media/File:Ameiurus_melas_by_Duane_Raver.png

References

Dennis, R., & Owen, G. (2015, December). Rep on the block: A next generation reputation system based on the blockchain. In 2015 10th International Conference for Internet Technology and Secured Transactions (ICITST) (pp. 131-138). IEEE.
Gai, F., Wang, B., Deng, W., & Peng, W. (2018, May). Proof of reputation: A reputation-based consensus protocol for peer-to-peer network. In International Conference on Database Systems for Advanced Applications (pp. 666-681). Springer, Cham.