Centralization is a threat to the survival of digital currencies because before Bitcoin, several other digital currencies including DigiCash, e-gold and Liberty Reserve got lost from market. There are some instances described:
DigiCash, introduced by David Chaum in 1989, used public and private key cryptography to turn money into anonymous currency and then be spent on the internet. Converting process of DigiCash to fiat was used to be done by a bank, which knows the purchaser but unknown of where the DigiCash was spent.
The popularity of DigiCash started increasing overtime. But centralization stifled the potentials of DigiCash. Meanwhile, Chaum refused making deal in with ING Bank and Microsoft thinking it would not be a good idea. Suddenly after that, Chaum stepped down and with his resignation DigiCash dissolved.
E-gold, introduced by Douglas Jackson and Barry Downey in 1996, was like a stablecoin and the first digital currency to be used by more than 1 million people. In this system, physical gold would be stored in a safety deposit box in Florida, and online users could exchange fiat for virtual currency that represented grams of this gold. E-gold could be partitioned into milligrams of gold. The amount of users became $2 billion in 2016 and by the time it got shutdown it had 5 million accounts.
Insecurity was the cardinal issue of E-gold that’s why government secretly destroyed gold. E-gold didn’t obtain money transmitter license that’s why the authority prosecuted e-gold for violating money transmitter laws. Jackson tried to adopt some steps to get money transmitter license. Tax authorities gave a deal where Jackson could plead guilty to money laundering and receive 300 hours of community service, a $200 fine, 6 months of house arrest, and 3 years of probation and an opportunity to apply for a money transmitter license, rather than the max sentence of 20 years in prison and $500,000 fine. But Jackson became failure to get a money transmitter license for e-gold in the end.
From the story it is clearly visible that if a digital currency has physical reserves they can be easily seized by the government. It was the story of many failures of centralization.
Liberty Reserve, introduced by Arthur Budovsky, allowed users to transfer money to each other with just an e-mail, name, and birthday. But it used to maintain no verification process but anonymity. For depositing money, there were multiple options including credit card and wire transfer. Liberty Reserve stored reserves in banks and was getting popularity overtime. As a wanted felon, Budovsky got arrested and authority seized all assets of Budovsky, who got 20 years of prison and a $500, 000 fine. It is an instance of how a centralized digital currency can easily be shut down by the government.