An Overview of Government Backed Cryptocurrencies and How They Will Change the Blockchain Landscape 4 months ago

Government Backed Cryptocurrencies

While cryptocurrency enthusiasts of a more libertarian-persuasion would like to believe that digital assets are designed to exist in a decentralized fashion void of any governmental control, such an ideal can be unrealistic in today’s world. Governments all around the world including the U.S., Japan, China, Canada, Venezuela, Sweden, and Estonia are either actively working on forms of digital currency or on a supporting project.

What this doesn’t mean, however, is that they’re working on another government-backed clone of Bitcoin. To understand government-backed cryptocurrencies means realizing that administrations have a different set of priorities, and decentralization – the hallmark of the blockchain revolution – isn’t necessarily one of them. Rather, government-backed digital assets would try to do exactly the opposite, centralize these assets while still retaining some benefits of blockchain technology.

 

Background

What makes experts so interested in this newfound development of government-sponsored crypto-projects is that there hasn’t been anything like it in the industries history. Ever since Bitcoin debuted in 2009, the crypto market has evolved from a fringe, tech-niche with a small following to a massive global trend capturing billions in investment.

Only recently have governments stepped into the markets by introducing regulatory legislation aimed at curtailing the excessive malpractices of some of the more fraudulent ICOs. Recently, however, many countries who were once skeptically about cryptocurrencies are stepping into this ecosystem. Russia, in particular, has been working on some ideas about a government-led cryptocurrency. While little detail is known about this “cryptoruble” project, many experts theorize that one reason why Russia has taken an interest in this area is to get around international sanctions and even allow the government to tax its black market.

Paul Triolo, head of geotechnology at the Eurasia Group, would describe the situation by saying that “there have been two reactions from central governments. One is to try to figure out how to regulate the darn things, and the other is, do we figure out how to make our own?” 2017 was sort of a watershed year in that 2017 saw the regulatory response globally really pick up.”

 

Why 2018?

While some might ask this question, the truth is that the governments have been interested in developing cyber currencies for a while now but simply lacked the technology to make it happen. Since solving these problems at the time was difficult, popularity in this field wasn’t as big as it is today, nor were any such prototype systems efficient or cheap. Since no one was in a hurry to develop a decentralized digital currency for these reasons, there simply was no sense of urgency in making this happen.

However, these problems would largely be done away with thanks to Satoshi Nakamoto, who implemented a Proof-of-Work consensus algorithm as a way to validate transactions. The resulting cryptocurrency – Bitcoin – would end up taking the world by storm. With regulators across the globe finally answering the first question of how to legislate these projects, the next question, how to incorporate this technology into the government, can now become a reality.

Jaboc Eliosoff, founder of cryptocurrency investment fund Calibrated Markets, said that “there could be various benefits…” to government-led blockchain projects, including “preventing counterfeiting, better record-keeping and monitoring of transactions, no printing press, etc.” He also added that “right now some governments, like some companies, are probably just dazzled by the type and making stuff up so as not to get left behind.”

But at the same time, cryptocurrencies such as Bitcoin have demonstrated that it’s possible to create money outside of the central-banking, government-sanctioned financial systems. This has prompted many central bankers and finance departments to ask difficult questions about their role in a possible futuristic, decentralized economy.

As such, it’s easier to try to get in on the market and try to capitalize on any advantage a government-backed cryptocurrency might bring rather than avoid the issue and hope for the best.

Aren’t Cryptocurrencies Non-Governable?

Most cryptocurrency enthusiasts of a more traditional persuasion would agree with this sentiment, arguing that the main feature of crypto is its decentralization and ensuring that no party, agency, or individual can control the system. However, newer generations of ICO investors are more concerned about the potential for profit and innovation rather than the political ramifications of whether something is decentralized or not.

What determines whether a cryptocurrency remained decentralized depends on the architecture of its consensus algorithms. Systems such as Proof-of-Work can be compromised if the majority of miners are under a single authority. Other algorithms such as DPoS and PoA are both capable of creating a more centralized operating structure.

Venezuela’s president, Nicolas Madura, is proposing a virtual currency called the “Petro”, with each token be backed by one barrel of oil. According to him, the country received over $5 billion in investment offers during its first week of presale back in February. As previously stated before, Russia’s central bank has also spoken with countries such as China, India, Brazil, and the former Soviet nations about creating a supra-cryptocurrency between the bloc – a digital competitor to the Euro.

Both examples prove that it’s not necessarily blockchain technology that makes crypto decentralized, but how the underlying architecture is laid out. In theory, a government can have even more control over a virtual currency than a fiat, paper one since it can keep tabs on every transaction recorded on the blockchain ledger.

How Governments Benefit

There are many reasons why governments would want to implement these projects. As mentioned above, one possible advantage to government-backed cryptocurrencies is that it would allow commerce to flow between parties regardless of any economic sanctions. This can even the playing field in nations such as North Korea, Venezuela, Iran, Russia, and others which have historically been unable to skirt around the economic sanctions placed on them by the US.

How sanctions work is that the U.S. blocks banks and companies from doing business with the target country within their own financial system. Any violators get their transactions traced back in the international banking system and are faced with repercussions. However, digital currencies would make transactions with these nations undetectable by authorities.

One question that’s often asked is why a separate currency would be necessary when a plethora of other tokens such as Bitcoin already exist? While governments can conduct transactions in Bitcoin hypothetically, it would be a struggle for any government to get enough of them to conduct large, meaningful transactions. Secondly, Bitcoin’s value is very volatile, making them dangerous to hold onto for any length of time – especially since it would take a while for a government to accrue a significant enough quantity in the first place.

From an international perspective, if enough of the nations of the world begin using digital currencies, they can bypass the already established western/global financial system and undermine the influence of traditional institutions such as the IMF, World Bank, European Central Bank and the Federal Reserve.

From a domestic perspective, however, government-backed cryptocurrencies have their own advantages as well. Digital currencies would cut out a slew of middlemen in the existing financial system, directly connecting buyers and sellers and allowing them to do commerce with fewer transaction fees.

Economists also recognize that there are advantages to cryptocurrencies when applied to the monetary system as well. Central banks regulate the economy through an arcane system in which they tweak interest rates, buying and selling bonds among other major banks in order to control the money supply. This multi-step process is a very indirect attempt at influencing the buying and selling behavior of its citizens. However, since these financial resources are held by major financial institutions such as national banks, the intended effect of a central bank ultimately is filtered through the motivations of these subsequent organizations.

As demonstrated after the 2008 financial crisis, these esoteric measures weren’t terribly effective in stimulating economic growth. Instead, economists believe that a cryptocurrency operated by a central bank would be able to much more directly intervene, compensate, and improve the state of our current economies.

Government Backed Cryptocurrencies

The Future and Possible Downsides

With some experts predicting that cryptocurrencies will replace national currencies as soon as 2030, there are some potential downsides – primarily for consumers and citizens – that need to be mentioned. For one, centralized digital currencies would mean that it’s impossible to hide anything from the government. This total transparency would be opposite to traditional cash, which is anonymous and gives people the freedom to spend money without worrying about outside monitoring. Some civil experts argue that untraceable transactions are an important civil liberty, and a digital fiat currency would end up being in opposition to what many of the original cryptocurrency enthusiasts wanted for the world.

As for the current ICO landscape, the prospect of a digitally-backed cryptocurrency wouldn’t necessarily do much to compete in the market. The demand for altcoins dedicated to solving specific solutions is likely to remain strong in the coming years. Just as how public, government-owned companies compete with private corporations (such as UPS and national delivery services), government-backed crypto projects will still need to compete with smaller, nimbler blockchain start-ups that wouldn’t have to deal with the same bureaucratic grievances.

However, start-ups that are more focused on offering actual cryptocurrencies that solely exist as a means of transaction will find themselves with new competition, potentially leeching away at their user base as these nationally-backed alternatives enter the scene. These types of projects will need to differentiate themselves in some way to stand out.

 

Either way, whether or not government regulated cryptocurrencies are good or not depends largely upon your point of view. They can serve to decentralize the global financial system away from the traditional, western paradigm while also giving new monetary strategies to play with. However, the end-users and citizens can find themselves with fewer transactions costs, albeit if they are willing to depart with their shopping privacy.

 


Also published on Medium.