The State of State-Sponsored Cryptocurrencies
The term is a bit of an oxymoron — a centrally-controlled decentralized currency? When Bitcoin proved that people were willing to use a purely digital currency, governments around the world saw an opportunity to capitalize on the craze. Without a complete understanding of what made Bitcoin so popular in the first place, nations began developing their own cryptocurrencies. Some have already launched, some have already failed, and more are on the way.
Ecuador claimed to be the first country to have a state-backed electronic currency back in 2015, but the system is based on traditional U.S. dollars and is more akin to PayPal or Venmo. It doesn’t use blockchain technology, is centrally controlled and distributed by the government, and doesn’t offer the anonymity that true cryptocurrencies do.
Cryptos.com has previously discussed Venezuela’s Petro, a digital currency linked to the Venezuelan fiat currency, the Bolivar, and backed — at least in theory — by Venezuela’s reserves of oil, gold, and diamonds. Venezuela allows and encourages the use of the Petro, but the people aren’t really using it. No major cryptocurrency exchange sells it and shops that accept it are hard to come by.
Tunisia’s Moneta and Senegal’s eCFA are a little closer to what would be considered a cryptocurrency in that they utilize blockchain technology, but they too are centrally controlled and have garnered very little interest from the general public.
You have likely never heard of any of these coins. That’s not surprising. Moneta and eCFA don’t even have Wikipedia pages. But they exist. They are real, legitimate attempts at a state-sponsored cryptocurrency and every one of them has failed miserably. The Petro’s launch was infamously plagued with conflicting information and scammers taking advantage of the chaos. Lack of interest, poor publicity, and all-around poor execution has doomed these currencies to failure. But that hasn’t stopped other countries from falling into the same pitfalls.
Sweden has proposed launching E-Krona which would be centrally controlled by Riksbank. Estonia is considering launching Estcoins. Japan wants to distribute J-Coins before the 2020 Tokyo Olympics. Israel, China, and India have also expressed interest in creating their own digital currency. Iran too is playing with the idea, making a statement last April that an experimental model for their own cryptocurrency has already been developed while simultaneously imposing harsh restrictions on every other form of cryptocurrency.
Now, a purely digital form of currency isn’t entirely ill conceived. People could act as their own banks. Without going through third parties, transaction times and fees can be cut. It would also act a cost-saving mechanism by eliminating the need to maintain hard currency that deteriorates over time. These ideas are all well and good, but there’s also a more sinister reason a country might make the switch to digital currencies: they make it a whole lot easier to skirt economic sanctions.
We have reached a point where cryptocurrencies are playing a role in international diplomacy. Both Iran and Venezuela are currently suffering from poor economies due in no small part to sanctions imposed on them by the United States that limit their abilities to perform international trade. Cryptocurrencies however, don’t play by the same rules as traditional currencies. Regulations that affect the Bolivar don’t necessarily affect the Petro.
Russia has gone back and forth on whether it will issue its own CryptoRuble. Reports from October 2017 claimed that the currency was on its way, but in June of this year, Putin rebutted the idea, putting bluntly what many of these other countries fail to realize: that “cryptocurrencies go beyond natural borders.” They are international and decentralized by design.
It’s understandable why a government would want to take the best aspects of cryptocurrency and incorporate it into their own currency. In fact, having state-backing offers quite a few benefits as well, not the least of which would be price stability.
This raises an interesting question: could a cryptocurrency viably replace traditional national currencies? There are definitely some obstacles to be overcome before it can. Fractional-reserve banking systems only keep a small portion of assets in cash. This allows banks to loan out money and make profits from interest. If everyone was their own bank, keeping funds on private wallets, then it would become a lot more difficult to secure loans.
Another obstacle to overcome is taxes. As much as we enjoy conducting transactions behind Uncle Sam’s back, it’s not a reasonable way of conducting business for a country. Without a means to audit users, countries open themselves up to financial crimes such as money laundering that law enforcement authorities will have difficulty tracking.
The success of Bitcoin, though, is based at least partially by the fact that it isn’t regulated. Government entities can’t step in and manipulate Bitcoin the way they can do so with their own currency. The relative anonymity, the lack of oversight — it’s all part of why Bitcoin has become so popular. Being invisible to tax authorities and financial regulators is a feature, not a bug.
Without these features, a digital currency can’t even really be considered a cryptocurrency. It would be no different than the electronic currency you have in your bank account that you use with your debit card. Instead of true cryptocurrencies, what we are seeing are traditional digital currencies advertising themselves as having the same benefits as Bitcoin. But they don’t, so they have failed, and in all likelihood, will continue to fail.