When Bitcoin launched in 2009, it did so as an alternative to traditional, government-backed currencies. For many, Bitcoin and the promise of blockchain came to represent the overthrow of traditional institutions. In the early days, this anti-establishment ethos drove much of Bitcoin’s adoption. So, it’s ironic now that national governments are using the same technology to issue their own cryptocurrencies.
In a lot of ways it makes sense. The blockchain does decentralize control over a currency, but the creator can still set the rules for the issuance of a cryptocurrency. It’s possible to have a distributed blockchain that still has centralized rules and a governing authority. Building such a blockchain would still offer the benefits of security and ease of transactions while keeping control over monetary policy in the domain of the issuing government.
Increasingly, countries are seeing cryptocurrency as a technological breakthrough, instead of as competition to national currencies. From a technical perspective this is true. It’s also likely that the introduction of national cryptocurrencies will spur the cryptocurrency market as a whole. A dollar or euro token wouldn’t sink Bitcoin. In fact, it would make Bitcoin more valuable because now fiat could be traded online on a token-to-token basis.
The European Union and United States are still far from creating cryptocurrencies. However, there are some countries that already have or are in the process of implementing a national cryptocurrency. This article will examine these efforts and why a country might want to adopt crypto.
One key benefit of establishing a national cryptocurrency is infrastructure. It turns out that electronic banking systems are difficult to create, secure, and maintain. This is especially true in areas where corruption is prevalent and government officials are skimming off the top at every opportunity.
Blockchain currencies provide an open source solution to financial infrastructure. It makes money transfers, payments, and tracking transactions much easier and more transparent. Back in 2014, Ecuador became one of the first countries to test out this state-run electronic currency scheme. The scenario was unique because Ecuador uses the U.S. Dollar as their national currency. However, the state-run digital cash system allows officials to easily track and set monetary policy for the entire country. As national cryptos proliferate, expect to see countries tracking and accepting taxes in digital currency.
Estonia is another interesting case study. Currently, Estonia uses the euro, and the rules of the Eurozone prohibit any country from creating a competing currency. Nonetheless, Estonia is a leader in blockchain and digital identity. They have plans to create an estcoin that would mimic the value of the euro to facilitate transactions without actually replacing any euros. Think of the estcoin as a side chain to euros, allowing greater liquidity through a new protocol layer.
2. Facilitating Currency Exchange
Countries implementing national cryptocurrencies have cited ease of exchange as a major reason. For an enterprise or trading partner, setting up banking relations in a smaller country can be a nightmare. The challenges of currency exchange and payment processing make international companies less likely to do business in countries with smaller economies. Digital currencies could change that by making exchange simple, standardized, and completely online.
Tunisia’s eDinar and Senegal’s national digital currency both launched for these reasons. Specifically, Tunisia cited money transfers in and out of Tunisia as a major hurdle for their citizens, many of whom live abroad and send funds back to their families. In Senegal, officials hope that a digital currency can make for more effective and efficient trade amongst partners in the West African region.
3. Appreciation as a Debt Solution?
Although it goes unsaid in most official documentation, the incentives for creating a cryptocurrency that trades on the open market are strong right now. A country that gets its national coin listed on a major exchange is likely to see that coin’s value grow. With enough growth, that digital currency could contribute to reducing the national debt in many countries.
A Portuguese project, CryptoEscudo, includes national debt reduction as one of its goals for its currency. It’s not officially backed by the Portuguese government, however, and the project hasn’t been active for some time. Other countries with debt issues or struggling economies have also looked to cryptocurrency as a means for support. Venezuela is perhaps the best example. There, cryptocurrency functions better than the hyperinflationary national currency. The Venezuelan Petro, a government created, oil-backed crypto, hopes to stabilize the economy using blockchain.
4. Going Cashless
For many countries, the ultimate goal of a national cryptocurrency is to go cashless. The People’s Bank of China has expressed such an interest with their explorations into a national digital currency. So have Israel, Dubai, and Japan with their various currencies meant to be accessible via a mobile app for payments anywhere.
While some countries have been exploring and discussing a digital currency, one country has officially done it. Last month, the Marshall Islands officially created a national cryptocurrency that it will gradually adopt as its only national currency. The Sovereign (SOV) is the first cryptocurrency to be recognized as legal tender. Its impact outside the Marshall Islands will likely be limited, but it nonetheless demonstrates a small scale proof of concept and that physical currency is largely and antiquated means of transacting.
Every year, more countries become interested in the implications of blockchain and cryptocurrency on the future of money and trade. Even if national currencies continue to be managed by central banks, there are other benefits to moving completely digital on the blockchain. These early adopters are harbingers of a coming shift in the way money operates in the world.