In the world of digital currencies, governments no longer have the financial authority derived from printing money. A currency can be anything we ascribe value to, from monetary value to friendship value, popularity value, brand value, and so on. Authority is built from consensus and derived by the use of a currency. Currencies are created over time through adoption and not through sovereignty.
M-Pesa, a currency being used in Kenya, is a fantastic example: while most Kenyans don’t have a bank account, eight in 10 have access to a cell phone. So, in 2007, Safaricom started offering a way to use cell phones to send and receive cash. The service is called M-Pesa: “m” stands for mobile, and “pesa” means “money” in Swahili. It is often referred to as Kenya’s alternative currency. But it is safer and more secure. Eleven years later, at least 25 million Kenyans use the Safaricom-owned service, through which they transacted $28 billion in 2015. This was equivalent to about 44% of the country’s GDP of $63.4 billion (Lesley Stahl, 2015, 2018, CBS News). M-Pesa is not controlled by the government. It is a peer-to-peer solution that was created and is maintained by a telephone company.
With the emergence of cryptocurrency technology, soon, a 10-year-old will be able to launch his or her own coin because of the availability of the mechanics and tools. Currently there are over 1,200 cryptocurrencies. The first, Bitcoin, was launched in 2009. Although it seems unlikely that Bitcoin, or any other of the current cryptocurrencies, will be adopted as a government-controlled monetary currency, it has opened the door to the distributed ledger technology that makes it possible to start thinking about digital sovereign currencies. Russia and the City of Dubai recently announced that they are creating state-regulated digital currencies, and many other are following suit by experimenting with the technology.
So, what makes it so attractive to start implementing a digital currency? On one hand, it is the benefits associated with the technology:
- It is immutable. Once recorded, it will be almost impossible to change a record.
- It offers great security. In the nine years Bitcoin has existed, the technology has not been hacked once.
- It allows faster settlement.
- It provides increased capacity.
- It reduces costs.
- It offers increased operational flexibility.
This brings many opportunities to governments. I focus on smaller countries that often don’t have the infrastructure or the knowledge larger countries have. Public servants in less-developed, smaller countries often use outdated systems, these countries’ currencies are often pegged to the USD, and they only have limited possibilities to guide an economy through changes in their monetary policies.
I see the following benefits for these countries:
- Reduced cost of operations. A cryptocurrency is controlled through variables in a software program. The creation, storage, and transport of paper money are not required. Controlling, for example, the money supply is achieved through changing a variable in a program.
- High flexibility. Recently, two hurricanes devastated several countries in the Caribbean. Most of these countries are not rich and have financial problems. Reconstruction, as one would expect it, is not an option to them. With a cryptocurrency, they could increase the money supply for a short time and boost the speed of reconstruction. Thus, by using a cryptocurrency, it is easier to stabilize an economy, and changes can be implemented with immediate effect.
- Transparency. Several problems are associated with paper money: nobody really knows the available money supply, and it is used for fraud and corruption, as it is difficult to trace. Creating counterfeit money is also only possible with cash. With a cryptocurrency, a government always knows the exact volume and location of currency. Cryptocurrencies cannot be forged, as they are incorporated in the chain. Using it for fraud and corruption is difficult, as the money’s final destination is transparent.
- Greater financial inclusion of people currently on the fringes of the financial systems. In many countries people are not allowed to open a bank account or receive a credit card. To acquire things, they either have to barter or use cash. With cryptocurrencies, opening an “account” is no problem, and using it is simple.
- New fiscal instruments. Imagine the possibilities open to a country when it can change fiscal policies, such as housing programs, lending programs, and monitoring project funds, through software applications.
When the internet was created, it removed barriers that came to benefit many countries. A notable example is the hotel industry. Through a website you can book a hotel room in the Turks and Caicos, which wasn’t possible 20 years ago.
Cryptocurrencies will offer the next big leap for world economies. It will make them stronger, more independent (it will no longer be a case of “when the US sneezes, many countries catch a cold”), and able to better support and serve their citizens.