The Rise of Cryptofiat
Governments across the world are researching and developing what the Bank for International Settlements calls central bank cryptocurrencies, and Izabella Kaminska of the Financial Times refers to as “Crypto Fiat”. This form of government-issued digital currency allows citizens to hold deposits directly with central banks.
A survey of recent developments suggests that the rise of cryptofiat is a trend that should be closely monitored by anyone concerned with how the global monetary system might evolve over the coming decades.
Venezuela
Last fall, Venezuelan president Nicolas Maduro announced plans to launch the Petro, a cryptocurrency backed by the nation’s oil reserves. The pre-sale for the Petro went live on February 20th. Maduro claims that over $735 million was raised on the first day, and that over 171,000 purchase orders have been received so far. Several Venezuelan companies have been ordered to accept payments in the Petro.
While early rumors suggested the currency would be built on Ethereum’s blockchain as an ERC-20 token, the government ultimately decided to use the NEM platform instead as described in the Whitepaper.
Maduro’s opposition in Congress has declared the Petro to be illegal. The U.S. Treasury has warned investors against dealing with the Petro, stating that it likely violates sanctions against the country. Senators have hinted at potential action “to prevent the Maduro regime from brazenly evading US sanctions”.
In theory, the Petro is backed by oil. In reality, it can only be redeemed for Bolivars based on the price of oil. As Vitalik Buterin points out, this leaves the currency vulnerable to the risk of total or partial default through manipulation of the Bolivar’s exchange rate.
Venezuelan and Russian officials have been discussing the role that the Petro could play in strengthening economic and financial cooperation between the two countries. Maduro has also announced plans for a second cryptocurrency, “Petro Gold”, backed by the nation’s gold reserves.
Activision/Blizzard co-founder Howard Marks wonders “is cryptocurrency technology now in the service of political warfare”?
Russia
Russian President Vladimir Putin has ordered the issue of a national cryptocurrency as a means for circumventing international sanctions. A draft bill was submitted to the Russian parliament in late January, marking a concrete step towards the launch of the “Cryptoruble”, which will be pegged to the Ruble. The latest reports suggest that the Cryptoruble is set to be launched in mid-2019.
China
Yao Qian, lead researcher at the People’s Bank of China (PBOC), discussed the banks efforts to develop a national cryptocurrency. Qian believes central bank-issued digital currency can “ bring down transaction costs, extend financial services to rural areas and increase the efficiency of monetary policies”.
PBOC’s Deputy Governor stated: “China’s official digital currency will adhere to centralized administration model. Aiming to replace M0 rather than M1 or M2. A prudential attitude should be held on incorporating smart contracts into central bank’s digital currency”.
Turkey
A Turkish lawmaker recently drafted a report proposing a state-backed “Turkcoin”. The coin would aim to tokenize asset-backed securities. “Large public assets in the Wealth Fund such as Turkish Airlines, the Istanbul Stock Exchange, the gas company Botas, Turk Telekom, Ziraat Bank and the National Lottery would serve, in a sense, as its “insurance policy”.
Iran
Iran’s Minister of Information and Communications Technology has confirmed plans for a national cryptocurrency to be developed by the state-run Post Bank.
The Marshall Islands
The Marshall Islands plans to release a cryptocurrency, the “Sovereign” (SOV), to serve as official legal tender. The SOV will require users to identify themselves, and the country’s parliament has voted to proceed with the plan which they hope will help “bolster local budgets”.
The country has partnered with Israeli startup Neema to develop the currency. In contrast with other countries that have concrete plans for cryptofiat, the Marshall Islands is a close ally of the United States.
The United Kingdom
While the Bank of England (BOE) has been conducting extensive research into digital currencies, they have halted plans to release a state-backed cryptocurrency, citing fears about potential impact on the wider financial system.
If the central bank launched a digital currency of its own, it worried consumers would stop using commercial bank accounts and, instead, have a bank account with the Bank of England, and choose to use digital technology to purchase goods and services over paper money.
The central bank added it feared if there were a flurry of withdrawals from commercial banks in favour of using the Bank of England’s crypto-currency, highstreet banks would not have the cash to pay all depositors, causing turbulence in the economy. — David Thorpe, Financial Times
Sweden
Sweden, on the verge of becoming a completely cashless economy, is also conducting research on digital currency. Sweden’s central bank, the Riksbank, has started a project to examine whether or not Sweden needs to issue an “e-Krona”.
One reason why the Riksbank wants to investigate the possibility of introducing an e-krona is that the use of cash in Sweden has been declining steadily over a long period of time. At the same time, the Riksbank has the statutory task of providing Sweden with banknotes and coins, households are using cash less and less and the private sector is reducing the general public’s access to, and the usability of, notes and coins.
This means that ultimately, private agents may determine the access to central bank money and payment methods. In addition to the Riksbank’s obligation to supply cash, the starting point for this project is the Riksbank’s task of maintaining price stability and promoting a safe and efficient payment system in a new digital environment. — The Riksbank’s e-krona project Action plan for 2018
Canada
The Bank of Canada has conducted experiments with “CAD-coin” as part of “Project Jasper”, an exploration of Distributed Ledger Technology (DLT) based wholesale payment systems. However, Bank of Canada senior deputy governor Carolyn Wilkins stated the bank was “ very far off” from issuing a digital currency for public use.
Technically, a CAD-coin is a deposit receipt; it gives the holder a transferable claim on its value in central bank money. But for all intents and purposes, this means CAD-coin is, itself, a form of central bank money. However, unlike central bank reserves, which are held in banks’ master accounts at federal reserve banks, CAD-coin holdings are held in banks’ “wallets” within the distributed ledger. Payments from one bank to another that are made using CAD-coin do not impact the central bank balance sheet. It is only during the redemption phase, when banks redeem CAD-coin for central bank money, that a redistribution of central bank reserves occurs. — CAD-coin versus Fedcoin
The Royal Bank of Canada’s (RBC) capital markets team released a report that argues cryptocurrency may represent a multi-trillion dollar market. The RBC is one of six private banks working with the Bank of Canada on Project Jasper.
Switzerland
As described in a recent piece from The Economist, Switzerland is enthusiastically embracing digital currencies and crypto-entrepreneurs.
The Chairman of the SIX group that runs the Swiss Stock Exchange told The Financial Times that he doesn’t like cash and would like to see the central bank issue an “e-franc ”. The Swiss National Bank (SNB) has stated they don’t see any need for such a move.
A think tank of Swiss financial professionals issued a report outlining their vision of a “Crypto Franc” pegged to the Swiss Franc.
The United States
Last December, the author of a Washington Post Op-Ed argued that a (non-existent) “Fedcoin” is bigger than Bitcoin.
“If the Federal Reserve does adopt its own cryptocurrency someday, it will become a major — and far less volatile — competitor to bitcoin and other digital currencies. In fact, it’s not clear whether fedcoin would want that competition, and the Fed is in a position to impose a regulatory environment that tilts the playing field. So watch out, bitcoin.”
Comments made by officials at the Federal Reserve indicate we won’t be seeing a Fedcoin anytime in the near future. Last November, San Francisco Federal Reserve Bank President John Williams said the Fed has no plans to issue a digital currency. Federal Reserve Chairman Jerome Powell gave his thoughts on the topic in a speech last year.
Indeed, I would expect private-sector systems to be more forward leaning than central banks in providing new features to the public through faster payments systems as they compete to attract retail customers. A central bank issued digital currency would compete with these and other innovative private-sector products and may stifle innovation over the long run. — Jerome Powell
However, given the activity of other governments across the globe, it seems likely the concept is being discussed among policy makers behind the scenes. Comments made by high-ranking U.S. Government officials reflect a deep understanding of the value and disruptive potential of cryptocurrencies.
Former FDIC chair Sheila Bair explains why she isn’t worried about the mania surrounding cryptocurrencies and sees no need to ban them.
“ I don’t think we should ban [Bitcoin]— the green bills in your pocket don’t have an intrinsic value, either. The value is based on what others think is its value. That’s true of any currency…Regulation should be focused on good disclosure, education, warding off fraud, and making sure it is not used for illicit activities. Let the market figure out what it’s worth..that is what it is doing now” — Sheila Bair
The Federal Reserve Bank of St. Louis published A Short Introduction to the World of Cryptocurrencies earlier this year that acknowledges some of Bitcoin’s advantages over other forms of currency.
However, Bitcoin is not the only currency that has no intrinsic value. State monopoly currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either. They are fiat currencies created by government decree. The history of state monopoly currencies is a history of wild price swings and failures. This is why decentralized cryptocurrencies are a welcome addition to the existing currency system…It could be argued that, in some ways, the Bitcoin protocol is more robust than many of the existing fiat currency protocols. Only time will tell. — Aleksander Berentsen and Fabian Schär
At a recent hearing of the U.S. Senate Banking, Housing and Urban Affairs Committee, Senator Mark Warner stated that cryptocurrencies could be as transformational as cellphones. CFTC Chairman J. Christopher Giancarlo testified at the hearing.
We are entering a new digital era in world –financial markets. As we saw with the development of the Internet, we cannot put the technology genie back in the bottle. Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity. Ignoring these developments will not make them go away, nor is it a responsible regulatory response. The evolution of these assets, their volatility, and the interest they attract from a rising global millennial population demand serious examination — Christopher Giancarlo
Giancarlo’s comments have earned him the nickname “Cryptodad”, and a large following of Bitcoin enthusiasts on Twitter.
If and when the world’s largest economic and military superpower decides to issue its own form of digital currency, it will have a significant impact on the its citizens and the global economy.
Conclusion
The majority of countries that have launched or announced concrete plans for a national digital currency are authoritarian regimes, “rogue states”, or involved in some sort of economic/political conflict with the United States. I don’t have high hopes that these efforts will benefit average citizens in these countries. Instead, they will likely serve as tools to help leaders consolidate power or evade international sanctions.
If a country like Switzerland, Canada, or the United States launched a national cryptocurrency, it could prove attractive to those who have avoided Bitcoin and other cryptocurrencies because they don’t trust currency that isn’t backed by a nation-state. I’ve encountered many people who fall into this category.
In light of research and development in this space, it would be wise to consider the possibility that cryptofiat might eventually provide significant competition for open, decentralized cryptocurrencies.
