Will Crypto Versions of Fiat Currencies Change the Way We Live?
When people discuss cryptocurrencies, much emphasis is given to the benefits of blockchain independence. Finally, so they say, there can be a currency that is not controlled by a single entity that we must unconditionally trust. But this view ties together two related features of cryptocurrencies that we can call Coin Control and Currency Control.
At Hexa Labs, thanks to our hands-on work with real customers on tokenizing and decentralizing their products, we have seen first-hand the substantial benefit brought by the digital properties of cryptocurrencies. In current national currencies, all transactions require confirmation by a trusted party or via the exchange of physical coins. If two banks want to transfer money between them they requires a trusted third party to verify the transfer on its ledger. In the cryptocurrency world, such a transaction is done on the public blockchain and is immediate and immutable.
Just as important but more innovative is the ability of digital currencies to be controlled by software-defined contracts. For example, two users can agree to exchange money and rely on a smart contract to ensure both comply with the terms of the transaction. The code will execute the exchange only after both parties deposited the coins in the value and timeframes agreed.
While the autonomous aspects of token minting on the blockchain offer new business models and interesting funding opportunities, the lack of central control creates a volatile economy, fueled further by the novelty of the entire field.
So, while there are advantages of cryptocurrencies in funding and creating “fenced prairie economies”, their potential value to the international trade and payment industries is severely limited as users find the extreme volatility nearly impossible to handle within their business protocols.
The negative effect of extreme volatility on cryptocurrencies led to several interesting attempts at creating so-called stable coins — Saga, MakerDao, Havven, and BaseCoin among others. But these new approaches lack the trust levels that central banks already have. Government-issued currencies are inherently more stable as they are tied to an existing economy and their controlling central banks have tools to manage a relatively stable financial system.
The best of both worlds
If we combine the two in order to create a government-backed cryptocurrency that is transacted over a public blockchain, we can capture the benefits of a trusted stable coin while simultaneously offering reduced-friction international trade and stable currency. Such currency would simply be another embodiment of the regular coin, just like paper notes and metal coins are two embodiments of the same value, the same economic system, the same currency.
Such a coin would allow local currency dealings to be done easily and automatically, using tools unavailable to normal fiat money.
It can be sent and received confidently without needing a rent-seeking 3rd party (such as a bank, a credit card company, or a digital wallet provider); It could offer cash-like transactions with full audit trail.
It could be controlled by smart contracts — released to a party, for example, when certain verifiable covenants have been met — and all at minimum friction.
International Aspects
Global traders are constantly seeking solutions for streamlining operations, which are today still expensive and cumbersome built on conventions that are actually centuries old.
The establishment of a stable, government-controlled currency that available in cryptocurrency form could prove to be a tool of great utility to such traders.
Depending on the government issuing the coin, one would have to balance the exchange risks associated with using that particular coin and the cost savings brought by its digital advantages. If this currency is a well-respected and of low volatility, it may become the go-to tool for traders, a position which could be leveraged by the currency-issuing institution to its advantage.
Additional Thoughts
There are many aspects to government-backed cryptocurrencies beyond the scope of this post; but two of the more interesting ones are the implementation of on-chain AML protocols: an undisputed government need; and the added layer transparency that could be gained by those central banks trying to strengthen the public faith in their monetary policy if all of their future minting would happen on the blockchain.
Join the Orbs community:
- GitHub: https://github.com/orbs-network
- Telegram: https://t.me/orbs_network
- Twitter: https://twitter.com/orbs_network
- Reddit: https://www.reddit.com/r/ORBS_Network/
- Read the Orbs white papers: https://www.orbs.com/white-papers
