3 Ways How National Cryptocurrency Can Replace Paper Money
What do you expect from national cryptocurrencies?
Someone can say that they have no sense since this idea is not worth the time and effort. Someone claims that they will increase the state’s transparency and help fight corruption. And someone immediately sees “Big Brother’s head” after thinking about central bank digital currency (CBDC).
One way or another, we don’t have a template for creating some kind of Statecoin yet.
It is known that the central banks of China, Sweden, Canada, Singapore, the UK, and Norway are carrying out research into digital currencies. But this idea remains only at the levels of discussions or tests so far. And the reason is that central banks must overcome a serious existential crisis to create an effective substitute for paper money.
A good example of identity problem is the statement by National Bank Of Ukraine Deputy Governor Sergii Kholod, after testing e-hryvnia:
“Our study has not only provided us with practical experience but also posed new questions for the NBU. How will this instrument affect the payment market ecosystem? Will there be sufficient demand for e-hryvnias from users, vendors, and market participants? What technology should we use? What level of anonymity should transactions involving e-hryvnias have? Today, not only the NBU but also other central banks have no clear answers to these questions.”
Would it be an authoritarian tool to control capital flows within the country or E-government 2.0 which should “improve” interaction between inhabitants/banks/business and government? Each country will answer these questions in its own way, depending on the purpose of creating such currency and the method of transition to absolutely digital money.
Tax Revolution
One of the reasons why we use the national currency in mutual settlements is that we use this money to pay taxes. The government will most likely want to implement Statecoin into the taxation system to optimize this process. But how will they do it? Principles of economic incentives will help them.
The state can lower tax rates if they are paid in national cryptocurrency. Moreover, it doesn’t have to be all taxes at once, you can start with one strategically important tax, which pays the majority of businesses, such as value-added tax (VAT). After that, it is possible to move on to other indirect taxes, and then to direct taxes. If a business sees sufficient economic benefits in using the national cryptocurrency, then it can switch to its constant use.
A similar mechanism can be applied to taxes which haven’t been adapted for the use of national cryptocurrencies yet. For example, if the company uses national cryptocurrency, the state may provide benefits, exemption from certain fees, tax holidays, reduced rates on other taxes. And when it will be possible to pay excise taxes or income tax with Statecoin, the company will be obliged to pay them in that way to maintain preferences and reduced rates.
In addition to business, inhabitants of the country also would like to have savings in the new currency. As a result, two national currencies will be temporarily in circulation (hello, bimetallism).
The government may introduce a fixed rate or a floating rate. Most likely, it will be 1:1 parity between paper and digital currency at the beginning. But then the parity may be revised. This revision can be partially compared with the People’s Bank of China approach to establish the RMB exchange rate against the US dollar. The first option is more optimal with a soft transition to a new currency.
The second option is best used in case of frequent shocks. If in such cases the state doesn’t switch to a floating rate, then a huge black market with a “real exchange rate” will appear, such as in Venezuela.
Eventually, the state will try to “wash out” the old currency and stimulate the use of the new one. Some countries acted in a similar way to abandon silver for the gold standard.
Why should the government go this way: Tax automation.
If the majority of businesses and most of the country’s inhabitants become part of the national cryptocurrency network, then the government can automate the taxation process. Taxes may replace transaction fee and they may be included in each transaction.
This gives the state a transparent business, the ability “to see” every transaction and income source (under certain conditions), confiscate money rapidly or block someone (if this option is provided).
In turn, business and people receive a system in which interaction with the state is minimized, and the corruption component is decreased due to cross-observation.
So, here are three outcomes:
- Transparent utopia;
- Dystopia with full state control;
- A mediocre system that works… so-so, and won’t be used everywhere.
Most likely, the first prototypes will relate to the third option. The question is whether the state wants to continue improving its cryptocurrency.
Digital Denomination
Economic history is not only about eternal money depreciation, but also about eternal emergence of new currencies. States are constantly introducing a new currency and hope that it will be better than the previous one. They just try to forget about past failures and move on.
The biggest failure was Hungarian pengo which faced the most terrible hyperinflation in history. On August 31, 1945, the exchange rate with the US dollar was 1,320 pengo. But in less than a year, it was more than 400 octillion pengos per dollar. After that, forint was introduced and it still exists.
New state currencies are not a relic of the past, they appear even in our days. A recent example is a sovereign bolivar which was introduced on August 20, 2018.
But what if we go further and replace the national currency with a national cryptocurrency (not necessarily after hyperinflation)? Venezuela partially followed this path, pegging the newly created sovereign bolivar to Petro cryptocurrency.
I’m not going to tell you how terrible Petro is, you can read a huge number of articles about it. I only want to say that such a “cryptocurrency” is giving digital currencies a bad name and can demotivate other countries from trying a national cryptocurrency. Not sure if this is good or bad.
Why should the government go this way: No sanctions and low money laundering risk.
What is the point of banning SWIFT, Visa, and Mastercard, if you have your own payment and transaction system? International transactions? A state can even prepare for this.
If some kind of atomic cross-chain swaps is implemented in the national cryptocurrency and the exchange for both other CBDCs and cryptocurrencies is easy and fast, then you may have to forget about such sanctions altogether. Doesn’t that sound like a truly independent currency?
Independence in the age of globalization is sometimes incredibly valuable.
Money laundering. Having an absolutely digital currency, we lose one important thing — cash. All funds are in digital form and this is unchanged.
Sounds like a cool solution to reduce crime and shadow economy. But, as for me, it’s too dangerous and not only because this gives the state and banks carte blanche.
Centralized digital currency raises many questions about the privacy, security, and diversification of people’s funds. Besides, there is a problem with unbanked and availability of money for people who live in rural areas and remote places.
Of course, you can create a certain analog of M-Pesa as an alternative. This mobile phone-based money transfer allows unbanked people to conduct different transactions.
To use M-Pesa in Kenya, you need to create a special mobile account and exchange cash for mobile credit at one of the thousands of telecoms kiosks. All you need is a passport and a SIM card.
M-Pesa already uses more than half of Kenya’s population. The service is also popular in many other countries such as Tanzania, South Africa, Mozambique, Lesotho, and Egypt. And that’s all because of the low cost of mobile communications and the distrust of banks.
M-Pesa has already become something more than a regular money transfer service. With M-Pesa, you can pay for anything from a hospital bill, salaries, utility bills, and school fees. It also allows you to open deposits and get a loan.
One way or another, if the state or company create M-Pesa analog, they will most likely get the bank… with another sauce. If there is no more cash, it may be even more spicy sauce, as people may be forced to become part of the network.
Nationalization
This option always seemed a little bit strange for me. How can a state nationalize a project that doesn’t have a specific jurisdiction and can consist of many developers and users from different countries? How will this affect nodes and miners? Will a new client be launched and will some fork be required? Too many questions that increase doubts about the successful implementation of this idea.
But after presenting decisions from Facebook and different local crypto projects, nationalization doesn’t seem so strange anymore because there is an obvious “head of the snake” that can be cut off.
Why should the government go this way: regain control.
Each government has a magic phrase that is used to justify any action — “national security interests”. If a company “dares” to compete with the state by creating its own currency, then the government can quickly deal with a competitor for the sake of “national security interests”.
If a company’s coin becomes more popular than the national currency, the government may nationalize the company, as some structurally important bank, to “prevent economic collapse”, or influence the company in another way to gain control. In the case of company’s resistance, which is more than likely, we can expect an interesting confrontation.
The state has to decide what is better for it. Maintain the status quo and cut off the “heads” or get ahead of competitors and launch some kind of digital currency? Which is more in the national security interests?
We’ll see.
Lucky Moment
Efficient replacement of paper money is possible only if CBDC or “nationalized” cryptocurrency looks like a finished product. Not a prototype, not a promising project that will take over the world, but a finished product. Today’s crypto market is full of prototypes and promising projects. Even bitcoin can’t be called a finished product. That is why the development of a national cryptocurrency can take a lot of time.
But if the state still wants to produce Statecoin, it’s important to find a good moment for the replacement.
Although most currencies appear either after the formation of a new country or after a crisis, perhaps it is better to replace paper money at a time of steady economic growth. The country must be able to overcome the changes, or some Petro might be your result. For example, the transition to the gold standard predominantly occurred during the Second Industrial Revolution and strong economic growth.
Digital currency needs some infrastructure like easy access to the Internet or telecom networks (for M-Pesa analogue). Existing infrastructure should also be adapted to the new realities.
Also, the digital currency should be able to easily exchange on the other currencies. Independence may be good, but isolation is hardly useful.
Taking into account these preconditions, it has to be a really good moment to launch a national cryptocurrency. Perhaps we won’t see national cryptocurrencies at all and there will be digital state money which hardly is called cryptocurrency.
One way or another, cash will step aside because the world is heading to a digital standard. We already live in a hybrid system where cash and digital money co-exist, and the latter gradually “wash out” the paper brother. The question is how much the future template of the digital national currency will look like cryptocurrencies and what will it borrow from them.
