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Sovereign digital currencies: Tech speak or viable concept

Publication Date: 19 Apr 2018 - By Market Mogul By Market M.

Cryptocurrencies UK China EU Asia ex-China Middle East USA


Centralised Cryptocurrencies

The global crypto and blockchain community will be offended by the mere mention of a centralised cryptocurrency. It might sound crazy but it’s certainly something to look into.

Being able to use cryptocurrencies such as Bitcoin for everyday payments has been the objective of many start-ups around the world. The problem is that Bitcoin and other cryptocurrencies are not yet ‘stable’ enough to be used as a viable currency for everyday payments or purchases. With Bitcoin wildly fluctuating between $7,000 and $12,000 in recent months and occasionally peaking at $20K or dropping way below $10K in 2017/18, price swings of this magnitude cannot be easily absorbed by the average consumer. 

Transferred to the real world, buying a cup of coffee with Bitcoin would either mean a huge profit or big loss for the vendor, depending on the hour and minute of the day. Conversely, the consumer would either be overcharged or undercharged depending on which part of the day that cup of coffee is consumed.

For all intents and purposes, Bitcoin (or Bitcoin Cash for that matter) and most other cryptocurrencies could not be used as ‘real money’ because of the instability and multi-digit ‘numerical’ characteristic of cryptocurrencies.

In simple terms, if a regular cup of coffee in New York costs about $2, how would this be converted into Bitcoin? At the current Bitcoin price of around $8,000 (rounded value on 16/04/18), the coffee vendor would have to charge BTC 0.00025 per cup, and this price would change by the minute. When using a credit card to pay in Bitcoin, the variable price calculation would be automatic, however the vendor would have to adjust their coffee cup price as well as the price display continuously. For consumers, prices behind the comma are very unusual, to say the least, and also not practical in remembering the cost of any item. People are just used to counting in pennies and dollars, pounds and pence, cents and euros or whatever other currency that is used. 

Consumers also use a currency as a measure of value, for example when shopping for food or consumer goods, and therefore that currency functions as a unit of account. That’s why is just easier to display prices in multiple digits before a comma and only 2 digits behind. 

Conversely, it would indeed be very strange and awkward if a cup of coffee would be charged, for example, at a price of $2,14986, and could only be paid for in cash with 2 dollars and 15 cents of real physical money (rounding up). Currently, Bitcoin and almost all other cryptocurrencies do not have the stability and fundamental attributes of government-issued currencies and as such are not yet a viable alternative to real money issued by central banks.

However, some asset-backed cryptocurrencies such as DGX (Digix Gold tokens) and DGD (Digix DAO tokens) not only survived but outperformed the January 2018 crypto market ‘mini-crash’ and current on-going downtrend.

This has spurred on the current ICO race to develop asset-backed digital currencies or tokens, of which the most promising seem to be Tether, Havven and Freedium, which intend to issue ‘stable coins‘ that are – as the name implies – stable enough to be used as currency for daily transactions and everyday cryptocurrency purchases via a decentralised payment network.

A stable coin – the holy grail of cryptocurrency – is a digital currency that is pegged to another stable asset, like gold or the U.S. dollar. It’s a currency that is global but is not tied to a central bank and has low volatility. This allows for practical usage of using cryptocurrency, like paying for things every single day. 

Developing state-issued coins or digital currencies could be very beneficial to cryptocurrencies and the entire “crypto-economics” that comes with it. 

Virtual Money vs. Real Money

“All money is an illusion.” – Mr Jon Matonis

In 2012, the European Central Bank defined a virtual currency as a “type of unregulated, digital money which is issued and usually controlled by its developers, used and accepted among the members of a specific virtual community”. 

The US Department of Treasury defined it as a “medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency”. 

The jury is still out on the exact definition of virtual currencies, however one thing is for sure – they’re not yet legal tender in most countries around the world, with the exception of Japan and Australia that adopted legislation to make cryptocurrencies legal tender.

And even the current definition of “legal tender” is being disputed, with the new term “permissive” being put forward as the correct alternative definition.

It will take time and probably high-level decision-making at the UN, IMF and World Bank to agree on a unified and globally accepted definition, as well as legal status of cryptocurrencies.

Central Banks and E-money

The main difference between fiat, electronic money (e-money for short) and digital money (cryptocurrency) is government and central bank control.

Whereas cryptocurrencies are digital only and borderless, national currencies – in digital or physical form – are controlled and confined within the country’s own borders, and as such, are controlled by its government and central bank (economic and monetary unions such as the Euro and East Caribbean dollar are some examples of the exemption, however these are also controlled by a central bank, with the latter being pegged to the US dollar since 1976).

This gives governments such as the United States great power and influence, because the mighty US dollar is used in more than half of all global financial transactions (the dark number of illegal or criminal dollar transactions is unknown) and about three times the reserve currency held by foreign governments, central banks and financial institutions (an estimated 64% of all known foreign exchange reserves).

Economist Paul Samuelson and others (including Milton Friedman prior to his death) have argued that the overseas demand for dollars allows the United States to maintain persistent trade deficits without causing the value of the currency to depreciate or the flow of trade to readjust. But Samuelson stated in 2005 that at some uncertain future period these pressures would precipitate a run against the U.S. dollar, with serious global financial consequences.

So is central bank control better – and safer for the global economy – than a peer-to-peer controlled cryptocurrency?

The jury is still out on this one, as well as many economists, arguing that there are benefits and risks on both sides of the equation. A stable national currency controlled by a government and central bank is good for commerce and trade and the economy in general, whereas others argue that cryptocurrencies will soon replace fiat currency around the world.

Another issue is convertibility – Bitcoin diehards tend to not admit but everyone still measures their crypto holdings in fiat money.

This is because fiat – that is, ‘real money’ – pays for everyday needs and requirements. It’s tangible, can be easily carried around or transferred electronically and is convenient to pay for purchases in everyday life.

Cryptocurrencies, by comparison, could be vulnerable to hackers (however this has not happened yet) or not accessible for a certain period of time in case of a cyber attack, power blackout or communications lines (internet, mobile, landline) being down or interrupted. 

Hacking up to now has only involved vulnerable exchanges that have been hit by cyberattacks and theft. The record to date is the massive $533m hackers managed to steal from the Tokyo-based cryptocurrency exchange ‘Coincheck’.

Other hacks and thefts are sure to follow – it’s only a matter of time. 

SDC – Sovereign Digital Currency

The concept of a cryptocurrency being issued by a government is being considered in many countries around the world, notably Japan, Russia and Estonia. Even banks and financial institutions worldwide are planning to launch coins of their own. ‘J-coin”’is a new national digital currency being launched by a consortium of Japanese banks, led by Mizuho Financial Group and Japan Post Bank, with the launch to coincide with the Tokyo 2020 Olympics. Estonia is also planning to launch its own government-backed cryptocurrency called ‘Estcoin’ through an ICO (Initial Coin Offering). 

Sweden is the most progressive in its aim to become the first cashless country in the world. Already now, more than 90% of payments are digital, using a credit card or bankcards. In many stores across Sweden, there are even signs displaying “No Cash”, which is something common for Swedes but usually a big surprise to visiting tourists. 

The “Riksbank” (Central Bank of Sweden) is planning to issue an electronic currency named “E-krona” which “is not to replace cash, but to act as a complement to it”. Monetary policy and financial stability are key issues that are still being examined by the Swedish government and central bank, as well as a digital complement to cash guaranteed by the State.

On this point, there’s a distinct difference between electronic money and digital money issued by a sovereign state. The first is a ‘digital complement’ to cash, whereas digital money, such as a sovereign coin, is digital money that in all likelihood will be issued and based on blockchain technology.

In this context, the term ‘sovereign’ is used in lieu of ‘national’ because in the hypothetical case of the EU deciding on and the ECB issuing a digital euro, it would be an agreement and consensus between 27 national governments.

In the meantime, Tether Inc has announced the launch of a ‘Euro-coin’ clone which is called EURT that is tradeable and transferable using Bitcoin blockchain and pegged 1-to-1 to the Euro currency.

Russia has been pre-emptive on this front and although Russian President Vladimir Putin has called for a complete ban on all cryptocurrencies within Russia, he has officially announced that Russia will issue its own ‘CryptoRuble’ which cannot be “mined” and will be issued and controlled by the Russian authorities.

Once issued, CryptoRubles will be exchangeable for regular Rubles, however if the holder cannot explain the source or origin of his CryptoRuble deposits, a 13% tax will be levied.

Only recently, President Putin has decided on a timeframe for cryptocurrencies legislation, stating:

“This is the prerogative of the central bank at present and the central bank has sufficient authority so far. However, in broad terms, legislative regulation will be definitely required in future… It is known that the cryptocurrency is not backed by anything. It cannot be a store of value. No material valuables are behind it and it is not secured by anything, it can be a settlement medium to a certain degree and in certain situations. This is done quickly and efficiently.”

Across the world, economists, bankers, business leaders, political figures, governments, financial authorities and central banks are debating and contemplating on how to classify and regulate cryptocurrencies, or even banning them altogether. 

As with the advent of any new technology, there are always the doubters, critics and sceptics that prefer the status quo. Bitcoin took almost ten years to become mainstream and now almost 1,600 cryptocurrencies have been created and are traded on cryptocurrency exchanges worldwide.

According to the latest figures (18/04/18) provided by CoinMarketCap, the current market cap of cryptocurrencies is an astounding $334bn – of which Bitcoin has a dominant 41.1 % market share – with the rest shared by 1,577 cryptocurrencies that are traded on 10,288 markets globally with a daily volume reaching a massive $19bn.

There’s no longer any doubt that cryptos have achieved mainstream acceptance and are here to stay, and it’s only a matter of time before governments and central banks issue their own cryptocurrencies in the form of Sovereign Digital Currencies that are legal tender, stable and backed by the issuing State or Union (such as the EU).

Governments that are digitally deficient will be left behind in a global monetary system that in the near future will exchange digital value based on blockchain technology and Internet 3.0 – The Internet of Value.


The post Sovereign Digital Currencies: Tech Speak or Viable Concept? appeared first on The Market Mogul.


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