As Bitcoin continues to reach new price records, investors are paying more and more attention to it. At the same time, the proliferation of cryptocurrencies has not gone unnoticed by the world’s governments either. The initial reaction has been mixed. Some were early to regulate them, with the U.S. government classifying bitcoin as a convertible decentralized virtual currency in 2013. Others, like Nepal and Ecuador, have made it illegal. In most countries, however, cryptocurrencies still exist in a legal vacuum.
Many governments are now understanding that cryptocurrencies are not a passing phenomenon but could permanently disrupt the world’s financial structure. For that reason, they are developing “national cryptocurrencies” that can gradually replace fiat currencies.
Here is a brief overview of developments in a selection of countries:
- Russia – In October Russia announced that it will issue the CryptoRuble, which cannot be mined and which is controlled by the Russian government.
- China – After cracking down on Bitcoin exchanges last September, the Chinese government has announced plans to introduce a national cryptocurrency.
- India – The Indian government has repeatedly warned its population on the volatility risks posed by cryptocurrencies. Despite that, the Reserve Bank of India is reportedly studying the introduction of a digital currency to replace the rupee in online transactions.
- Singapore – The Monetary Authority of Singapore has already implemented the first phase in tokenizing the Singaporean Dollar using a private Ethereum blockchain.
- Venezuela – On December 4th Venezuela announced it would soon begin to issue the “Petro”, a national cryptocurrency backed by the country’s oil, gold and gas reserves.
- Estonia – Estonia, one of the world’s most tech-savvy countries, has proposed to launch a national cryptocurrency called the “Estcoin”.
- Kyrgyzstan – Kyrgyzstan, a major gold producer, is planning to launch a gold-backed cryptocurrency called “GoldenRock”.
- Catalonia – Although an integral part of Spain, the autonomous region is thinking to introduce its own digital currency if and when it achieves independence. The local government would model it based on Estonia’s “Estcoin” project.
The advantages of using cryptocurrency instead of fiat money for both individuals and governments are multiple:* Hedging Inflation –
With a limited issuance structure embedded in the blockchain, cryptocurrencies tend to be disinflationary by nature. It is not a coincidence that in countries suffering from hyperinflation, notably Venezuela and Zimbabwe, they have become a more and more frequent means of payment.
Nicolas MaduroThe number of Venezuelan users has boomed from 450 in August 2014 to more than 100,000 currently. Some of the country’s merchants are now exclusively accepting Bitcoin as a form of payment. Venezuela’s cheap electricity, due to its collapsing currency value, has also led to a boom in Bitcoin mining operations. In Zimbabwe, strong demand has brought a premium in local Bitcoin prices of up to 70% above the global average.* Reducing Transaction Costs –
Digital currency money transfers are virtually instantaneous, commission-free and error-free due to the blockchain.* Improving Tax Collection Efforts –
Governments would be able to supervise all payments generated in the private sector and tax them accordingly. This would boost government revenues, reduce regulation costs and decrease the size of tax evasion and the black market economy. Bitcoin has come under pressure in various countries due to its association with money laundering and tax evasion. Creating a cryptocurrency under government control would, therefore, enable a country to benefit from the advantages of Bitcoin while eliminating its potential economic and social risks.* Eliminating Fraud & Counterfeiting –
It is not possible to counterfeit a cryptocurrency which is based on the blockchain. This makes financial fraud almost impossible, reducing the policing costs of governments.
Overall, it seems like the global race to digitalise currencies is in its beginning phases. Countries are realising that whoever first creates a viable national cryptocurrency will reap the benefits of increased investor interest, new investments and a technological first-mover advantage. More and more of these initiatives can be expected in the future, as the popularity of Bitcoin and cryptocurrrencies continues to rise.