Economics

How Soon Before We See a Government Backed Crypto Coin?

For millennia, money drew its value from hard assets like gold, silver, and other commodities. The bearer currencies changed that.

How Soon Before We See a Government Backed Crypto Coin? 19.12.2017Leave a comment
How Soon Before We See a Government Backed Crypto Coin?

Today, the fiat money, the one issued by our central banks, draws its value from a promise that the government makes. However, its value changes, and the government has a near god-like power on whether the money loses its value or gains it, and by how much. The advent of cryptocurrencies has brought about the biggest paradigm shift in the definition of money that people have seen, maybe ever.

Something like bitcoin is 100% unregulated. The government has absolutely no control or say in what will be the value of one bitcoin tomorrow. Well, short of spending a bulk of its resources on buying lots of bitcoins and then controlling its availability in the market, there’s nothing the government can do.

Even if it does that, there’s no guarantee that the bitcoin’s price will not drop to $10 tomorrow, in which case any government that tried such an adventure will go bankrupt the very next day.

So, the solution? Well, they are doing everything from banning it to joining it.

New Era

Governments around the world have been caught off guard in the aftermath of the back-to-back launch of 1000+ cryptocurrencies in less than a decade. During the initial years, some governments, like China, took to prohibiting them. Some governments, such as the US and Canada, have accepted that they are here to stay.

Then there are some governments who are still trying to play cautiously, like India is doing at the moment. All of them have now learned that cryptocurrencies are going nowhere, whether they like it or not. And, they can’t stop billions of people freely transacting in cryptocurrencies, completely shielded away from the prying eyes of the government.

The current number of estimated active wallets
The current number of estimated active wallets

So, they came up with a crafty solution. Create a government-backed cryptocurrency of course. At least, that’s what appears to be the new philosophy of many governments.

How Soon Really?

None of the world’s governments have given a timeline on when they will be officially releasing their cryptocurrencies open to the public. However, Peter Smith, CEO of Blockchain, estimates that we are just a year and a half away from the launch of the world’s first government backed cryptocurrency.

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Peter Smith
Peter Smith

The first surest sign of governments jumping onto the blockchain bandwagon came from China earlier this year, when it announced that it has successfully completed the test run of a blockchain based digital currency. Then came the announcements from the countries like Japan, Sweden, and Estonia, who all confirmed that they are working on their own central bank controlled cryptocurrency.

Although there is much debate on whether a similar endeavor is being taken up by the Federal Reserve in the US, many industry experts feel that the US government will be releasing its own cryptocurrency in a few years’ time.

But, Why?

Just because people are using cryptocurrencies, does that mean that governments should also launch cryptocurrencies of their own? Even if they did, will people use it?

The insane popularity of cryptocurrencies has its basis in multiple factors. The primary draw of a currency like bitcoin is that it is a decentralized currency. No government or central bank has any authority over it. Its value is completely driven by market economics – demand and supply.

The supply is growing slowly, but will eventually stagnate. This will keep pushing the price of the bitcoin in the upward direction in the long term. The short term rise in price that bitcoin is currently experiencing is because of speculation. As the bubble bursts, the bitcoin prices will be slashed to a fraction of their present values in the medium term.

Bitcoin price
Bitcoin price

The uncertainty of a currency like bitcoin is definitely a problem for its long term adoption by the mainstream users. Yet, people are still ready to use it to keep their transactions private and protected from the government’s eyes. Sometimes, they could be doing something illegal. Sometimes, they could just be buying something that is absolutely harmless, but one that could attract censure, such as an adult toy.

In any case, the government cannot put restrictions on bitcoin transactions or track them as easily as they monitor bank transactions. For instance, any person could make international transactions using bitcoins without ever being part of the financial system – no bank accounts, no credit cards, no debit cards.

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Is any of this possible with a government backed cryptocurrency? No.

If there’s one thing that anybody knows about governments, it is their hunger for more surveillance and control. Naturally, they will put a myriad restrictions on who can make the transactions and when. They will also monitor and track every transaction ever made. In all probability, they will fix the value of the cryptocurrency against a fiat currency.

As these currencies will not appreciate significant in comparison to fiat currencies, they will not be able to attack the huge number of people who buy cryptocurrencies just to make quick profits.

So, no privacy, and no profits. Why the hell would anyone buy these digital currencies?

The answer is everyone if they are forced to do so! Doug Casey, one of the renowned cryptocurrency experts, who has an uncanny ability to predict everything crypto with high accuracy, thinks that the US government will not only create a cryptocurrency, but also force Americans to use them.

That’s after of course prohibiting bitcoin and similar cryptocurrencies altogether. While Doug’s views may sound closer to the conspiracy theories rather than to the market analysis, governments have shown time and again that they mean to seize every opportunity that is presented to them as far as public surveillance is concerned.

So, Is It All Doomsday For The Cryptocurrency Market? Well, not really.

Governments coming out with their own cryptocurrencies can have a transformative effect on the entire world. In fact, even one country launching a cryptocurrency can send huge ripples across the world. There are a myriad ways in which such a currency can transform the lives of the citizens.

  • For starters, the government will exercise an unprecedented level of control over their citizens. Not just in the conspiratory way, but in a good but questionable way too. They can prevent fat people from buying sugar, perhaps with their consent;
  • prevent offenders from buying weapons;
  • even prevent the people subsisting on food stamps from purchasing, say marijuana, which is already a policy even in states where marijuana is legal.

There is no question that the government will be able to do a lot of good if it gets a higher degree of control on its citizen’s finances. However, as multiple leaks by the likes of Snowden and Manning have proved repeatedly, the government doesn’t always do a great job of protecting its citizens from itself.

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So, having that kind of control over the entire country’s population’s finances sounds dystopian. So, a lot of discussion needs to happen on this front.

The Economy Bleeds

Once a government launches its own cryptocurrency, it will not only ban other cryptocurrencies, but get rid of the fiat currency as well. With hard cash to spend, people will be forced to transact using only a digital currency. Bye-bye privacy.

But, such a move will hurt the unorganized sector tremendously. Small businesses that mostly deal in cash, such as hair salons, food trucks, art and craft show vendors, and others, may get destroyed if the government begins to extract taxes from them. These kinds of businesses offer legitimate services. They are major contributors to the economies of all countries.

As they deal mostly in cash, they underreport their revenues, which leaves enough money with them to eke out a decent living. Take 30-40% of that away, and it becomes a struggle for them to survive. If they increase their prices, the cost of almost everything around will increase, which is bad for everyone. If they do not change their price, then their businesses go downhill.

Skirting around tax payments is not an ideal thing either. So, a more practical solution needs to be formulated by the governments to address their concerns before they implement a nationwide single cryptocurrency.

Final Thoughts

A central bank issued cryptocurrency is only a dozen months or two away from becoming a reality. So, there’s a need for a conversation on all of these issues before it hits everyone like a shovel in the face. It is important to keep the cryptocurrency community alive and kicking.

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