Central governments and cryptocurrency: an unlikely pairing? | The World Weekly
Cryptocurrency has been a growing phenomenon in recent years, facilitating anonymous peer-to-peer transactions without the involvement of any central authority. It is estimated that there are now at least three million active users of cryptocurrencies worldwide. Bitcoin, the first decentralised cryptocurrency of its kind, currently holds a total market value of around $250 billion.
The rise of cryptocurrencies has been a contentious one. Critics say high levels of anonymity facilitate criminal activities such as money laundering, tax evasion and terrorist financing. Others cite the instability of currencies such as bitcoin, which have experienced high price volatility.
Yet, experts praise the decentralised method of record-keeping, or the blockchain technology, that underlies cryptocurrencies. Many governments and central banks are exploring how such technology could improve the efficiency, security and cost effectiveness of national financial industries.
An unlikely pioneer on the scene revealed himself last Sunday. President Nicolás Maduro of Venezuela announced the creation of the country’s very own cryptocurrency, the “petro”. The decentralised nature of the currency could allow the government to circumvent international sanctions, enforced through banking regulations.
The development also looks to sidestep the catastrophic weakness of Venezuela’s national currency, the bolívar, which lost more than 97% of its value against the dollar in 2017. Banknotes, as well as basic food and medicines, are hard to come by for the majority of Venezuelans.
“Venezuela is in a very, very deep economic hole,” Phil Gunson, senior analyst at Crisis Group, told The World Weekly. “Hyperinflation is around 2,000%. Foreign reserves are well below $10 billion, and the productive economy - what’s left of it - is virtually in pieces.”
Could the creation of the 'petro' constitute a modern, pragmatic step towards solving the country’s economic woes? Venezuelan opposition leaders and many economists around the world do not seem to think so.
“This is, in essence, a way for the government to carry on postponing the day when its entire financial structure collapses,” says Mr. Gunson.
Despite the criticism, the government will officially launch the 'petro' on January 14, available for sale shortly after. One hundred million units of the currency will go into circulation, with a total value of over $5.9 billion.
The cryptocurrency that isn’t
Unlike many existing cryptocurrencies, the 'petro' will be issued by a centralised entity - the Venezuelan government - and backed by material commodities. Each unit of the currency will correspond to one barrel of oil, supposedly utilising the natural wealth of the oil-rich country. However, many remain sceptical.
“Maduro’s plans are not for a cryptocurrency, but for a digital currency - the difference is important,” Monica de Bolle, senior fellow at the Peterson Institute for International Economics in Washington DC, told TWW. “Cryptos are issued in a decentralised fashion and are not backed by anything but the belief that they can be used and will be readily accepted for online transactions.”
Belief in the government-backed currency may be hard to muster in a country with high levels of corruption and what many observers see as increasingly authoritarian rule.
Trust is especially key in this case as the oil which will back the 'petro' remains underground, yet to be extracted. Oil production has dropped by almost 50% since President Maduro came to power, from three million to 1.6 million barrels a day.
Furthermore, many view the currency as technically unconstitutional. On Tuesday, Venezuela’s opposition-run Parliament declared the currency illegal, naming it an unlawful attempt to mortgage the country’s oil reserves. Legislators also cautioned investors that the currency would be invalid once Mr. Maduro loses power.
“Venezuela already has one currency that is widely recognised as inflated, distorted, and virtually worthless,” Tim Gill, a sociologist who specialises in Venezuelan affairs, told TWW. “I don't think many individuals or governments will be convinced that a second currency is somehow better.”
Nevertheless, Mr. Maduro is tapping into technology, or at least using terminology, that has excited economists and technology buffs the world over. The “petro” may elicit sceptical reactions, but government-backed crypto- or digital currencies of some sort are becoming a matter of serious contemplation.
A cashless society
The way people complete transactions is changing around the world. Payments are increasingly made electronically via credit and debit cards or mobile payment apps.
Take the example of Sweden. Swish, a Swedish peer-to-peer money transfer app, allows people to make payments to each other instantly and free of charge. The app “is used by over 50% of the country and is replacing cash which is down to around 2% of transactions by value,” Rod Garratt, professor of economics at the University of California, Santa Barbara, told TWW.
Sweden’s central bank is researching alternatives to cash payment. Its e-krona project explores the idea of supplying digital central bank money to the general public. Depending on the technology used, the e-krona could either take the form of a cryptocurrency or another type of digital currency.
In contrast, the development of J Coin in Japan aims to wean the public off their dependence on cash, which accounts for almost 65% of transactions. The digital currency would work much like fiat money with a one-to-one conversion rate with the yen, but payments would be made via smartphone apps and special barcodes.
In Russia, talk of a state-backed 'cryptorouble', a cryptocurrency issued and regulated by the Kremlin, continues to circulate. The currency is seen as a potentially useful tool for evading Western sanctions.
Elsewhere, the Bank of England has reported that issuing a digital currency on a distributed ledger, or blockchain, could add as much as 3% to a country’s economic output. Central banks in Canada are also looking into using some sort of government-backed crypto- or digital currency, either for retail use or limited to wholesale payments.
The central bank cryptocurrencies destined for retail use would “have the ability to duplicate the anonymity features of cash”, says Professor Garratt. The bank would decide the issuance of the currency but transactions would not necessarily have to be visible to central authorities once in circulation.
The added anonymity and security which blockchain technology offers is ever more appealing to consumers in an age of identity theft and increasingly sophisticated cyber attacks.
However, the potential for central banks to lose their function as financial intermediaries and for criminality to occur as a result of heightened anonymity complicates the issue.
Silk Road serves as one example. The online marketplace, notorious for its sale of drugs and other illegal goods, used a Bitcoin-based payment system to hide the identities and locations of those accessing the site.
“The point is governments need to learn what people in their countries desire in terms of the properties of money and then balance these desires against other social concerns,” says Professor Garratt.
An incongruous collaboration?
An inherent contradiction lies at the heart of the discussion. Bitcoin and its fellow cryptocurrencies fundamentally undermine one of the most powerful tools of governments: the power to control monetary systems.
As governments, banks, and financial institutions look to harness the underlying technology of cryptocurrencies for their own needs, they may well find a way to adapt its foundational premises without relinquishing their power.
Observers see it as unlikely that the Venezuelan “petro” will provide a model for other nations to follow. However, President Maduro has cottoned on to a major trend in the financial world.
As a government-backed cryptocurrency issued for general public use, the “petro” may be the first of its kind but, perhaps, it will not be the last.