Since its release just over nine years ago, Bitcoin has surpassed a vast number of expectations and milestones. Early supporters of the project – predominantly hardcore cryptography fans – rejoiced when in February 2011 the cryptocurrency reached US dollar parity. Fast forward to the closing days of 2017 and we see values sitting comfortably above $10,000.
This has only fuelled the ongoing hype surrounding Bitcoin and other big cryptocurrencies such as Ethereum or Ripple’s XRP. The rise of these technologies has paved the way for claims that virtual currencies will revolutionise the way we pay for goods and services. Some go even further to predict the approaching decline of fiat currencies in favour of ones supported by blockchain technology.
Major governments and central banks have even begun to signal interest in launching their own blockchain initiatives. This is a potential spanner in the works for many seasoned users of the technology who value cryptocurrencies as decentralised digital assets. Although transactions made using these technologies are traceable and once verified cannot be changed, they do offer pseudonymity which is exploited by organised criminals, amongst others. This gaping regulatory black hole brought with the explosion of crypto has been a technical challenge for law enforcement agencies. If a legislative crackdown is insufficient in tackling this issue, attracting cryptocurrency users to a government-approved asset may seem tempting from a policymaker’s perspective.
But to many, the notion of government-backed cryptocurrencies is a paradox in itself. Attempting to rein in an entity designed to be decentralised is a daunting task; especially considering the daily new arrivals to a market with somewhat low barriers to entry.
In order to successfully entice users to take part in any state initiative at the expense of other cryptocurrencies, legislative endorsement alone is unlikely to be enough. If central banks are sincere about pushing a cryptocurrency of their own, an aggressive tightening of regulations to discourage competitors is expected. Yet this approach will only bear fruit if it is part of an international drive towards virtual currency regulatory compliance. But a government-approved offering that seeks to overthrow the likes of Bitcoin or Ethereum seems improbable – at least in the near future.
There are other driving factors behind Central Banks’ experiments with virtual currencies. One of the main reasons is to harness the technology behind cryptocurrencies in order to facilitate a more streamlined method of payments. This is evidenced by the Swedish Riksbank’s on-going ‘e-krona’ project, which many regard to potentially be ‘the world’s first major government cryptocurrency’. While the e-krona is still in its conceptual phase, many of the ideas behind it go some way to answering the question of what a state-backed virtual currency might look like.
At a glance, the proposed e-krona as it currently stands has very little in common with traditional cryptocurrencies. A main feature is that it will represent a direct claim on the Riksbank. Another is that the virtual currency is intended to be for smaller payments. These two characteristics alone demonstrate Riksbank’s keenness to draw a line between the e-krona and cryptocurrencies like Bitcoin, and to focus on domestic issues such as decreasing cash usage in Sweden.
A similar picture can be seen in other government initiatives. The People’s Bank of China plans for its future digital currency to expand financial services beyond its wealthy coastal regions, and to use the technology for gathering data to guide monetary policy. The Bank of Israel hopes its cryptocurrency initiative may help it reduce cash supply in order to combat its black economy problem. More recently, Venezuela’s proposed Petro, tied to the country’s unexploited raw materials, is seen by some as a thinly-veiled attempt to address its foreign exchange crisis and potentially avoid US sanctions.
All in all, the current climate points towards states seeking to digitalise their own currencies rather than aggressively encroaching upon existing cryptocurrencies. The hurdles that central banks across the world would have to overcome to compete with truly decentralised virtual currencies will persist – due to their intrinsic borderless nature. It is no surprise, then, that countries such as Russia, China or South Korea are rumoured to be backtracking on their preemptively strict regulatory stance.
Whatever the future holds for international regulation of cryptocurrencies, there is one certainty: governments and central banks are hoping to capitalise on the benefits of a virtual currency. While this may comfort its advocates who predict a future dominated by digital money, for now it seems that state-backed cryptocurrencies will simply be a digital extension of their respective fiat counterpart.
At the current pace, then, it seems unlikely that the world will see governments make significant strides into the world of digital currencies this year. The cryptocurrency market is one that changes with incredible pace, both in terms of size and technological innovation. This alone suggests it would be wise for central banks to continue monitoring movements as some have done, as well as conducting further research before launching their own offerings. At worst, failure to do so could bring about major security breaches for governments. And should the global regulatory black hole persist, these risks will only become higher and difficulties with organised crime will also intensify.
But all of these assumptions rest upon the survival of the cryptocurrency market. As 2018 ushers in a greater focus on regulatory catch up, digital currency investors’ FOMO–Fear Of Missing Out–will meet its greatest test yet. If faced with a comprehensive, global approach to regulation, the already volatile market may become even more fragile.