Russia is working on a government-run cryptocurrency. And they’re not alone.
But don’t expect a bunch of bitcoin clones. Governments have very different priorities, and decentralization — a main feature of most cryptocurrenices including bitcoin — doesn’t tend to be one of them. In fact, government digital currencies could herald a new era of centralization, posing serious questions about privacy and the viability of true cryptocurrencies like bitcoin.
There’s important differences between true cryptocurrencies and what are generally called “centralized digital currencies” (CDCs). One of the main qualities — if not the central feature — of cryptocurrencies is that they’re decentralized. This means no single person, government, company, or group can control them. CDCs, on the other hand, are on the opposite end of the spectrum. They are as centralized as can be.
That centralization could provide governments with some world-changing capabilities — some good, some rather scary. There’s the upside of giving people a secure and cheap way to buy thing. There’s also serious privacy concerns, especially when talking about authoritarian countries.
Russia has, in particular, floated some interesting ideas around why it would want to introduce some form of government-led cryptocurrency. Details are scant, and it’s not clear if the “cryptoruble” would be a true cryptocurrency using decentralized ledger technology or if it could be mined. What is clear, however, is that Russia is interested in some sort of digital currency to get around international sanctions and possibly even allow the government to tax its sizable black markets.
“There have been two reactions from central governments. One is to try to figure out how to regulate the darn things, and the other is, do we figure out how to make our own?” said Paul Triolo, head of geotechnology at the Eurasia Group. “2017 was sort of a watershed year in that 2017 saw the regulatory response globally really pick up.”
The technology behind digital cash isn’t new in concept of execution. Long before Venmo had become a verb, companies were working toward entirely digital transactions.
Adoption wasn’t terribly quick or widespread. Nor were the systems that emerged to service digital transactions terribly efficient or cheap. Governments and banks weren’t in any hurry to adopt this tech since nobody else was either.
Then bitcoin happened. The explosion of BTC and other cryptocurrencies have forced governments to take a look at just what these technologies mean for the future of commerce, finance, and centralized authority over the creation and movement of money.
Jacob Eliosoff, founder of cryptocurrency investment fund Calibrated Markets, said governments are now seeing the benefits of this technology but are also going to need time to understand it.
“In principle there could be various benefits: the simple efficiency of instant global electronic transactions, preventing counterfeiting, better record-keeping and monitoring of transactions, no printing press, etc,” Eliosoff wrote in an email. “But also right now some governments, like some companies, are probably just dazzled by the hype and making stuff up so as not to get left behind.”
There’s also some larger conceptual issues at play here. Bitcoin has proven that it’s possible to create money outside of government-based financial systems. Ole Bjerg, an associate professor in at Copenhagen Business School, said this is forcing governments and central banks to ask tough questions about their role in the economies of the future.
“What bitcoin has done is it’s sort of made a lot of people aware that you can actually create money in new ways,” Bjerg said.
By many definitions, digital currencies backed, issued, and tracked by a government or central bank would not be a cryptocurrency.
“To many of us Bitcoiners, the essence of ‘crypto’ is decentralization: a currency that no person or institution owns or controls, so no one can take it from you or prevent you from sending it, or print it at will,” Eliosoff wrote. “Countries like Denmark have been moving towards cashless societies since before Bitcoin existed, but of course those are still centrally managed currencies. You don’t have to be against fiat per se (I’m not) to see it as fundamentally different from cryptocurrencies.”
To some, the question of what is and isn’t a cryptocurrency is besides the point. The mechanism is just a detail.
“The main point is you can have digital money which is a liability with a central bank rather than a private bank. Whether you do that with a blockchain or you do it with a database doesn’t make much of a difference,” Bjerg said.
Why should I care?
There’s a very simple reason a government digital currency could be good for you.
It’ll save you money.
Andrew Levin, a professor of economics at Dartmouth College, said digital currencies could cut out middlemen and banks, meaning fewer people taking a cut out of transactions.
“One important reason for trying to move ahead with a central bank digital currency is to create a payment system that is essentially free for consumers and businesses,” Levin said.
If you have a debit card, there’s a good chance it says some combination of MasterCard, Visa, Bank of America, Wells Fargo, or any variety of other companies. They’re not providing that service out of the goodness of their hearts. They make money when you use that card.
Under the new system, you’d pay with money directly held by the government (or really a country’s central bank) through what some call a “Centralized Digital Currency,” or CDC.
With a CDC, you’d have a card but it wouldn’t say any of those companies. It would say probably say “U.S. Federal Reserve” — the U.S. central bank. It wouldn’t take any cut, and the U.S. government is much less likely than a bank to go under and take your cash with it.
A CDC, then, is the functional equivalent to using cash, with one big caveat that we’ll get to shortly.
Even the economists are getting excited
There’s a good reason that economists have been getting excited about CDCs.
Governments control the economy through central banks. In the U.S., that’s the Federal Reserve a.k.a the Fed. The Fed controls the economy through a relatively arcane system in which it tweaks interest rates to control the money supply. It’s a multi-step process that attempts to influence spending and saving behavior by consumers and businesses. But since financial resources are held by private institutions, the ultimate effects of the Fed’s decisions are filtered through these other organizations.
The major upside of a CDC is that central banks would be able to directly change the interest rates on the currency, meaning it’s incentives for saving and spending would pack a much bigger punch. And not just that, it could easily turn the interest rate negative — something central banks can’t really do now — when it really needed to stimulate growth.
After the financial crisis and the ensuing global economic slowdown, these measures did not prove terribly effective at stimulating growth. Central banks did what they could, lowering interest rates about as much as they could in order to try to goose their economies.
Giving central banks the ability to aggressively push the economy through control of a digital currency would make a major difference in peoples’ lives, Levin said.
“This has been a very long slow painful recovery that’s been very painful for lots of normal households. Normal American families have really suffered for the last ten years and part of the reason for that is that the Federal Reserve was constrained,” he said.
Imagine that the financial crisis was just a speed bump instead of a giant crater that the U.S. (and really the world) is just barely climbing out of. That’s the kind of promise that some economists think CDCs could deliver on.
OK, so what are the downsides?
There’s two main drawbacks here.
The first is that the promise of decentralization isn’t just negated by a central digital currency; a CDC is even more centralized than the existing system. For people who believe that decentralization is a good thing that will free people from dependence on governments and big companies,
The other main drawback is privacy. Cash is anonymous, giving people a certain amount of freedom to spend money without having to worry about explaining their actions.
A CDC would conceivably remove any and all privacy from your spending (at least as far as hiding it from the government).
“This sounds glib, but many of us would argue that untraceable transactions are actually an important civil liberty which cryptocurrency enables, but digital fiat impairs,” Eliosoff wrote.
Russia’s nefarious goals for its cryptocurrencies point to how governments around the world could start embracing digital currencies for their own ends both good and bad. Meanwhile, countries like Russia and China — two of the countries most aggressively pursuing their own digital currencies — are the ones cracking down hardest on bitcoin and other distributed currencies.
In the near future, not much will change. Governments don’t tend to move quickly. There will be any number of tests to see how this could work, as some countries have done with ideas like a minimum basic income.
They could, however, be forced to adapt if cryptocurrencies begin to offer a real, viable alternative to the existing financial system. There’s plenty of blockchain enthusiasts who believe that’s just a matter of time, though it could be a while.