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Why Governments Are Exploring Their Own Cryptocurrencies

January 18th, 2018

Regulating the Cryptocurrency

With the collective cryptocurrency market approaching $1 trillion in market capitalization, it’s hard to argue that cryptocurrency and the technology that powers it, blockchain, haven’t been the innovation of the decade. Although the cryptocurrency market is unregulated, with various securities commissions and central banks advising people against cryptocurrencies because of the huge risk they present, it turns out some governments are exploring the possibility of issuing their own cryptocurrencies. Sweden, Estonia, Japan, United States, China, Venezuela and a few others have talked about the idea of having their own cryptocurrency. Given the stance they had taken regarding cryptocurrencies, it’s okay to wonder why governments are interested in creating their own cryptocurrencies. Let’s try to debunk it.

Cryptocurrency Is the Future of Money

Yes, we know that’s a bold call. You’d understand why cryptocurrencies are the future of money if you look into the evolution of money. Here’s a brief look into it.

First, it’s important to understand that two of the most important and popular use of money are a medium of exchange of value and store of wealth. However, it wasn’t until about 3,000 years ago that any form of money surfaced. Before that time, commerce happened mainly by bartering, which simply means the exchange of goods or services between two or more parties without the use of money, in any form, as a medium of exchange. For example, imagine that you own five oranges and after eating three, you suddenly start to crave apples. Luckily, your friend sitting next to you has two extra apples and, coincidentally, he craves oranges too. What you’ll simply do is give him the two oranges you have left in exchange for his two apples. That’s essentially how bartering works and that’s fundamentally how commerce happened before any form of money was ever developed.

The problem with bartering, however, was that it depended on the coincidence of want as in the example above. In order words, your friend needs to want what you have and vice versa. If you want what your friend has, but your friend doesn’t want what you have, the way it was done was to seek out someone who has what your friend wants and want what you have. You’d then go ahead and exchange with your friend.

This system of commerce was simply not effective and it inhibited economic growth. This led to the development of money, which first took the form of miniature weapons casted in bronze and kept on evolving until the paper money you spend today.

As shown in the move from bartering as the main tool of commerce to money, each form of money that ever existed was developed to make it more efficient to transfer value and accommodate the realities of each economic era. This is exactly what happened when the digital era saw the birth of digitized paper money put into credit cards and debit cards. As the internet grew as a platform for commerce, there was a need for a more effective medium to exchange value to transact with someone you can’t see. Paper money wasn’t effective, but paper money put into credit and debit cards were effective.

However, credit card doesn’t give the same experience as transacting with physical money. With physical money transactions, you simply buy your groceries pay the storeowner with cash and go your way. Period. But with digitized paper money (credit and debit cards), the money has to go through several intermediaries, all of whom get a share of the money, before the seller receives it.

Developers of cryptocurrencies found that it’s possible to replicate the instantaneous experience of physical cash transaction with a new type of money that is decentralized, hence making it cheaper than transacting with digitized paper money.

The basic idea of cryptocurrencies is to send money directly to your friend in the presence of a lot of witnesses, who are referred to as miners in the cryptocurrency world. The fact that you can send money to anyone directly without an intermediary makes doing commerce on the internet theoretically more effective.

McKinsey found that the internet accounted for about 21 percent of GDP growth in mature economies between 2005 and 2010. This speaks to the importance of the internet to the global economy. Improving on the value of the internet guarantees even more economic growth. Cryptocurrency is a step in the right direction to increase the value of the internet.

Simply put, governments want to key into the value that cryptocurrencies bring to internet commerce.

The Use of Paper Money Is Declining

After thinking about how cryptocurrencies could make commerce in the digital era more efficient, another factor that serves as a motivation for governments to consider issuing their own national cryptocurrencies is the gradual decline in the use of paper money.

For example, In Sweden, cash transactions accounted for only 15 percent of the total transactions in 2016, according to Sweden’s central bank, Riksbank. Cash transactions were 40 percent of the total transactions in the country in 2010 and Riksbank estimates that cash transactions will make up only 0.5 percent of Sweden’s total transactions by 2020. In addition, Korea plans to stop minting coins by 2020 and 60 percent of internet users in China were using mobile payments in 2015.

The message from this is that the future of money is digital. If the future of money is digital, then it only makes sense for governments to seek out ways, which are more efficient, to use money in the digital economy. So far, cryptocurrencies are the leading contender.

One thing to note, though, is that the idea of a national cryptocurrency is still in the test phase. Venezuela, which announced the launch of its cryptocurrency “petro” is the closest we are to having a government issued cryptocurrency. For the rest, only time will tell if cryptocurrencies become a standard medium of exchange.