Opinion: On the three major reasons for government cryptocurrency to replace banknotes

Some people say that cryptocurrency doesn't make sense, because this idea is not worth the time and effort. Some claim that cryptocurrencies will increase national transparency and help fight corruption. Someone immediately thought of the Central Bank's digital currency (CBDC) and immediately saw the "Big Brother's head".

But anyway, for now, we haven't created a template for some kind of government cryptocurrency (Statecoin).

As we all know, central banks in China, Sweden, Canada, Singapore, the United Kingdom and Norway are studying digital currency. But this idea is currently only in the discussion or testing phase. The reason is that central banks must overcome a serious crisis of survival in order to create an effective alternative to banknotes.

A good example is the statement issued by the Deputy President of the National Bank of Ukraine, Sergii Kholod, after testing e-hryvnia (Ukrainian National Digital Money Plan):

“Our research not only provides us with practical experience, but also raises new questions for the Ukrainian Bank (NBU). How this tool will affect the payment market ecosystem; whether users, suppliers and market participants have e-hryvnias Sufficient demand; what technology should we use; what level of anonymity should be involved in transactions involving e-hryvnias. Today, not only the NBU, but other central banks have no clear answer to these questions."

The question is, should the central bank's digital currency be an authoritative tool to control domestic capital flows, or should it be an e-government 2.0 that “improves” interaction between residents/banks/enterprises and the government?

Each country will answer these questions in its own way based on the purpose of creating such a currency and the transition to absolute digital currency.

Tax revolution

One of the reasons we use the national currency in mutual settlement is that we use this money to pay taxes. The government is likely to want to implement the government cryptocurrency (Statecoin) in the tax system to optimize the process. But how will they do this?

The principle of economic incentives will help them.

If paid in national cryptocurrency, the state can lower the tax rate. Moreover, it is not necessarily all taxes, it can start with a tax of strategic importance, which pays most of its business, such as value added tax (VAT). After that, it is possible to switch to other indirect taxes, then direct taxes. If the company believes that using the national cryptocurrency is economically viable, then it can be used instead.

A similar mechanism applies to taxes that have not yet been adapted to use Statecoin. For example, if a company uses Statecoin, the state can provide benefits, exempt certain fees, tax exemptions, and lower taxes on other taxes. When Statecoin is able to pay GST or income tax, the company will be obligated to pay in this way to maintain the discount and reduce the tax rate.

In addition to business, residents of this country also want to save in new currency. Therefore, the currencies of the two countries will be temporarily circulated (Hello, Bimetallic).

The government can use a fixed exchange rate or a floating exchange rate. The most likely scenario is that the first note and the digital currency will be 1:1 parity. But then the parity may be corrected. This amendment can be compared to the Chinese central bank's practice of formulating the exchange rate of the RMB against the US dollar to a certain extent. The first option is more ideal, that is, a gentle transition to a new currency.

The second method is to use it in the case of frequent impacts. If, in this case, the state does not turn to a floating exchange rate, then there will be a huge "real exchange rate" black market, such as Venezuela.

In the end, the government will work to “eliminate” the old currency and stimulate the use of the new currency. Previously, some countries also abandoned silver in a similar way and adopted the gold standard.

Why the government should do this : tax automation.

If most companies and most of the country's residents become part of the national cryptocurrency network, the government can automate the tax process. Taxes can be substituted for transaction costs and can be included in every transaction.

This will make the business of the entire country transparent, and the government can “see” every transaction and source of income (under certain conditions), quickly confiscate funds or block someone (if this option is provided).

In turn, interactions with the state are minimized in systems received by businesses and individuals, and corrupt components are reduced due to cross-observation.

So here are three results:

Transparent utopia

a dystopian with complete state control;

A system that works but is not widely used .

The first result is likely to be related to the third result. The question is whether the government wants to continue to improve its cryptocurrency.

Digital denomination

Economic history is not only about the eternal depreciation of money, but also about the eternal emergence of new currencies. Countries are constantly introducing a new currency, hoping it will be better than the previous currency. They just try to forget the failure of the past and move on.

The biggest failure was the Hungarian currency unit Pengo from 1925 to 1946, which faced the most terrible hyperinflation in history. On August 31, 1945, 1 dollar against 1320 pengo. But in less than a year, $1 can be exchanged for more than 40 billion pengos. After that, the new currency forint from Hungary was introduced and is still in use today.

It is worth noting that the new national currency is not just a legacy of the past, they even appear in our time. A recent example is the sovereign Bolivar launched by Venezuela on August 20, 2018.

But what if we go further and replace the national currency with Statecoin (not necessarily after hyperinflation)?

Venezuela embarked on this path, linking the newly created sovereign currency Bolivar to the oil.

I won't tell you how terrible oil is, you can read a lot of articles about oil coins. I just want to say that such a "cryptocurrency" is giving the digital currency a bad reputation and may cause other countries to lose the incentive to try a national cryptocurrency.

Why the government should do this : no sanctions and reduce the risk of money laundering.

If a certain type of atomic cross-chain swap is implemented in the national cryptocurrency, while exchanging other cbdc and cryptocurrencies is simple and fast, does this sound like a truly independent currency?

In the era of globalization, independence is sometimes very valuable.

With an absolute digital currency, we lose an important thing – cash. All funds are in digital form and will not be changed.

Sounds like a cool solution to reduce crime and the shadow economy. But at the same time, this is also very dangerous because it gives the state and the bank full power.

The concentrated digital currency raises many questions about the privacy, security and diversity of people's funds. In addition, residents in rural and remote areas do not have bank deposits and no money.

Of course, you can create a specific simulation of M-Pesa (Kenya's strongest electronic payment) as an alternative. This mobile phone-based transfer allows people without a bank account to make different transactions.

To use M-Pesa in Kenya, you need to create a special mobile account and redeem mobile credit in one of thousands of telecom booths. You only need one passport and one SIM card.

More than half of Kenya’s population has started using M-Pesa. This service is also popular in many other countries, such as Tanzania, South Africa, Mozambique, Lesotho and Egypt. This is all because of the low cost of mobile communications and the distrust of banks.

M-Pesa is more than just an ordinary money transfer service. With M-Pesa, you can pay for hospital bills, wages, utility bills and tuition. It also allows you to deposit and loan.

In any case, if the country or company creates something like M-Pesa, they are likely to get bank deposits in another way. If there is no more cash, there may be more ways because people are being forced to become part of the network.


How can a country nationalize a project without specific jurisdiction and consisting of many developers and users from different countries? How will this affect nodes and miners? Will a new client be started? Will some forks be needed? Too many questions increase doubts about the successful implementation of this idea.

But after seeing Facebook's decision and encryption projects in different places, nationalization seems to be no longer so strange, because there is an obvious "head" that can be cut off.

Why should the government do this: regain control.

Every government has a whisper to defend any action – "national security interests." If a company “dare” to compete with the country by creating its own currency, then the government can quickly trade with its competitors for “national security interests.”

If a company’s currency becomes more popular than its own currency, the government may nationalize the company as a structurally important bank to “prevent economic collapse” or otherwise affect the company. Get control. In the case of a company boycott, this is very likely, and we can expect an interesting confrontation.

The state must decide what is more beneficial to it. Keep the status quo, cut off the "head", or lead a certain digital currency ahead of competitors? Which is more in line with national security interests?

I believe that we will see it soon.

Lucky moment

Only when CBDC or “nationalized” cryptocurrency looks like a finished product can it effectively replace banknotes. It is not a prototype, nor a project that hopes to occupy the world, but a finished product. Today's cryptocurrency market is full of rudimentary and promising projects. Even Bitcoin can't be called a finished product. This is why the development of national cryptocurrencies takes a lot of time.

But if a country still wants to develop Statecoin, it is important to find a suitable time to replace it.

Although most currencies either appear after a new country is established or after a crisis, it may be better to replace banknotes as the economy grows steadily. This country must be able to overcome these changes, otherwise the oil coin may be a good example. For example, the transition to the gold standard occurred mainly during the second industrial revolution and strong economic growth.

Digital currency requires some infrastructure, such as easy access to the Internet or telecommunications networks (for M-Pesa simulation). Existing infrastructure should also adapt to new realities.

In addition, digital currencies should be able to easily exchange with other currencies. Independence may be a good thing, but isolation is almost useless.

With these prerequisites in mind, it is now a good time to introduce government cryptocurrencies. But maybe we won't see the government cryptocurrency at all, and it will probably be a government digital currency that is hardly called cryptocurrency.

In any case, cash will fall back because the world is moving towards digital standards. We have lived in a hybrid system where cash and digital currencies coexist, and digital currencies are gradually “eliminating” paper currency. The question is how much the future template for government digital currency will be similar to cryptocurrency and what it will borrow from cryptocurrency.

Author: Illia Otychenko

Compile: Sharing Finance Neo

Source: Sharing Finance