By Sergey Yakubanets
June 8th, 2018

National cryptocurrency: utopia or reality?

What is the point and is it feasible?

Bitcoin and other cryptocurrencies were intended to be government-independent money. And yet nowadays some governments plan to launch their own national cryptocurrencies. What is the point and is it feasible? ICONIC co-founder and managing partner, Sergey Yakubanets, is answering these puzzling question

From skirting sanctions to building an ecosystem

While the goal of traditional currency emission is the same for all countries with their own cryptocurrency, and it is to maintain essential to the national economy level of money supply, the benefits from cryptocurrency issuing might differ from country to country.

For some, for instance Venezuela, it is the way to overcome the financial crisis and strengthen the national economy. The President of Venezuela, Nicolas Maduro, claimed that the government had succeeded to attract several billion dollars during the pre-sale of Petro cryptocurrency, the connected to oil cryptocurrency. Venezuela also plans to release another cryptocurrency, which will be pegged to the price of gold. By such measures the country attempts to skirt the U.S. imposed sanctions that make foreign investments to national budget impossible, for example by sanctioning government bonds listing on global capital markets.

Despite the official announcements that the tokens are backed by national oil reserves, in fact it is not true. According to the released white paper, the exchange of Petro to venezuelan oil is not meant to be. The venezuelan government took an obligation to accept tokens as a payment method for public services (for example, taxes and customs), and the official price of the token will be determined in bolivars by formula that takes into account the oil price and Petro market price. Considering the difference between the official and real bolivar exchange rate, it is evident that Petro is backed up by nothing. At the same time Petro is pegged to the oil price and in a way Petro is a harder currency than bolivar. But in general, the token issuing should be considered as a desperate Maduro’s attempt to attract the currency liquidity to the country and provide citizens with a harder currency.

Following the venezuelan cryptocurrency presale opening, on the next day the Iranian government announced their plans to issue its own national cryptocurrency. Two days after the Petro’s launch, local news outlet reported that Turkey’s Nationalist Movement Party issued a report on regulating crypto market, where the possibility of launching “national Bitcoin” named Turkcoin was outlined. Previously,  turkish government officials have already claimed that they are ready to release a national cryptocurrency.

For other countries the cryptocurrency emission is a way to create an entire ecosystem and attract quality investments to the country. For example, Estonia that is planning its own cryptocurrency called Estcoin. The currency will be issued during the government ICO campaign. The funds raised by ICO are set to be managed through a Public Private Partnership, which will develop “digital nation”. Foreign investors will be able to receive digital ID, which allows to set up a company in the EU country in accordance with the simplified procedure. Estcoins will be used as a payment option for both public and private services in Estonia. Nevertheless, the officials highlighted that Estcoin will not become a national currency and it is not meant to replace the official currency, euro.

Some countries would like to release cryptocurrency to simplify and accelerate transaction processing. For example, the regulators from the United Arab Emirates and Saudi Arabia are reportedly launching cryptocurrency for cross-border payments. Also, the appearance of a new currency (cryptoruble) is planned in Russia.

Bringing out into the open

For countries with high level of ‘grey’ economy national cryptocurrency can serve as a way to increase economic transactions transparency. Passing through the case with cash сould remain unnoticable, but cryptocurrency transactions are easily traced.

Following that logic, China, despite its ban on cryptocurrencies within the country, plans to launch its own national cryptocurrency. People’s Bank of China claimed that new cryptocurrency will stand alongside with the official national currency, yuan. By implementing blockchain technology, Chinese government plans to cut down fraud and forgery, as well as lessen the corruption scale.

Chinese logic is clear: if to ban bitcoin, which is widely used for criminal activities, and launch a national cryptocurrency with government-controlled emission, all transactions with this currency will be transparent. However, there will be also a need to ban the anonymity of crypto wallets.

In December 2017 Israel was reportedly examining the possibility to create its own ‘digital shekel’, which was planned to be identical in value to the physical shekel, israeli national currency. Israel openly admits that the main goal of the launch would be to curb the black market use of cash that comprises 22% of Israel’s GDP. Officials hope that digital currency based on blockchain with transactions transparency will complicate black market operations.

With Russian last autumn announcement of crypto rubble plans, the goals remain unclear. Some officials claimed that the government has to provide citizens with more convenient in use digital currency in accordance with digital economy development plan. Others stated that the crypto rubble emission is a way to codify by law blockchain technology. At the same time, after all, some territorial entities of RF, like the Republic of Crimea, are under the U.S. sanctions. The sanctions are not as severe as in Venezuela, but still they complicate the fundraising processes.

Nevertheless, the Ministry of Communications has already prepared the project, in accordance with which the crypto rubble emission will be controlled by government, the mining will be impossible, and the ecosystem is to be set by private sector. Neither Russia nor China intent to recognize other cryptocurrencies. It is likely that the controlled currency transactions could become another source for budget replenishment. The officials have already stated that the gains from selling crypto rubble can be a subject for 13% income tax.

Future or utopia?

Will counties succeed in achieving the desired goals? Many factors will play a role. For example, with Venezuela a lot depends on what will be given to the national cryptocurrency buyer and how justified will be the risk. With no growth in economy and projects that back up cryptocurrency, and as a result no growth for cryptocurrency itself, the demand for it will depend mostly on speculative moods. Moreover, the U.S. can impose new sanctions against crypto market, which can have a negative impact on investments.

China and Israel in their fight with black market are unlikely to succeed until they decide to completely eradicate cash and the monetary regulations will be fully transferred to crypto economy. Then again, there is no doubt that even with total digitalization the criminals will be able to invent sophisticated methods to maintain ‘grey’ economy. At very least, however smart contracts will complicate fictitious transactions processing, but with enough organization of the network of placed middlemen and nominee bank account holders, the automated algorithms could even be useful to fraudsters. We do not have to look far to see the examples of transactions on the ‘grey’ market: all available to our fellow countrymen crypto exchanges are informal money transfer systems  (hawala) that offend anti-money laundering laws.

In countries like Estonia an attempt to create conceptually new market infrastructure that will be more flexible, liberal, competitive in comparison with neighbours, indeed might be successful.

As for the future of cash, it is safe to expect total abandonment of its use. The concern is in the timeframe prediction, as for full transfer to digital currencies not only the leaders of all countries should believe that it is promising (including the growth control efficiency and decline in power of small banks), but also all individuals should have all the necessary for transition tools and skills.

 

Sergey Yakubanets – Managing partner of ICONIC.VC