The appearance of Venezuela’s Petro, an early attempt to create a state-backed cryptocurrency, draws attention to several significant trends in the cryptocurrency space, trends both central to Petro’s larger story, yet also worthy of independent consideration. Commentaries on the Petro itself have too often struggled to explore the full range of relevant issues; many authors have done little more than obscure or distract from the central issues with superficial, even outright hysterical, detours. Yet the core trends underlying the project will remain integral to the industry's evolution, and merit consideration regardless of the Petro's fate. While Smith + Crown considers state-backed cryptocurrencies an inevitable and likely imminent development, we also anticipate that the ultimate form of such currencies will likely be somewhat tempered relative to many of the idealized or maximalist positions that have been proposed. Nevertheless, given the opportunities, implications and potential disruptions entailed, state-backed cryptocurrencies merit serious consideration.
States experimenting with cryptocurrency will need to grapple with several core issues: the fundamental nature and role of state-backed cryptocurrencies, questions of financial transparency as well as the role of asset-backed stablecoins in monetary policies, and the place of blockchain-based assets within and in relation to existing financial systems. On a more immediate level, several fundamental questions will determine the ultimate shape of these currencies, including:
- What particular form will a state-backed currency take? States currently setting independent monetary policy appear to have little to gain by adopting a truly decentralized, protocol-governed blockchain-based cryptocurrency. Doing so would considerably weaken or remove controls over monetary policy and it is difficult to imagine most states taking this step. States choosing to introduce a 'digital currency', secured on a blockchain and actively managed by central banks using existing policy tools, is a more plausible alternative. Significantly, this can still be expected to result in significant and disruptive impacts across a number of fields.
- Wholesale vs. retail currency? Will a particular state-backed cryptocurrency be a ‘wholesale’ product designed to modernize existing inter-bank transactions, or a ‘retail’ product designed for individual use and peer-to-peer transactions? This fundamentally impacts the design, nature, and complexity of a state-backed digital currency, and the features and applications available to different users.
- What is the new currency’s foundation of value? While the Petro introduced the idea of pegging the price of a state-backed cryptocurrency to the price of a physical commodity, the reality is that officially-sanctioned cryptocurrencies could be backed by physical resources, function more like a bond with a dedicated revenue stream, or simply exist as an unbacked digital version of a fiat currency.
All these questions have implications for governments, citizens, banks, and any entities touching the financial system. Equally, the question of the resources and expertise states will need, the plausible adoption paths, and the policy packages that need to be considered are core aspects of any discussion of such issues. These questions have yet to receive critical, comprehensive discussion, despite receiving considerable attention across a range of geographic and ideological perspectives. Both states evaluating the development of state-backed cryptocurrencies and individuals considering what the impacts of such efforts can be anticipated would be well served to look deeper.
When Tyler Winklevoss commented in 2013 that “we have elected to put our money and faith in a mathematical framework that is free of politics and human error,” he was professing a widely-shared perspective of many Bitcoin and cryptocurrency partisans. This view laments the lack of communication and disclosure from government officials and central bankers relative to the process of establishing monetary policy in particular and governing economies in general, decrying the economy’s exposure to policy makers’ poor judgements, misguided theories, and questionable values. Such arguments combine particular criticisms, directed at supposedly poor and unscientific policies, with more general concerns regarding what are seen are misguided central bank policies. These criticisms, heavily influenced by gold bugs and the accusations of 'hard money' advocates regarding government and central bank inability to resist the appeal of debasing monetary supplies in service of short-term objectives, see virtually no value in existing central bank-governed approaches to managing economies and monetary policy, instead championing the protocol-governed element of cryptocurrencies as the antidote to error-riddled nature of central banker decision-making.
While there is a positive component to such arguments in favor of cryptocurrencies, notably for the transparent, simple, inexpensive, and direct peer-to-peer nature of cryptocurrency transactions, as well as broader argument for a more fundamentally just and equitable system implied as virtually certain to emerge in a world of ubiquitous cryptocurrency usage, the overall worldview is effectively inseparable from a critique of existing systems as poorly-governed, unscientific, undisciplined, inflationary and even exploitative.
The obvious scientific and technological utopianism embedded in the above representation of blockchain-based systems as a panacea, effectively a sort of cure-all for a wide range of errors and problems, is also quite striking. Yet such descriptions can also appear decidedly overenthusiastic, especially from the perspective of 2018 and with knowledge of the thefts, hacks, debates, and disputed hard forks prominent in cryptocurrencies’ history. Without questioning blockchain’s extraordinary potential to impact a wide range of fields, reason and experience nevertheless suggests that the technology remains a fallible system, subject to hacks, failures and many of the same errors of human judgment the technology ostensibly seeks to replace. Despite all of this, the underlying sentiment that blockchain-based projects can meaningfully change the world still justifiably remains a compelling one.
Beyond being sympathetic to such views, we can also explore their emergence from particular contexts, such as that of 2009, for instance, when Bitcoin emerged only shortly after the Ben Bernanke-led Federal Reserve Bank (Fed) began ballooning the United States Dollar supply while bailing out the American financial sector. The Fed justified its actions as a studied, historically-informed, and expertise-driven response to exceptional conditions. Many found these explanations underwhelming, at best, partially explaining the emergence of widely resonating appeals for a more “scientific,” “rules-based,” and transparent approach to governing monetary policies.
Alarming as the above chart may be, the Fed, joined by many other thoughtful observers, would insist that their efforts prevented the national and global economies from falling into a far greater recession than was experienced in 2008-2009. While even those criticizing the Fed’s decision to print trillions likely would not have enjoyed the post 2009 period had the Fed not intervened as it did, considering the chart above helps appreciate the sentiments underpinning the (re)emergence of arguments calling for greater exercise of restraint, and greater transparency regarding the Fed’s core values and principles. Some of these arguments, when extended, call for a return of the gold standard or for re-imposing a form of ‘sound money’ ‘that cannot be diluted according to the mere whim of central bankers,’ and removing monetary policy from the imperfect world of incomplete human knowledge and subjective human efforts. Alarm at an economy straying from sound, transparent or democratic footing clearly motivates some arguments, and while such sentiments merit consideration, the actual prescriptions that too often emerge from such criticisms must also be considered somewhat suspect.
In particular, history strongly suggests that the gold standard’s restoration would be neither useful nor remotely desirable. While there is a certain nostalgic allure in appeals for the gold standard’s return--nostalgic appeals to idealized pasts being commonplace in times of turbulence or transition--the reality is that there is a decided lack of either originality or meaningful potential in such arguments. A limited historical detour illustrates why the gold standard has historically proven unworkable over the long-term. Such a detour also suggests key reasons to be skeptical of the arguments of crypto-advocates that adopting an algorithmically-governed blockchain based-system as the foundation of national money supplies will either meaningfully advance monetary policy or offer novel solutions to its challenges.
Historical Challenges of Fixed-Supply Monetary Regimes
Reflecting on how economies fared under the gold standard, the defining insight that emerges is how the relatively limited money supplies, which only grew in proportion to the supply of mined material, effectively served as a governor on economies, limiting growth and frequently engendering both popular and official frustration. Such systems’ inflexibility meant that gold standards were often oppressive or simply unworkable, and were generally highly prone to dramatic price swings if not outright failure, the result of authorities having few monetary tools at their disposal. Given the resemblance of the gold standard to protocol-governed, blockchain-based systems, also devoid of meaningful tools for responses to financial conditions and built around unalterable supply mechanisms, examples of how these shortcomings have been experienced throughout history can be a useful exercise.
One relevant example comes from the United States in the late 19th Century. Within a period of sustained low agricultural prices during the 1880’s, the People’s Party emerged from a base of disgruntled Southern and Western farmers opposed to both eastern elites and the prevailing gold standard. The farmers felt elites were imposing upon rural commodity producers a gold standard resulting in lowered agricultural prices that were driving them to ruin. As conditions worsened still further, with the Depression of 1893 moving across the country, these sentiments grew, as did the party’s support. William Jennings Bryan’s famous Cross of Gold speech, delivered in 1896 as he ran for president, encapsulated then prevailing views concerning the gold standard’s inflexibility and the hardships it inflicted upon populations.
Far earlier examples of the inflexibility of metallic standards and their resulting hardships can also be cited, such as the case of 16th Century revolts in the Ottoman Empire. Following a decline in the global price of silver decades after the Spanish discovery of silver mines in the Americas flooded global markets, large numbers of Ottoman troops led a series of disruptive revolts after their salaries declined dramatically in real terms. Nor were Ottoman troubles unique during this period, as the inflationary impacts of New World silver were equally pronounced across Europe, resulting in decades of struggles.
In each case, the metallic monetary system’s core weakness was its inability to respond to changing economic and fiscal conditions, even as economic challenges and individual hardship were widely felt. The resulting protests and active revolts demonstrated the depth of opposition to changing conditions, yet the gold supply remained unable to meaningfully respond.
Of arguably greater significance were the numerous instances of countries forced to de-peg their currencies and abandon the gold standard during periods of difficulty. Such abandonment occurred frequently, the result of the combination of the gold standard’s inflexibility and the absence of mechanisms for alleviating emerging tensions. While the most well-known example remains President Nixon bringing an end to the Bretton-Woods monetary regime in 1971, ending the convertibility of American dollars for gold as stresses in the global financial system led to a run on U.S. held gold, history is replete with examples of the gold standard being abandoned by countries at times of economic or market turbulence, from the United Kingdom and 13 other countries in 1931 to the United States in 1933. In the case of examples from the 1930’s, considerably scholarly work has convincingly argued that the adherence to the gold standard was an important contributing element for the length and extent of the depressed financial conditions of the decade. In particular, the deflationary pressures the fixed-supply regime introduces are amplified by and in turn further amplify banking panics in a worsening cycle, and states have few ways to solve either and realign the incentives of borrowers and lenders.
Despite the gold standard’s failure to meaningfully provide for general welfare or to endure as a stable financial system for significant periods, the retrospective rehabilitation of the quasi-cult of the gold standard is fascinating to observe. While idealized views of the gold standard’s influences appear in contemporary political discourse, arguments for the “idyllic” conditions of the pre-1971 gold standard era seek to present the various gold standard periods as outstanding examples of low inflation and thus, despite however tenuous and ironical the relationship may appear, as periods where “liberty” blossomed. (Note: the article is archived in the linked database.) But while the current trajectory of the US Dollar monetary supplies, seen in the earlier chart, admittedly provides reason for concern--as does perhaps the generally unremarkable track record of fiat currencies more broadly—it nevertheless remains difficult to argue that the gold standard would truly offer a meaningful alternative.
Fortunately, while the gold standard may possess both a historic and symbolic appeal as a means of limiting inflationary tendencies by fixing money supplies, the chances of a state officially adopting such a system today are virtually nonexistent. This is not because central banks have unassailable power to defend their roles, as some assert, but because, as the above examples illustrate, existing monetary regimes provide a wide range of generally effective tools for governments and central banks to respond to changing economic conditions. To those familiar with the historic experiences of countries under the gold standard, existing monetary regimes have been relatively far more successful in maintaining price stability and adapting themselves to economic cycles and conditions in ways that facilitate stable, relatively successful economies. Put otherwise, while even governments can occasionally express disappointment with the decisions or policies of central bankers, a government that acted on such opposition by reducing all that is monetary policy to an inflexible inflation schedule as represented either by a gold standard or a bitcoin standard, would be rather unreasonable. Nor would populations likely endorse such a move, for while the role of governments and central banks may be imperfect, they remain far more effective than reintroducing an inflexible gold standard or innovating its cryptocurrency equivalent.
Moreover, even if substantial public pressure for such a move did exist, that central bankers or national authorities would bow to popular pressure and willingly renounce existing monetary tools in order to allow the emergence of a protocol-governed monetary regime seems highly unlikely. Doing so would severely limit the ability of governments and central banks to employ the range of contemporary monetary policy tools, whether interest rate targeting through open market operations, direct increases in money supplies via quantitative easing, or simply guiding the market through informal communications with major funds and market players as the Fed is understood to regularly do. That these would be voluntarily renounced is difficult to imagine, particularly as the Fed has long resisted relatively simple calls to consider a wider range of inputs or be more transparent in its decisions without meaningfully changing its behavior. Imagining the Fed suddenly yielding to popular sentiment on an issue of relatively greater significance requires a certain suspension of disbelief.
These charts illustrate the challenges of actually implementing a fixed-rate, Bitcoin-standard as the basis of monetary policy. Above, the growth in above ground gold supplies between 1900 and 2012, when gold stocks increased from 35,000 tonnes to more than 190,000 tonnes, and specifically including numerous periods under the gold standard, including the Great Depression as well as Nixon’s ending of the convertibility of US Dollars for gold in 1971. The tremendous growth of gold supplies during this period is readily apparent. Yet, as the previous discussion made clear, the ultimate effect was nevertheless deflationary as the increase in gold stocks was unable to keep pace with increased demand for currency, during the period. Below, a graph of the programmed increase in Bitcoin supply over the next 100 years, which will be far below the rate of historical expansion of the gold supply, makes clear the highly deflationary impact a Bitcoin standard would have.
The Bank of Canada, having actually published a document that considered how a “Bitcoin Standard” would function in light of historical understandings of the classical gold standard era, concluded not only that the impact would be deflationary while limiting the independence of policymakers in autonomous nations to chart independent monetary policies, but also that such a standard could not be expected to last long before forced abandonment due to its inability to respond to evolving circumstances.
The core flaw the study identified, which should come as no surprise after considering the gold standard’s limitations, remains the lack of monetary policy tools and the ability to respond to crisis by adjusting monetary supplies. The inability to rapidly increase or decrease monetary supply in response to extraordinary conditions is, in effect, precisely the challenge that consistently hobbled efforts to sustain the gold standard as a monetary framework, and a core weakness in arguments advocating a protocol-governed cryptocurrency’s adoption. While there are private, protocol-governed projects such as Basis that argue they could function as the foundational currency of a national economy– an “algorithmic central bank” able to respond to price fluctuations in order to preserve and maintain price stability– their admitted inability to function as a responsive monetary regime that could, for instance, ease interest rates at times of high unemployment, illustrates precisely the weakness of an inflexible cryptocurrency as the underpinning of a modern national economy. That Basis incorporates a mechanism for defaulting on its obligations, then resuming operations, also suggests the project team is acutely aware of how similar in function a “Cryptocurrency Standard” is to the gold standard.
While it is difficult to imagine a contemporary national government renouncing its monetary tools, this reality does not preclude select instances of official state-backed cryptocurrencies emerging as official monetary structures. Such exceptions prove the rule, however, as examining the particular circumstances of such instances' reveals. For nations that renounced or never had control of their monetary policy, such as countries like Ecuador that have adopted the US Dollar as a national currency, there would be little to be lost from allowing a protocol-governed cryptocurrency to emerge as a national currency. Such a nation may even gain from such a move if having an official cryptocurrency allows it to attract capital inflows or greater use of its currency as a vehicle of exchange, as was noted by a Russian official during 2017. This is the also the case with the Republic of the Marshall Islands, which announced in February 2018 that it would be holding an ICO for its SOV cryptocurrency that would function as an official currency alongside the US Dollar.
Not having an existing independent currency or meaningful control over national monetary policy, there is nothing to be lost by introducing the SOV. Given that a portion of funds raised for the SOV will be dedicated to social and environmental programs within the Marshall Islands, there is potentially a substantial benefit should significant funds be raised. That said, the SOV is effectively an unbacked currency, with value arising from its de facto peg to the US Dollar, pegged by virtue of its acceptance alongside of US Dollars for official fees and service in the Marshall Islands. As such, calling SOV unbacked might even be misleading– SOV may more accurately be described as a functioning e-Dollar.
State-Backed Digital Currencies on the Blockchain
If an actual state-backed, protocol-governed fixed-supply cryptocurrency is unlikely to emerge on a widespread basis, what can more reasonably be anticipated is the emergence of hybrid fiat-cryptocurrencies: state-backed currencies that complement existing monetary supplies and represent claims on central bank assets in an identical manner to banknotes, are issued on a blockchain, can be issued and withdrawn in identical fashion to existing fiat currencies, and which are governed by existing monetary policy tools in accordance with the prevailing logic governing central bank operations. While critics will decry these efforts as poor, state-led simulacra of actual cryptocurrencies, the implications nevertheless promise to be substantial.
Numerous observers—from academics to industry consultants to think tanks to central (LINK DOWN 404) bankers themselves— have explored the possibility of creating state-backed digital currencies, forecasting a number of wide-ranging repercussions. Among them are increased access to financial services for citizens, cheaper and more rapid payment options between individuals, and easier international transfers. This would in turn result in reduced spreads on foreign exchange transactions, with further positive impacts on global commerce. In every case, the necessity of the state retaining control of monetary policy and tools is understood, and the possibility of other approaches, such as implementing a “Bitcoin Standard”, effectively goes unmentioned when not dismissed outright or described as somewhat naīve.
The repercussions of the emergence of digital assets promise to be particularly significant and far-reaching relative to existing financial infrastructure. One of the most highly anticipated impacts is likely to affect banks, who potentially stand to lose out on significant business lines once individuals can easily and inexpensively interact on a peer to peer basis. More specifically, state-backed digital currencies would reduce the need for individuals to hold accounts with commercial banks, as digital wallets would become sufficient for a wide range of basic transactions, a scenario acknowledged by many, including even IMF Managing Director Christine Lagarde. This would undermine or largely eliminate a major line of business and substantial fee income on charges such as overdrafts, estimated at $17 billion in the United States alone during 2015. Check cashing services, where fees of as much as 4% can be commonplace, are also likely to be existentially threatened. That as many as 20% of households in the United States are described as “underbanked” and consequently forced to avail themselves of such services illustrates the problem’s scope. These populations are also the least able to afford additional fees, suggesting that digital assets would have immediate and widespread impacts. Moreover, given that the government in the United States appears to have effectively abandoned efforts to police these excesses of groups such as payday lenders through the application of the legal system, the importance of digital currencies and their potential impacts in creating mechanism to bypass these groups becomes even more clear.
The Bank of Canada’s discussion of issues around state-backed currencies clarifies the scale of the disintermediation potentially affecting commercial banks; finding new roles for banks was specifically identified as a major challenge. That one of their potential solutions in terms of future roles for commercial banks was as nodes processing transactions on the restricted blockchain hosting national currencies– a potential solution also identified by Sweden’s Riksbank– illustrates the ideological gap between those advocating for the use of blockchain technology as a technological improvement to existing systems and those focused upon the promise of a national currency based entirely on a distributed, public blockchain as representing a wholesale transformation of existing structures.
Existing payment processing intermediaries are a second set of entities widely recognized as likely to be impacted by state-backed digital assets. Not unlike the challenges facing banks, existing payment providers risk finding themselves disintermediated in core business lines when officially-sanctioned cryptocurrencies allow the processing of payments via considerably cheaper and more secure mechanisms than existing payment ecosystems. Even if state-backed digital currencies merely capture a portion of payment markets from existing providers, the pressure they place upon such providers will help ensure a less expensive, more competitive, and more robust payments ecosystem. This is a meaningful and widely-recognized result in a global environment where payments are increasing shifting to digital platforms.
Despite the welcome reception state-backed digital currencies are likely to receive, it appears that few states will likely be willing to move to a completely cashless system, in which digital payment mechanisms replace physical circulating cash. Central bank studies generally recognize, for instance, that certain populations, primarily already disadvantaged or marginalized ones, would be significantly affected by such a measure. Moreover, moving to an entirely digital system reduces the kind of systemic resilience that might be needed in times of emergency, when access to banknotes can be critical. That said, the generally decreased use of cash in countries across the globe suggests central bank digital assets would be welcomes and seamlessly incorporated in an everyday sense.
While the above comments represent a broad overview of the major issues, specific questions and observations also shape both the decision making and the ultimate forms state-backed digital assets will take. Central among them are:
- Register-based or Value-Based Digital Currency: As Sweden’s Riksbank has discussed in reference to its own relatively advanced considerations of the subject, a core question is whether state-backed currencies will exist as account records stored in a centralized database, or a value-based solution, effectively a bearer instrument functioning much like cash currently does. In the latter case, value is stored in an app, card, or digital wallet. The Riksbank views the centralized model as potentially enabling greater functionality, but also as more complex and challenging. A value-based system would be quicker and easier to implement, and would be ideally suited to microtransactions between users.
- Question of Wholesale or Retail Digital Currencies: One fundamental question for state-backed digital assets is whether they will be wholesale or retail products. Small-scale, peer-to-peer use by individuals, as opposed to wholesale use by banks conducting inter-bank settlements, represent distinct alternatives for state-backed digital assets. A purely wholesale-level digital currency would facilitate large-scale transfers between commercial banks and central banks, and could satisfactorily be completed on a private blockchain while still offering meaningful upgrades on existing practices in terms of improved speed and reduced paperwork. Given the widely noted reality that many inter-bank communication and transaction mechanisms employ outdated systems and software, a wholesale cryptocurrency to facilitate transactions between banks and when interacting with the central bank could improve the functioning of the financial system in a relatively simple manner that would be considerably easier to develop than a retail-focused payment currency. A retail product would be considerably more complex and support the broader penetration of digital assets across different levels of society, but would take longer to develop and implement given the increased range of functions required to be supported and would likely be best supported by developing upon a public blockchain.
State-backed cryptocurrencies and digital currencies could also bring negative impacts. Depending upon their exact form and mechanics, state-backed digital assets could leave a much wider range of transactions trackable by government authorities. However, as long as physical banknotes continued to exist alongside and as a complementary part of money supplies together with digital currencies, the most worrying aspects of a potential loss of privacy would be avoided. Further, in a world where other cryptocurrencies exist that already offer possibilities to transact beyond the world of official currencies––including privacy-centric currencies specifically designed for such purposes––it seems unlikely that government would gain significantly greater ability to snoop into digital payment ecosystems beyond what is already possible. Other potentially negative impacts include pressures on underground economies as cash becomes scarcer, and a greater ability of the government to collect tax on transactions using digital currencies--although this could justifiably be considered a positive from certain perspectives.
Other State-Backed Digital Assets?
While the eventual arrival of state-backed digital currencies offers many possibilities, the conversation can also be expanded beyond the level of central governments. Another level of public sector activity where blockchain-based systems are likely to make substantial inroads is in the municipal bond market in the United States, a massive market with over $3.7 trillion in outstanding obligations. Initial discussions of these possibilities emerged early in 2018 in reference to ongoing explorations of the subject taking place in Berkeley, California. Given the scale of municipal bond markets, where the role of middlemen has long been significant, if not always positive, this appears to represent an ideal market for the promise of blockchain to enable a substantial disintermediation of existing middlemen. While one result would be to allow increased funds to reach local governments, a second, arguably more substantial, impact could be to introduce opportunities for municipalities to engage local populaces, and for more direct, immediate governance as populations actively shape their community’s direction by voting with their pocketbooks to support projects believe in.
Beyond the instances discussed above, additional state-backed digital assets could emerge. One likely area of activity could be other attempts to create official oil-based currencies. While a fully redeemable currency is perhaps unlikely, as few would be capable or desirous of actually taking delivery, something actually backed by oil and not merely pegged to market prices as the Petro is could find a positive reception as a kind of hybrid ETF/digital currency/stablecoin native to the crypto space. This would be functionally akin to a Petro copycat, but by a state not facing American sanctions, suffering hyperinflation, and virtually disintegrating. Venezuela has already expressed their own interest in building upon their announced success with the Petro to develop a gold-backed cryptocurrency, and Iran, another state subject to U.S. sanctions, is reportedly considering a natural gas-backed cryptocurrency. While these efforts may or may not prove fruitful, neither represents a meaningful advance beyond the contentious effort represented by the Petro.
Another potentially groundbreaking step, at least symbolically, would be for a more mainstream resource-backed or revenue-backed cryptocurrency to emerge. For example, Iceland could choose to back a cryptocurrency with long-term revenue from geothermal facilities. Admittedly, many consider Iceland its own version of a rogue state, by virtue of having actually jailed bankers in the wake of the financial crisis, but this example would nevertheless serve to make state-backed digital-assets more difficult to ignore.
Another possibility would be for OPEC to issue an oil-backed cryptocurrency. A generally overlooked aspect of the Petro is Venezuela’s intention for its cryptocurrency to function as a resource-focused blockchain upon which other entities might issue their own commodity-backed cryptocurrencies, as noted when Venezuelan President Maduro reported that he would be encouraging OPEC to create its own oil-backed cryptocurrency. Whether such a development is realistic or not, the creation of an OPEC backed cryptocurrency would have far-reaching implications. Given OPEC’s centrality to global oil markets, such a step would immediately transition some portion of the reserves backing 60% of global oil exports to the blockchain.
The implications would also extend beyond the global oil trade, touching upon the larger Petrodollar regime while representing a substantial endorsement of cryptocurrencies. Most importantly, an OPEC-backed cryptocurrency would be impossible to ignore or discredit with dismissive, facile half-truths. That both Venezuela and Iran, the countries most often cited as poised to attempt their own cryptocurrencies in order to bypass American sanctions should the Petro succeed, are OPEC members and would benefit from any such move would undoubtedly lead to complex, strained, and ultimately highly entertaining efforts to discredit or dismiss such a move. Given the historic influence of the United States with several members of OPEC, one might normally consider the odds of OPEC taking such a step to be low, but, in light of the United States’ awkward relations with many countries under the Trump administration, such a step might be less unlikely than in the past.
Beyond oil and gas, the creation of other resource-based cryptocurrencies is probably not realistic. With respect to mineral assets, such as copper or gold, most states lack national mining companies that could develop or extract such resources or could be considered comparable to the national oil companies of Venezuela and other OPEC states. Further, production costs across most mineral resources are both high enough and cyclical enough that actual margins on extracted resources are relatively low and difficult to forecast, hardly representing the foundation for an asset-backed cryptocurrency. It is also the case that most states lack unencumbered sources of assets, such as gold, copper or lithium, since exploration licences or agreements are usually granted to private companies when production is being considered.
Proposals for tokenizing other state-controlled resources would merit careful observation. While some novel efforts will undoubtedly emerge, any such attempts will likely be minor and take many years, since few assets are as valuable as global oil markets, or enjoy markets as broad and deep.
Overall, prospects of nation-states choosing to replace their fiat currencies with a fixed-supply protocol-governed cryptocurrency are highly unlikely. While some observers will surely find that disappointing, what will likely emerge– different kinds of state-backed digital currencies incorporating blockchain technology yet with the state or its representatives retaining control of monetary policy tools– will nevertheless bring meaningful disruptions, most specifically to the roles of banks and payment processors. Given that less expensive and more rapid payments have even been described as effectively a tax cut, this disintermediation of middlemen would have both individual and collective economic impacts and could spur additional economic activity.
On a larger and more systemic scale, the largest impacts of protocol-governed cryptocurrencies may come not through being adopted as official currencies but precisely in remaining outside official systems, from where they can serve as alternatives to fiat currencies and effective checks upon the actions of central bankers. While some criticisms of the American Federal Reserve bank are rather comical, others, particularly concerns around transparency, communication, and the core assumptions underpinning Fed actions discussed above, are far from baseless. In either case, however, for an individual convinced that the Fed or some other central bank is hopelessly corrupt or incompetent, digital currencies allow new, accessible opportunities for individuals to no longer be captive to monetary regimes with which they disagree.
While alternatives such as precious metals or foreign currencies have long existed as savings vehicles, the expensive, burdensome nature of using either as an alternative to one’s national currency reduced their effective appeal. The advent of cryptocurrencies, whether state-backed or independent ones such as Bitcoin, suddenly allows for more nuanced discussions and a wider range of options. For instance, an individual not categorically opposed to the Fed’s existence, but who disagrees with particular policies and the assumptions behind them, could simply and easily shift some portion of their assets to a different digital currency following a policy trajectory they support and wish to implicitly endorse by holding the currency, be it an e-Ruble, e-Krona, e-Euro, or simply shift a portion of assets to an independent cryptocurrency such as Bitcoin.
In this regard, the growth of cryptocurrencies, and even the emergence of state-backed digital assets, can be considered historically unprecedented opportunities for individuals to relatively seamlessly move their assets to a currency governed according to ideals they support. This also creates the opportunity for individuals to vote with their pocketbooks and flee from currencies they consider to be managed in opaque manners or according to values or guidelines of which they do not approve. This reality is not lost on national officials, who speak of an effective race to develop national digital currencies that, they hope or suspect, will provide support and competitiveness to their fiat currencies. Official awareness of these potential negative effects also emerge in discussions noting how the advent of cryptocurrencies could lead to increasingly rapid bank runs or swings in fiat currency prices. Such comments serve as implicit confirmation of an awareness that the mere presence of digital assets obliges responsible, popularly supported and effectively communicated policies on the parts of governments and central banks, precisely to ensure against discontent or misunderstandings that could lead to runs against particular currencies. What clearly emerges is a growing recognition that, for effectively the first time ever, individuals having an opportunity to vote in favor of, or against, central bank policies, introducing a significant and novel dynamic into the financial world.
While the implications of the above are likely to be felt across all fiat currencies, there are sound reasons to wonder whether the US Dollar, currently the defacto global reserve currency and the primary currency used in international trade, might disproportionately bear the brunt of such impacts. One scenario might consider whether the Dollar, as the most prevalent fiat currency, could find its use declining across broad swathes of the world, which could lead to a variety of related impacts both domestically and internationally. Another view might argue that the Dollar, often viewed as the most stable of the world’s fiat currencies, also with the most liquidity, might retain its relative importance while smaller and arguably weaker fiat currencies are the first to be left behind by a growing range of alternatives. Whatever the exact result, the complexities of international finance and geopolitics which supported the Dollar through the Bretton Woods, Petrodollar, and Bretton Woods II eras may ultimately lead to another major disruption, with outcomes that are challenging to forecast.
Ultimately, scenarios for meaningful coexistence between fiat currency, state-backed digital currency, cryptocurrency, and even precious metals promise a richer and more complex financial ecosystem, with a wider range of options available to all participants. As this variety of assets interact and compete as mediums of exchange, accounting units, and stores of value, the interplay of competing options will begin to clarify the relative strengths and weakness of each asset. This will also create an atmosphere where official fiat currencies must not only be effectively managed, but managed in such a way that effectively conveys guiding policies, values, and assumptions and to perhaps even garner popularly support. In this sense, cryptocurrencies’ greatest impact may not be in displacing national currencies, but in functioning as a check upon the efforts of policy makers and central bankers’ to shape monetary policy. While arguments for the Fed to become more transparent have historically had limited success persuading the Fed to become more communicative or transparent, or to incorporate a wider range of considerations into its policy making, the mere existence of viable alternatives will likely compel policy makers to better communicate and explain how policy choices serve the widest number of people. In this sense, making policy makers more responsive to the public they serve may well emerge as the single greatest impact of cryptocurrencies on state-backed monetary regimes.