How countries could adopt crypto

SMART VALOR
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Friday, October 28, 2022
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It’s no surprise that governments have been looking at the runaway success of cryptocurrency usage worldwide and wondering how they can piggyback on its momentum. But how could nation states actually adopt cryptocurrency and would it work?  

Crypto as legal tender 

The earliest digital assets enthusiasts have been pushing for cryptocurrency to be accepted as legal tender since the earliest days of Bitcoin. Until very recently, the idea that any digital assets would be considered as candidates for a national currency was almost inconceivable. But then the coronavirus pandemic hit and then wave after wave of economic mayhem started shifting the goalposts for what was possible in the financial world.  

El Salvador went straight for the jugular and adopted Bitcoin as legal tender on 7 September 2021. It was a massive move and came near the peak of the long bull run of 2020-2. El Salvador is an interesting case because it has a struggling economy, of which 21% is made up of remittances. Remittances are international payments made by migrant workers that send money to their families in their home countries. This dynamic meant that nearly a quarter of the economy faced a chokehold by payments providers in the form of often extremely high fees and slow transaction times.  

The introduction of Bitcoin meant that Salvadoreans could send each other money in a peer-to-peer network via the Bitcoin blockchain. Peer-to-peer payments on blockchains go straight from sender to recipient without any intermediaries, meaning that fees are consequently much lower and transactions are faster. In fact, it doesn’t even matter where you’re sending the money, blockchains don’t have any kind of geographical boundaries and the fees are related to network congestion rather than distance.  

Less than a year later, another country followed suit. The Central African Republic (CAR) voted unanimously to accept Bitcoin as legal tender on April 21, 2022, a move it claimed put CAR “on the map of the world’s boldest and most visionary countries.” The CAR’s other national currency is the CFA franc, and is also used by several countries that used to be occupied by the French during colonial times. The move was seen by some as an attempt to move away from the French-backed CFA franc towards a more independent form of currency and as a way of helping citizens and businesses alike of conducting global trade due to the ability to convert Bitcoin into any currency.  

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These countries will go down as trailblazers regardless of what the end result of their adoption of cryptocurrency is likely to be. Despite this, not all countries are ready to welcome cryptocurrency into their monetary system in unchanged form. But that doesn’t mean they’re not actively trying to steal the technology behind digital assets to try and jumpstart their creaking economies. The past few years have seen the invention of a strange new hybrid creature: the CBDC.  

CBDCs 

Central Bank Digital Currencies, also known as CBDCs, are new forms of currency. It’s one of the ways that central banks, the institutions that issue and control their own countries’ currencies, are trying to make fiat fit for the future. To critics, they are simply an electronic version of the currency that any can hold in their hands, but to others that are closer in nature to stablecoins and are seeking to harness some of the best qualities of digital assets. 

When compared to the borderless payment networks, low fees and fast transactions that digital assets can offer, fiat currencies look slow. And that’s because they are. International payments with fiat can take day and have to go through a whole host of intermediaries that ramp costs.  

CBDCs are usually pegged 1:1 with the fiat currency of the country they are issued within. Unlike cryptocurrencies that are decentralised, meaning that no one entity controls or owns the network, CBDCs are owned and managed by a central bank. Countries will not have to ‘adopt’ CBDCs because they are already legal tender, just in a slightly new form. Let’s look at two countries that have had big histories of crypto usage, only to ban them and try to capitalise on this trend by issuing CBDCs: India and China.  

India 

India was fast becoming a crypto-loving nation, had a sizable community and a healthy variety of home-grown companies until the Indian government banned cryptocurrency in 2022. It was a heavy blow for digital asset enthusiasts in India, although the decision was overturned by the Supreme Court some time later. However, to this date cryptocurrency occupies a space in a kind of legal grey area. According to Business Today, the Indian government will finalise its stance on digital assets by Q2 2023.  

Until then, it seems, the Indian government is set to keep all financial flows under its watchful eye. The most prominent example of this is India’s own CBDC project. According to Bloomberg, the Reserve Bank of India (RBI) is developing its project and will call the new digital currency the e-rupee. 

In a paper published by the RBI, the bank pretty much laid bare the intention to capitalise on the technological capabilities of digital assets when it stated the reasons for which it was developing the CBDC project:  

 “CBDC holds a lot of promises by way of ensuring transparency, and low cost of operation among other benefits and the potential to expand the existing payment systems to address the needs of a wider category of users,” the RBI said. 

But the RBI also highlighted one of the main criticisms that the digital assets community have against CBDCs, privacy:  

“Ensuring anonymity for a digital currency particularly represents a challenge, as all digital transactions leave a trail. Clearly, the degree of anonymity would be a key design decision for any CBDC and there has been significant debate on this issue. 

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China 

China is famous these days as a country with an openly hostile stance on digital assets. It was extremely quick to exercise control over digital assets by placing a ban on payments and financial institutions processing digital asset transactions as early as 2013. In fact, China has rolled out bans against many of the latest iterations of cryptocurrencies as fast as they are developed, with a ban on ICOs in 2017, followed by a total ban on digital assets and mining in 2021. 

As one of the largest economies in the world with an extremely developed payments industry, it’s perhaps natural that China has been working on a CBDC project since 2017 called the e-CNY. In April 2020, the project was rolled out in trials at 4 cities in China where commercial banks could test conversions between cash and digital currencies as well as payments.  

Only a few months later, the test expanded to twenty-eight major cities. Then, in June 2021, the People’s Bank of China reported that more than 20 million personal and 3.5 million corporate digital yuan wallets had been opened, with total transaction values of around $8.8 billion. Data from 2022 suggests that over 260 million digital yuan wallets have been opened. As of Q3 2022, Cointelegraph reported that the pilot expanded to support state institutions and a variety of citizen services 

“Multiple e-government service platforms have opened digital renminbi payment services, supporting online and offline channels to handle various public utility payments, using digital renminbi to issue tax rebate funds, special funds for monthly medical insurance payment, funds for helping people in need, and ‘specialized, special and new’ enterprise support funds, etc.” 

From the enormous scale and long time frame of its pilot program, it’s clear that the Chinese government sees a great deal of potential in a CBDC scheme. In fact, this new, supercharged yuan appears to have encouraged Chinese authorities to try and expand further still, with a state run think tank putting forward the idea of a pan-Asian digital currency backed by the yuan.  

The middle way: stablecoins 

If you’re concerned about the way that governments seem able to co-opt the technology behind cryptocurrency, you’re not alone. But fortunately, there’s a third way for people to make the most of the freedom behind digital assets without either government control or volatility: Stablecoins.  

If you aren’t sure about what stablecoins are, the clue is in the name. Stablecoins are digital assets that have a stable value. This means they don’t suffer from the same volatility as other cryptocurrencies. This stability comes from their value being pegged 1:1 to underlying assets such as fiat currencies. Two of the most prominent stablecoins are USDC and USDT, both of which are pegged to the U.S. dollar. 

Stablecoins were designed to bridge the gap between cryptocurrency and the traditional financial system, allowing businesses to easily accept payment in digital assets for services and products and making it easier for crypto enthusiasts to receive their salaries in crypto.  

These digital assets stand to benefit both states and citizens. Ordinary people can use them just like any other currency, but with the added benefit of faster transactions, lower costs and a truly global payment network. Stablecoins would be easier for states to adopt than digital assets like Bitcoin because they fit more seamlessly into the wider global financial network and are able to be put to work earning yield in decentralised finance. El Salvador is currently working on its own stablecoin, the Colon.  

Stablecoins are relatively recent inventions but they have the potential to be one of the most influential digital asset classes due to their utility, convertibility and earning potential. They give people greater freedom over their finances than CBDCs and are not subject to the loose policy of central banks. 

Digitial assets have a lot to offer the global economy 

It’s no secret that the global economy is entering a very challenging period. We’ve been through all this before, but this time both governments and citizens know that something has to change. It’s likely that we’ll see countries adopting digital assets to some degree. A strong U.S. dollar and high inflation means borrowing in emerging economies is much more expensive, something that could bring about wider usage of fiat-pegged stablecoins.  

Ordinary investors are looking for ways to extricate themselves from the restrictions of their local economies and to try and insulate their finances from the likelihood of a recession in the near future. An example of this was the increase in BTC/GBP activity after the onset of the 2022 UK Government crisis that tanked the British Pound. But there’s always the likelihood that states will seek to adopt digital assets on their own terms. In which case, we will probably see an increase in CBDC pilots, whether from the native fiat currencies of states or as part of regional currency initiatives like China’s pan-Asian digital currency.  

Fortunately, options like USDC and USDT will remain available for everyone to access and could prove to be extremely useful assets for investors of all kinds. If you’re interested in making the most of these assets in turbulent times then head over to SMART VALOR to get started.