Why Governments May Want to Launch Their Own Cryptocurrencies

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Government bureaucrats might have a reputation for being boring, but that doesn’t mean they can’t get just as excited about new technologies as the rest of us. And they have been getting excited: governments in Russia, Venezuela, China, the U.S., Japan, Canada, Estonia, Sweden and Uruguay have been exploring or are pursuing their own cryptocurrencies.

These governments face very different decision calculuses for launching their own cryptocurrencies (i.e. govtcoins), which are important because they influence the structure of those digital currencies, which affects whether people will decide to use them in the far-flung future. Let’s cover several of the most compelling reasons a government would be interested in launching a state-backed cryptocurrency. I previously wrote some thoughts on govt coins and stable coins here.

To make a quick buck.

After beginning its presale in late February for its govtcoin the “Petro,” Venezuela is the furthest along globally in its crypto voyage. But it is more of a gimmick to bring in much-needed cash infusion than a viable stablecoin alternative. The Venezuelan government is among the least trustworthy in the world. Why would anyone in their right mind transact using the Venezuelan government’s iteration of a still-new technology? It’s the public sector equivalent of shady people peddling fraudulent ICOs.

To gain unprecedented visibility into citizens’ transactions.

Russian fingerprints were all over the Venezuelan Petro cryptocurrency that began its presale in February, and Kremlin officials seem to view it as a pilot project of sorts. Unlike Venezuela, Russia isn’t a failing state flailing around for financial gambits. It’s not hard to see the benefits to the Russian surveillance apparatus of fully digitizing the ruble: they can see how everyone is spending their money.

Even if it were designed with zero-knowledge proof technology à la Zcash, the Russian government could structure the blockchain to give regulators informational access to all transactions. A permissioned blockchain would include anonymous transactions that can be audited, which means a government-controlled blockchain that allows corrupt actors approved by the Kremlin to conduct their business free from public scrutiny, while also freeing the authorities to oversee all citizens’ transactions. Not a recipe for utopia.

To try and circumvent sanctions.

It’s been widely noted that a cryptorouble would offer Russia—a country heavily weighed down by sanctions—a means of circumventing them. But skeptics abound about the potential for govtcoins to deliver on this promise, and for good reason. Imagine the scenario: a Russian oligarch or high-ranking state official under sanctions wants to move his money from Russia to London (a wild idea, I know) and seeks to buy a flat in Knightsbridge using cryptoroubles. Who would want to fill the other end of that transaction? Why would a property owner want your digital roubles?

The same isn’t true of cryptocurrencies today, as they’re non-national entities with global demand—there are willing counterparties so far as the asset itself has sufficient liquidity. But that doesn’t mean it’s a perfect solution for skipping around sanctions. Not all cryptocurrencies or tokens are built for private value-transfer—the anonymity of Bitcoin, for example, isn’t as robust as once believed. Moreover, the total market cap of cryptocurrencies and tokens is currently worth 5-10 percent of daily foreign exchange flows, and if you only count specialist privacy coins in the top 100 crypto assets by market cap (Monero, Dash, Zcash, PIVX, Zcoin, Bytecoin, Electroneum), then the total market value of privacy coins is just under $10 billion, as of late March 2018. This would amount to around 0.2% of daily FX—Russian, Venezuelan or North Korean authorities would have to get their hands on a huge proportion of these coins to meaningfully circumvent sanctions.

To greatly increase the transparency (and thus understanding) of the economy in real time.

Western countries face a very different decision calculus when it comes to considering their own cryptocurrencies. Measuring the economic output, for example, of more than 300 million people in the U.S. every year is a monumental task of measurement. The Bureau of Economic Analysis (BEA) is the agency that handles this endeavor, and they do their best. But ultimately, measuring U.S. GDP largely means using the twice-a-decade Census as a benchmark and doing a bunch of smart math to come up with reasonable estimates.

If the BEA had access to a blockchain that recorded all transactions in the U.S. executed in cryptodollars, (a) the agency might not need to exist because the task would be so much simpler and (b) the U.S. government would have access to a real-time and detailed portrait of the national economy. This insight could have enormous advantages in times of economic peril—the policymakers scrambling for solutions at the depths of the 2008 financial crisis would have given an arm and leg for such assistance.

To fund or distribute public spending.

With its own cryptocurrency, a government would be able to directly send govtcoin to a welfare recipient’s crypto address rather than having to send them a voucher or deposit into their bank account. Take the U.S. public program SNAP, commonly known as food stamps. When applying for food stamps, an applicant may be required to bring the following items to their personal interview: proof of income, documentation of federal benefits like Social Security, documentation of rent or mortgage payments, document of medical expenses, documentation of day care or child support payments, and bank statements.

Notice a trend? That’s a lot of different kinds of financial documentation. If all the related transactions were logged on a cryptodollar blockchain, then it would be significantly easier to see what someone’s financial situation is. As such, administering vast governmental programs like SNAP, which provides assistance to tens of millions of people in the U.S., could be much more efficient.

Government incentives to create a state-backed cryptocurrency run the gamut, from making it easier to run a complex top-down government–criminal enterprise to providing assistance to citizens in needs more efficiently. But perhaps the most powerful incentive will be that governments cannot bear the thought of losing control of their countries’ monetary policies. As private cryptocurrencies continue to increase in adoption and influence, govtcoins will be the ace up governments’ sleeves to ensure they continue to exercise that precious control.

Sunny Dhillon is a founding partner at Signia Ventures, a $100m seed and series A venture capital firm based in the San Francisco Bay Area. He invests in consumer and enterprise startups. He leads the fund's investment strategy in distributed ledger tech.

Special thanks to Signia's Alex Lloyd George for his help on this article.

Sandeep Dhillon