Cryptocurrencies have many benefits over traditional financial systems such as banks, payment companies and private databases. These benefits range from reductions in national and international payment transaction fees, the free flow of money to any country worldwide and the increase in transaction transparency to help reduce fraud.
Digital currencies are different to cryptocurrencies as digital currencies are an electronic model of an existing currency. In addition, they are centralised to the reserve banking system of that country, so the transactions are not available to the public, nor are they encrypted, making them vulnerable to both cyberattack and fraud.
Cryptocurrencies are fully decentralised. There is no third party or controlling authority present. The system is fully encrypted and open to being audited as the entire list of transactions is publicly available, making it resistant to fraud and cyberattack, unlike a digital currency.
UK and US perspective
The chair of the US federal reserve, Jerome Powell, recognises the benefits that cryptocurrencies can offer. However, he believes that the public must have faith in the dollar, payment networks, banks and other service providers, allowing daily monetary flow for the American economy to function effectively.
Creating a national cryptocurrency will increase trust in the financial system to help achieve his vision.
Conversely, the UK finance minister Rishi Sunak is launching a new task force between the Treasury and the Bank of England to coordinate exploratory work on a potential central bank digital currency.
The UK government is currently looking into the objectives, use cases, opportunities and risks to ascertain the feasibility of proceeding with a launch of a national digital currency.
Regulatory measures on cryptocurrency vary internationally. The majority of countries, including the UK and the US, currently have no financial regulatory regime whilst some countries such as China, Algeria, Bolivia, and Egypt have banned cryptocurrencies.
As an example, China escalated a crackdown on cryptocurrency due to concerns about the potential for money laundering and trading losses by individual investors following a surge in investment in Bitcoin and other tokens over the past six months.
Benefits of digital and cryptocurrency internationally
Traditional monetary systems such as electronic banking operations struggle to create, secure and maintain the banking system in a real-world situation. By using cryptocurrency, online transactions are easier to manage. In addition, a national cryptocurrency can eliminate corruption and reduce the burden of illegal activity in the economy.
Setting up banking relations and operations in smaller countries is a laborious task. Currency exchange and payment processing are problematic, making international companies less inclined to do business in countries with smaller economies.
National cryptocurrencies standardise currency exchange, moving it online and making it easier for trade to occur. This levels the playing field and equalises opportunity for all countries engaging in business ventures.
Countries that list their national cryptocurrency on a major exchange anticipate growth in the cryptocurrency’s value. This growth can enable governments to reduce the national debt.
For example, in Venezuela, a recently created oil-backed cryptocurrency called the Petro functioned better than the bolívar, the national currency, which suffered from hyperinflation.
Since the price of one Petro is equivalent to one barrel of oil, the token maintains its value better than a fiat currency. Despite heavy criticisms from many governments about the legitimacy of the Petro, it raised more than 735 million dollars on its first-day presale, and the government is seeking to raise 6 billion dollars in total.
Moreover, since its public release in February 2018, cryptocurrency stabilised the economy and supported the national financial system.
Several countries with strong economies, such as China, Dubai, Japan and Israel, have expressed an interest in moving to a cashless system. The Marshall Islands has successfully created a national cryptocurrency with the aims of becoming cashless.
Their national cryptocurrency, the SOV, enables the elimination of fees when nationals transfer money home from abroad, bringing about cost savings, particularly for small transactions. The success of the SOV demonstrates a proof of concept that a cashless society is viable and that cryptocurrency can benefit the economy of a country of any size.
In 2014, Ecuador became one of the first countries to test a state-run digital currency scheme. Ecuador is unique because its national currency is the US dollar and 40% of Ecuadorian adults are without a bank account. Digital currency offers a more convenient and economical way to send money both nationally and internationally.
The percentage of GDP, made up of remittances sent from abroad into Ecuador, was around 3.02% in 2019 and is slowly rising. This sum equates to roughly 3.2 billion dollars per year, and reducing the transaction fees will positively affect the economy. The state’s digital cash system enables officials to track and set monetary policy for the entire country.
Estonia currently uses the euro as its national currency; however, Eurozone rules prohibit the creation of a competing currency.
Despite the strict regulations, Estonia is a clear leader in the concept of digital identity (the compilation of information about an individual that exists in digital form) and is currently planning to develop a national cryptocurrency called Estcoin. This cryptocurrency would track the euro’s value, aiding transactions without replacing the euro.
In summary, a country would implement a digital or cryptocurrency for numerous reasons. These include reducing transaction fees, increasing the transparency of interactions, reducing the potential for fraud and stabilising an economy in turmoil.
Digital currencies and cryptocurrencies have already been introduced internationally, although there is still some scepticism. The benefits of these to monetary systems may ultimately revolutionise the finance industry for the better.