The theme of a recent report from Casey Research was that the Russian government is planning to issue its own cryptocurrency (the “CryptoRuble”) that would be created, tracked and held on a state-controlled digital ledger. This was portrayed as being a huge plus for the Russian economy. I don’t see how giving the government greater ability to monitor financial transactions and thus divert more money into its own coffers could be anything other than a negative for any economy, but the Casey report got me thinking about whether a state-sponsored cryptocurrency is a valid concept.
I’m far from an expert on cryptocurrencies and so I could be missing something (please let me know if I am), but it seems to me that it is not a valid concept. The essence of the blockchain technology that underlies cryptocurrencies such as Bitcoin is that the ledger is DISTRIBUTED. This is what makes the system secure. Cryptocurrency exchanges and wallets can be hacked, but the blockchain itself is, for all intents and purposes, ‘unhackable’.
If a digital currency exists on a centrally-controlled ledger it is not a cryptocurrency, it is a garden variety electronic currency like the dollars in your bank account.
Central banks and governments want to eliminate physical cash so that there is a digital record of all transactions. This is not to promote economic growth or to fight terrorism or to reduce crime or to further any other noble cause; it is primarily to maximise tax revenue and secondarily to cut off a way of escaping from negative interest rates. Therefore, it’s a good bet that physical cash will be outlawed in the not-too-distant future. For exactly the same reason (they make it more difficult for the government to monitor financial transactions and thus maximise tax revenue) it’s likely that cryptocurrencies will be outlawed at some stage.
Another relevant point is that commercial banks generate a lot of profit by lending new money into existence and monetising securities. Given the banking industry’s influence on government and the reliance of government on the financial support of banks, there is no chance of the government implementing a monetary system that substantially reduces the profitability of commercial banks.
In summary, I expect that governments will attempt to make the official currency 100% digital/electronic, but not introduce their own cryptocurrencies. As far as I can tell, “government-controlled cryptocurrency” is a contradiction in terms.