More than 10 years since the first bitcoin transaction in January 2009, and almost two years since a speculative spike pushed the price per bitcoin to almost $20,000, cryptocurrencies are moving beyond cypherpunks and anti-government culture into the world of governments and traditional institutions. The transition is impossible to ignore. While some governments, central banks and financial companies see cryptocurrencies as a threat, others want to harness the advantages they offer. And some governments see cryptocurrencies as a way to save their own struggling economies.
To understand whether nonsovereign currencies can serve as a default currency and what threat they pose to governments or how beneficial they might become, it's useful to examine some of the most interesting geopolitical and corporate use cases available.
The media outlets that specialize in cryptocurrency magnify, at least momentarily, the importance of any news concerning blockchain and bitcoin, Ethereum and other digital currencies. The problem is, the rest of the world often has trouble understanding what's what or is confused about what developments in that realm mean.
That's what happened in May when U.S. Rep. Brad Sherman of California urged his colleagues to "nip bitcoin in the bud." Sherman pointed out that "an awful lot of our international power comes from the fact that the U.S. dollar is the standard unit of international finance and transactions. It is the announced purpose of the supporters of cryptocurrency to take that power away from us, to put us in a position where the most significant sanctions we have against Iran, for example, would become irrelevant. So, whether it is to disempower our foreign policy, our tax collection enforcement or traditional law enforcement, the advantage of crypto over sovereign currency is solely to aid in the disempowerment of the United States and the rule of law."
The cryptocurrency community reacted to Sherman's remarks swiftly, generally equating them to the opinion of the whole of the U.S. government. Investor, influencer and podcaster Anthony Pompliano reminded readers of his Off the Chain blog that Sherman wasn't as ignorant of nonsovereign currencies as some of their defenders were claiming and instead "knows exactly what is happening. He sees the increased probability that we are moving to a world where nonsovereign currencies are the default, and it sounds like he is scared." But what Sherman doesn't understand, Pompliano wrote, is "the improbability of being able to ban ownership of these decentralized digital currencies. The laws could be created but they would be nearly impossible to enforce." Groups on Telegram, the instant-messaging platform of choice for most blockchain companies and for discussions related to cryptocurrencies, vigorously debated whether U.S. officials had declared cryptocurrencies an existential threat to the United States' global financial dominance or not.
The mainstream media reacted more modestly — when it reacted at all. Bloomberg, The New York Times and The Washington Post, for example, did not report about Sherman's statement. To try to say why would be nothing more than a guess. The position of the U.S. dollar in the global economy remains solid. But by imposing sanctions on Russia, Venezuela and Iran, and by deepening its trade war with China, the United States has motivated those countries and others to attempt to find a substitute for the dollar.
Other recent cryptocurrency news couldn't be ignored. Widespread attention greeted Facebook's announcement in June that it will launch a proprietary cryptocurrency, Libra, in 2020. Libra will be a so-called stablecoin, a digital asset backed by a basket of international currencies, such as the dollar, euro and yen. Facebook has formed the Libra Association to oversee the cryptocurrency's development and governance. The Libra Association will be based in Geneva, Switzerland, and will be run as an independent, not-for-profit organization with more than two dozen founding partners, including Mastercard, Visa, PayPal, eBay, Uber, Lyft, Spotify, Vodafone and Coinbase.
By imposing sanctions on Russia, Venezuela and Iran, and by deepening its trade war with China, the United States has motivated those countries and others to attempt to find a substitute for the dollar.
Opinions vary. Despite Facebook's privacy failures and monopoly superpower, the cryptocurrency community sees Libra's potential to drive global acceptance of nonsovereign currencies. Meanwhile, Chris Hughes, a Facebook co-founder who has been critical of the company's recent decisions, worried in a Financial Times op-ed that a currency like Libra "could threaten the ability of emerging market governments to control their monetary supply, the local means of exchange, and, in some cases, their ability to impose capital controls." Lawmakers and central bankers are wary, too. U.S. Rep. Maxine Waters, chairwoman of the U.S. House Financial Services Committee, asked Facebook to stop Libra's development until it can clarify questions about potential privacy violations concerning consumer data. Numerous questions during a U.S. Senate Banking Committee hearing on July 16 centered on whether Facebook can be trusted to run its own cryptocurrency. Central bankers in the United Kingdom, France, Germany and Australia agreed with their U.S. counterparts that Libra must answer many regulatory questions to ensure it will not jeopardize financial systems or be used to launder money.
News about Facebook's plans has played out well for bitcoin so far. Bitcoin's value remains volatile, but as a decentralized currency beyond the control of governments or corporations, bitcoin suggests new options for countries tired of the dollar's dominance. Growing geopolitical instability will increase the desire for a decentralized currency infrastructure no matter what the United States wants or whether Facebook succeeds with Libra.
Russian authorities have given mixed signals about cryptocurrencies. On the one hand, for example, there have been reports that Russia is exploring the creation of a gold-backed cryptocurrency; on the other, there have been statements by Elina Sidorenko, chairwoman of the State Duma's cryptocurrency group, that "the Russian Federation is simply not ready to combine its traditional financial system with cryptocurrencies. And to say that this idea can be implemented in Russia for at least the next 30 years is unlikely." Russian officials have also leveled the usual accusations about money laundering, tax evasion and supporting terrorism against the use of bitcoin and other digital currencies.
During his annual televised "Direct Line" with the public in June, President Vladimir Putin was asked if Russia would have its own cryptocurrency. "Russia cannot have its own cryptocurrency by definition — just as any other country cannot have its own cryptocurrency," Putin said. "Because if we are talking about cryptocurrency, this is something that goes beyond national borders." He added that the government treats issues like mining cryptocurrency "very carefully," even if they aren't yet regulated, and said that "the central bank believes that cryptocurrency cannot be a means of payment, settlements, cannot be a means of accumulation, and they are not secured in any way." But Putin also said the Russian government was carefully analyzing this "phenomenon" to understand how it can participate and use it.
The rate of adoption of bitcoin and other cryptocurrencies is rather low in Russia, and a year of official bearish sentiment toward them combined with the country's economic struggles has decreased Russian interest in cryptocurrencies. But interest in using blockchain and digital assets can increase when a country is undergoing a social-economic ordeal. Such is the case with Zimbabwe.
Many Zimbabweans are tech-savvy despite the country's poor technological development, and many have embraced bitcoin. The country's hyperinflation is one factor behind that trend. The government abandoned its national currency after a trillion-Zimbabwean dollar note was introduced in 2009, allowing the use of foreign money, including the U.S. dollar, euro and South African rand. (Zimbabwe reintroduced the Zimbabwean dollar this year and enacted other fiscal changes that have reinforced interest in bitcoin.) This decision, in turn, created other problems such as shortages of foreign cash. To address that problem, the government tightly controlled the amount of U.S. dollars available for withdrawal. So, Zimbabweans started to look for ways to control their money without government restrictions. For many, bitcoin, delivered by Zimbabwe's cryptocurrency exchange Golix, was the answer.
With an inflation rate above 50 percent, a falling peso and tumbling markets, Argentines (at least those in the tech industry) have shown an increased interest in bitcoin and other digital currencies. So has the government. In March, Deputy Finance Minister Felix Martin Soto said the Argentine government should use cryptocurrencies and blockchain technology to reduce the country's demand for U.S. dollars and encourage global investment. (Half of Argentina's population doesn't have bank accounts and prefers to keep savings in dollars.) President Mauricio Macri has met with cryptocurrency investor and advocate Tim Draper, who argues that Argentina could disrupt the devaluation of the peso and other economic problems by embracing blockchain and legalizing bitcoin. The Argentine government has co-invested in blockchain projects and promoted the use of bitcoin to sell exports. (In February, for example, Argentina sold pesticides and fumigation products to Paraguay, settling the transaction using bitcoin.) Though the cryptocurrency may be volatile, it's less volatile than the Argentine peso and other South American sovereign currencies, which makes it an attractive alternative.
Venezuela is the first country to introduce its own cryptocurrency, El Petro. Venezuela's traditional currency, the bolivar, has become practically worthless as the country's economy has spiraled downward. But economic despair can encourage bitcoin adoption and Venezuelans, motivated by the country's strict capital controls, instability and financial insecurity, have turned to cryptocurrencies, which are more stable than the hyperinflated bolivar and can be fully owned.
Petro, supposedly backed by Venezuelan oil assets, also should be more stable than the bolivar and help Venezuela weather U.S. sanctions and its economic crisis. So far, it hasn't worked out as promised. Experts criticize Petro for lacking transparency and global exposure, and for it being fully centralized with all control in the government's hands. For instance, whether or not Venezuelan oil actually backs it remains an unknown. U.S. officials have warned that Petro is a "scam" perpetrated by President Nicolas Maduro's government to undermine democracy in Venezuela. There is little evidence of Petro's actual use. As Reuters reported last year, it's not traded on any major cryptocurrency exchange and apparently, no shops accept it. Meanwhile, bitcoin usage continues to grow in Venezuela.
Real progress with a decentralized sovereign cryptocurrency — and a positive and promising use case — is being made in the Marshall Islands. Last year, the Pacific nation announced its plan to create an independently governed digital currency called the Sovereign (SOV). In June, the government said it has established a not-for-profit organization to develop and manage the SOV, which will circulate alongside the U.S. dollar, the currency currently in use in the Marshall Islands. A decentralized, government-supported cryptocurrency designed with transparency and security can become an important point of adoption. Success in the Marshall Islands might prove that cryptocurrencies can substitute for the U.S. dollar.
When government control over currency is too tight, disaster can follow. A famous example of this occurred on Sept. 16, 1992, when George Soros and other speculators took advantage of an overregulated British pound to short the currency. The pound collapsed, and the United Kingdom was forced to withdraw from the European Exchange Rate Mechanism, which was designed to stabilize European currencies. Meanwhile, "breaking" the Bank of England reportedly earned Soros more than $1 billion in a single day. For a contemporary example, consider Venezuela. Its government's tight control over the economy has fostered inflation so intense that Venezuelans become poorer every minute. The International Monetary Fund projected that Venezuela's inflation rate could reach 10 million percent by the end of the year.
Cryptocurrencies don't need to be non-sovereign, with their benefits limited to individuals. Countries can benefit, too.
Instability and uncertainty stir distrust in government. And for many who feel excluded from a central financial system, who lack economic opportunity or have no banking account (more than 1.7 billion adults remain unbanked worldwide), or resent third parties chewing into their profits, a currency that doesn't depend on a government or authoritative leader, and which allows anonymity, simplifies transactions and minimizes third-party interference, is appealing.
Government concerns about cryptocurrencies are understandable. They are a new form of money not limited by national borders or controlled by central banks. They conjure visions of individual control over earnings, investments and transactions free of government interference. But they don't need to be nonsovereign, with benefits limited to just individuals. Countries can benefit, too. For small countries like the Marshall Islands, Malta or Estonia, establishing a proprietary sovereign cryptocurrency or adopting bitcoin as the main currency can be a means of attracting innovative companies and entrepreneurs, which in turn can boost economic and technological development.
Still, in their early stages of development and acceptance, cryptocurrencies hold tremendous potential as an alternative to traditional banking. It seems inevitable they will only gradually strengthen that position.