High level government officials in a number of countries, notably China and Russia, have said their countries will issue a national cryptocurrency soon. Many people in the crypto world are baffled.
The main reason for bitcoin — the original cryptocurrency — was to create a currency free from government interference. Fiat (paper) currencies are wantonly inflated by governments. China, Europe and United States have each doubled or tripled their money supply since 2008 in the name “quantitative easing”. This is far, far above real economic growth, in effect socializing bank losses from the 2008 crash, but without the political backlash. Gold is supposed to be a currency which governments can’t inflate, but because gold is bulky and detectable governments can still interfere in its transport, or just buy it up, effectively denying it currency utility. (Gold has other issues, which bitcoin also solves).
But a government controlled cryptocurrency? That sounds like an oxymoron. What will that even look like? If they are going to be inflating it like fiat then what’s the point? You don’t need a cryptocurrency to have electronic payments, we already have it with Paypal and Alipay.
There are several points. Bitcoin is not just a distributed digital inflation-protected currency. (Bitcoin inflates too, but predictably according to a mathematical formula, not around elections cycles) Bitcoin, along with other cryptos, is also a technology which provides radical transparency and features such as automatic multi signature wallets and smart contracts, including tokenization. None of this is a feature of fiat today, though you can fake it with buildings full of people, lawyers and bureaucracy. Exactly because it already kind of exists but is very inefficient, it is not an existential threat to governments (though it might be to the banks). On the contrary, for example governments love transparency (of people, not them).
In an oft cited example, if I pass to you a million dollars in cash in a bag at a downtown restaurant, nobody will likely ever know about it, not even the NSA unless they are actively tracking you or me. If I send you $5 using a cryptocurrency, say bitcoin, the entire planet’s humanity will be able to see it stream by, or look it up forever. Most people won’t know (or care) it’s you and me, but there are technical tools government agencies can use to link addresses to people, especially since they also have access to a mass electronic surveillance system to capture people exchanging bitcoin addresses. That alone is a very nice feature of crypto that cash simply does not have and that’s like catnip to the government. It’s kind of ironic that some people involved in illegal activities choose to use bitcoin today rather than cash. Maybe it’s why many of them are in jail now serving long sentences.
It is also very possible if not likely that some governments will want to block bitcoin and other cryptos or regulate them very, very heavily in the future. Unfortunately for these governments, I predict that in the decades ahead banning crypto will be like banning the internet: it would banish you to the status of North Korea. But, pundits might say, China has shown that you can heavily regulate internet access and still have a vibrant economy. Things are not that simple though.
China’s social and political landscape has changed a lot over the years despite heavy handed regulation in no small part because of— what I call — the Chinternet that exists there. You still may not form a political party in China in 2017 like you weren’t allowed to in 2001, but Chinese people are a lot more connected today than they were back then or ever for that matter. For example, as late as 2005, if you wanted to organize a group with more than 5 people — Collectors of Beanie Babies — you were required to register with your local police station, fill out a form and subject yourself to questioning about your intentions and political correctness. As you might imagine, not a lot of people went through the exercise. Today, within seconds you can organize hundreds of people in a WeChat group without police registration. Of course, your WeChat account is linked to your phone, which is linked to your ID — and the telco is a state company — so in effect you are registering with the government, it just happens seamlessly and a lot more efficiently, for both you and the government. Further, the government monitors those groups of course, and they love it, because now not only do they know who is connected to whom, but also what people are saying, which is more than they got back in the day with paper forms stuck at the provincial police station. And they can track this nationally now. Perfect.
On the other hand, there have already been several “mini internet uprisings” in China, something the communist Chinese government has traditionally balked at, and which the government has managed to squish with censorship — but it was also forced to act. We know now there is solid dissent in China, because we have seen it online. Chinese people themselves have seen it too. What effect this “I am not alone in thinking this” will have on the future of China’s political landscape remains to be seen.
Regardless, objectively speaking, there is no doubt that political freedoms in China are much higher today than they were back in 2005. This is not because there was a meeting of the Communist Party of China in which they decided to give these freedoms to the Chinese people. No, I can tell you for sure that such meeting never happened. What happened was that those freedoms bubbled up anyway, in part because of the Chinternet, and the Chinese government allowed them because they now had the tools to make sure those freedoms didn’t topple them.
I think something similar will happen with crypto: it will “liberate” finance, and national cryptocurrencies will be the tool that pacifies governments enough to allow it. “National cryptocurrency” is the “Chinternet”.
“That’s horrible” might be your knee-jerk reaction if you are an ideological crypto enthusiast. But you should know that things with technology don’t always turn out as neat as the original ideologues imagine it anyway. If you were in Silicon Valley in the 1990s, when foundations of the modern internet were dug, you would have heard from many liberal technology enthusiasts how other than enabling what was to become Amazon, Youtube and Netflix, internet will also democratize societies, around the world and even in the US. Anyone will be able to talk to anyone, and publish their thoughts without censorship or go through some gatekeeper in the form a publisher, a Hollywood studio or even a legislator. Many of those same democracy zealots rejoiced years later when people used Twitter in country after country during Arab Spring to organize themselves and topple governments. After Donald Trump won the presidency on Facebook, however, many of those same people now declare that democracy is under attack and call for a “return to trusted brands like CNN”.
Technology has all sorts of effects. Regardless of where you are politically, you will like some and not the others. Indeed, you may like some then learn to hate them when they stop working in your favor. Reality is that ultimately nobody, including no government, can predict or fully control all its effects, especially the more social ones. Same is likely to happen with crypto. While governments will try to cherry pick features through regulation and with national cryptocurrencies, long term that’s not how things work. While national cryptocurrencies may be a sacrilege to the original spirit of crypto, I think they will actually help crypto deliver to the masses many of the benefits original thinkers envisioned.
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