Despite concerns about the potential volatility of cryptocurrency, it appears to be gaining traction among governments looking to establish their digital currencies. China, Ecuador, Senegal, Singapore, and Tunisia are among the countries that have already created digital currencies, with Estonia, Russia, Japan, Palestine, and Sweden potentially following suit.
Even a tiny country, the Marshall Islands, has intended to create its digital currency to boost its economy and will accept the US dollar as payment. What appeared to be a novel thought experiment about whether cryptocurrency could be a legitimate alternative to the established norm has turned out to be an option that governments are seriously considering. Indeed, some have speculated that increased adoption of country-specific cryptocurrencies could have severe consequences for the established international monetary system. So, is national cryptocurrencies a trend you need to watch?
States facing severe economic sanctions are turning to cryptocurrency to mitigate the consequences. Iran is one of these countries and is said to be very interested in developing a digital currency, a significant shift from its initial stance of prohibiting banks from dealing in cryptocurrency. In the wake of fresh US sanctions, the Secretary of Iran’s Supreme Council of Cyberspace reportedly plans to “smoothen trade” between Iran and its allies by using cryptocurrency. According to the same source, a state-backed cryptocurrency was accepted as an industry in the government and related organizations such as the Central Bank, the Ministry of Communications and Information Technology, the Ministry of Energy, and the Ministry of Finance,…
In this endeavor, Iran is not alone. Some countries have used cryptocurrency to avoid sanctions imposed by some global community members because such transactions can occur without oversight or tracking. Venezuela has been a pioneer in developing a government-backed cryptocurrency to achieve this goal. Venezuela created “the Petro” in December 2017 as a cryptocurrency to supplement the bolivar Fuerte currency and to help overcome US sanctions. North Korea is another example. Although it has not yet created its cryptocurrency, the North Korean regime has been accused of stealing vast sums of money from cryptocurrency exchanges to soften the blow of sanctions.
How effective are cryptocurrencies in providing sanction relief to sanctioned governments? The success or failure of a government will be determined mainly by its solvency and stability, as well as its ability to effectively be used as a positive instrument. In Venezuela’s case, all signs point to failure. According to recent news reports, the oil reserve-backed cryptocurrency is barely used, with the government showing no signs of tapping into its oil reserves as promised.
According to the same source, the Petro has yet to be found on any major cryptocurrency exchanges and is not accepted by retailers. Here, the government’s failure to follow through on its plans has led some to wonder if the Petro was a publicity stunt or a scam.
As more states, besides the rogue governments already mentioned, investigate the possibility of adopting cryptocurrencies, much speculation surrounds how this will affect the current international monetary system. The current system is based on a slew of internationally agreed-upon rules, norms, and institutions that allow countries to trade and invest with one another.
Cryptocurrencies rely on decentralized control, typically through blockchains, which act as a public financial transaction database. If enough nations develop their digital currencies, it is the immediate cause for concern; the system will collapse, and they will operate outside the global central banks’ current framework. Some, including the head of the International Monetary Fund, believe that cryptocurrencies will replace banks and existing financial systems in the future by eliminating the need for intermediaries and third-party service providers. Other experts predict cryptocurrencies will displace roughly 25% of national currencies by 2030.
However, cryptocurrency is prone to volatility and risk, and the scalability of mining cryptocurrency does not appear workable, at least for the time being. However, these issues can and will most likely be addressed. National cryptocurrencies have yet to show their ability to provide sanction relief to rogue states. And that could be the first litmus test for other nation states: determining whether this hot new commodity is the viable alternative that many believe it is. Contact SmartOSC to get full-service blockchain development solutions.
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