The question – Why is a technology threatening to decentralize money so attractive to highly centralized, authoritarian regimes? is ripe to be asked with Russia and China both embracing the idea of sovereign cryptocurrencies.
President Vladimir Putin had ordered the swift launching of a “crypto-ruble”, Argumenti i Fakti, a pro-government newspaper, quoted Russian Communication Minister Nikolai Nikiforov as saying last weekend. The currency would be impossible to “mine” like bitcoin because it would be “a closed model with a definite volume of regulated emission” and would use “Russian cryptography”, Nikiforov is reported to have said according to the report.
Statements that stressed the need for the Russian state to bring cryptocurrency emission and use under control were issued by Central Bank Governor Elvira Nabiullina and Finance Minister Anton Siluanv.
Recent unofficial Chinese proposals sounded familiar to the vague description of the crypto-ruble by Nikidforov. A central bank-issued electronic currency for which commercial banks would administer “wallets” has been discussed by Yao Qian, deputy director of the People’s Bank of China’s technology division. The idea has also been echoed by state-affiliated researchers and other Chinese officials.
The interest of China and Russia is baffling to those who believe bitcoin’s main innovation is the exclusion of a central authority. The technology is a peer-to-peer system in which transactions are validated by “miners”. Control to the blockchain is not being planned to be given up by those governments. On the contrary, to control everything that’s going on in the financial system, they are trying to figure out how to lower the cost for a centralized issuer.
Private banks produce the electronic money we use today. It is, essentially, their liabilities to each other. As a recent Bank of International Settlements paper pointed out, “Cash is the only means by which the public can hold central bank money. If someone wishes to digitize that holding, he/she has to convert the central bank liability into a commercial bank liability by depositing the cash in a bank.” However, for both central banks and governments, cash has its disadvantages. Printing, minting, distributing and destroying cash is costly. It can take years to administer changes to the banknotes and coins. There are also risks of theft and robbery. At the same time, criminals and tax evaders depend on it because cash is anonymous.
If a central bank can have transactions registered in a bitcoin-like distributed ledger, verified by central bank-approved agents and can issue its own cryptocurrency, these problems can be resolved.
“With a lower entry hurdle to becoming a transactions verifier in a distributed system than to becoming a member bank in a tiered system, we would expect more intense competition in the provision of payment services,” Bank of England’s John Barrdear and Michael Kumhof wrote in a paper last year. “To the extent that existing systems grant pricing power to member institutions, this should ensure that transaction fees more accurately reflect the marginal cost of verification.”
The elimination of cash at this point is not envisaged by the Russian and Chinese plans. But more attainable in Russia and China than almost anywhere else, that would be the logical end goal. In both these countries, the role of banks in the economy can easily be reduced by offering an alternative central bank-based system and the state controls most of the banking systems’ assets.
(Adapted from Bloomberg)