The concept of central bank issued cryptocurrencies is not new and we have never been closer to witnessing the actual creation of government-issued cryptocurrencies than in 2018. But while it may be easy enough for governments to create cryptocurrencies, how likely is it that they will succeed?
The concept of central bank issued cryptocurrencies is not new. It has been discussed in the bitcoin community since the early days of altcoins back in 2013. However, we have never been closer to witnessing the actual creation of government-issued cryptocurrencies than in 2018. But while it may be easy enough for governments to create cryptocurrencies, how likely is it that they will succeed?
Venezuela’s Petro is here
As Brave New Coin reported in January, Venezuela is the first country to launch a national cryptocurrency. In February, the oil-backed ‘Petro’ raised over $735 million on the first day of its pre-sale, according to its primary proponent, Venezuelan President Nicolás Maduro. Claims were made that the oil-backed ‘Petro’ would be used in tourism, gasoline sales and oil transactions. However, no actual evidence has been provided to support this, and Maduro’s opposition alleges that this token sale is an illegal debt issuance.
Chris Burniske, author of ‘Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond’ and advisor to ARK Investment Management, considers the Petro not to be a “real” cryptocurrency as it is not decentralized. Instead, he considers it as tokenized oil, more similar to a commodity ETF than an actual cryptocurrency. “This is a stunt, and I don’t think of it as a cryptocurrency,” he told Bloomberg. “The Petro is really a top-down hierarchically controlled asset, and it’s much more akin to a new way to tokenize oil.”
To add to the controversy, the network that the Petro will supposedly run on has not yet been decided. First, there was mention of it being an ER20 token, then it was said that the NEM blockchain would be used. However, neither the Ethereum blockchain nor the NEM blockchain show the sale of $735 million dollars worth of a single digital token during the time period the pre-sale allegedly took place. That begs the question: “How did they sell $735 million worth of Petro tokens, if they do not have a network to run on?” The Petro is starting to look more and more like an ICO scam than the actual launch of a national cryptocurrency.
Interestingly, President Maduro also announced that he wants to issue another national cryptocurrency that will be backed by gold that will be titled ‘Petro gold’ in the hope to skirt financial sanctions that have been placed on the country by the U.S.
Iran talking up a cryptocurrency
Another country keen on bypassing U.S. financial sanctions, is Iran, with a government official announcing recently that it too will be launching its own cryptocurrency. Iran’s Information and Communications Technology Minister, Mohammad-Javad Azari Jahromi, tweeted that the central bank plans to “implement the country’s first cloud-based digital currency using the capacity of the country’s elite.”
However, Iran’s central bank published a statement, shortly after, that denied Jahromi’s claims, citing the high volatility of digital currencies and risks such as pyramid schemes as reasons for not pursuing such a venture. The conflicting statements out of Iran signal that it is unlikely that we will witness an Iranian version of bitcoin this year. However, it does show that governments suffering under prolonged financial sanctions are recognizing the value that cryptocurrencies can bring to increase the level of financial sovereignty. Something that early adopters of bitcoin have known for years.
Turkcoin is coming
According to a report by Al-Monitor, the deputy chairman of the Nationalist Movement Party (MHP), Ahmet Kenan Tanrikulu, is proposing a state-sponsored national cryptocurrency for Turkey called the ‘Turkcoin’. "The world is advancing toward a new digital system. Turkey should create its own digital system and currency before it’s too late," Tanrikulu told Al-Monitor.
“We […] can create a digital currency, based on companies in the Wealth Fund. Since the demand exists, we should create and release our own digital currency. Opposing those currencies is meaningless. This is a national issue which requires a national consensus,” he says. Last month, Deputy Prime Minister Mehmet Simsek, who oversees the country’s economy, stated that the government plans to begin preparations for sovereign cryptocurrency.
Unlike in Venezuela’s case, where its new cryptocurrency is allegedly backed by oil, Turkey plans to back its digital currency with assets in the country’s Wealth Fund. These assets include holdings in some of Turkey’s largest publicly-traded companies such as Turkish Airlines and Turk Telecom. Therefore, in theory, the value of Turkcoin should increase as the Wealth Fund’s asset value grows. In that sense, the new national cryptocurrency would resemble an asset-backed security more than a decentralized cryptocurrency such as bitcoin.
Nation-state cryptocurrencies face big challenges
The idea of issuing a sovereign cryptocurrency may be a good one, especially for countries suffering from the downsides of sanctions and dollarization. However, the successful execution of such a policy move is a mammoth task. The challenges for issuing a national cryptocurrency range from legal issues, technological hurdles and cybersecurity concerns, through to convincing citizens that the newly-issued digital token is actually “real” money.
While it is understandable that countries such as Venezuela and Iran want to regain stronger economic bargaining power, issuing a cryptocurrency that may or may not be backed by something is unlikely to have the desired effect. For example, should the Petro become tradable on international exchanges, the smart money would most likely short the coin and watch its value dwindle as the faith in Maduro’s promises is limited given how the Venezuelan economy has fared under his presidency.
The same goes for the controversial leaders of Turkey and Iran. The faith in these individuals is limited among large sections of their populations. Hence, it would be challenging to convince citizens to adopt a newly-issued national cryptocurrency simply because the government announces that it will supposedly help the economy.