Government backed crypto-currencies: An easier way to get coffee? — by Kay Rieck

There are several debates around the pros and cons of government backed sovereign cryptocurrencies. As some governments move closer to rolling out their trials to the wider population, it is worth having a look at these discussions and ultimately remembering the fundamental purpose of money in the first place: making it easier to buy things.

With the best will in the world, digital currencies are still the preserve of the evangelists. The people who see them as a way of revolutionizing the financial system, of taking control away from governments and putting power back in the hands of people.

There is progress in making the digitization project more real to more people, but at this stage, while there is massive interest among converts, it is still going to be some time before it is embraced by the mainstream. There is a flurry of headlines when something exciting happens, but this tends to quickly subside because most of the digital currency announcements are very technical and a long way from having an impact on people’s day-to-day lives.

In truth, there are several things going on, and in the mind of the public, they are all part of the same thing: the ongoing peaks and troughs in the price of Bitcoin, the phenomenal interest in non-fungible tokens in the spring, the debate around the environmental implications of the crypto as a whole and the challenges that an emerging sector faces, are all lumped in together for the majority of people.

Coffee as a catalyst

They are of course closely related, but for the majority of people that are all part of an indefinable mulch that is only very loosely understood. The difference between a stable coin and an unpegged crypto-currency is not really essential when all you want to know is whether you buy a coffee with it.

What is likely to help to understand coalesce around the sector would be one of the governments of the world emerging with a coherent and consistent policy for a government-backed sovereign digital currency. A digi-dollar or an e-euro.

While progress has been made in several countries, as with many things, these days, China looks likely to claim the accolade of being first to market with its Digital Currency Electronic Payment (DCEP) system.

The DCEP is already being trialed in four cities, and the government has stated that it aims to roll it out further during the 2022 Beijing Winter Olympics.

Why is a big question

There are both practical and political reasons why the Chinese state is keen to explore the potential of having a digital currency. One of the key factors is simple efficiency. DCEP will work directly between the consumer and the Central Bank, removing the costs of having a middleman involved in a transaction.

Meanwhile, from a political perspective, the government has recognized that being able to track all spending would be a massive benefit from a regulation and taxation perspective. Cynics might also suggest that if China can offer the technology behind DCEP to emerging governments at a reasonable price, it will be another big step in the process of unseating the dollar from its position as the world’s reserve currency.

The more things change

Like many things in life though, the DCEP looks like it will be an enhancement in some ways but not in others.

As a digital currency that is built on the blockchain, it has the potential to be a very efficient way of making financial transactions. And being backed by the government, it has the potential to solve many of the accusations of illegality that have dogged the crypto sector throughout the last decade.

The flip side of this, however is that it doesn’t get around the crypto-sector’s voracious appetite for energy. More importantly, crypto was originally envisaged as a way to reduce the control and centralising tendencies of national governments, so having one created by the government in China feels like it could be going against the spirit of the technology’s development.

Don’t let perfect get in the way of good

Either way, technology and, to be fair society as a whole, tends to move forward through compromise, and a developer’s original intentions are often forced to change when the realities of the market come in to play. You have to ask yourself: do you want a cheaper, safer, quicker way to complete transactions online or are you so ideologically opposed to government involvement that you will forgo all of the potential benefits if a government plays a role.

The trouble with the latter stance is that it brings us back to the challenge that the crypto sector faces at the moment in terms of wider uptake: the majority of people that are not directly involved in the space are not necessarily interested in the ideology, they just want a way of making online transactions cheaper, safer and quicker.

Irrespective of which government leads the charge, the main reason why some are trying to embrace cryptocurrencies is because they appear to be happening whether they like it or not. Some governments have taken Draconian steps to discourage the use of the current generation of crypto, but all this tends to achieve is a re-emergence in a slightly different guise.

Taking such a hard line runs the risk of making tech development into a game of cat and mouse, and that will cost revenue in two ways. Firstly, by not allowing it you reduce innovation in your economy, and encourage innovative companies to move their operations to more welcoming counties. Secondly, you will also have to spend money to prohibit it.

As a result, some governments have taken the view that there are clear advantages to digital currency, so why not bring it into the fold and exercise a modicum of control. Most people aren’t interested in the philosophy, they just want to be able to buy a cup of coffee in the morning with as little hassle as possible.

About the author

Kay Rieck has been active on the investment side of the oil and gas sector for more than two decades. Starting his career as a financial adviser and stockbroker on the New York Stock Exchange, he quickly developed an interest in natural resources and associated assets, building his expertise with investment banking and asset management roles at the New York Board of Trade and the Chicago Board of Trade. Utilising his exceptional network of global contacts, he started his first exploration and production company in the US in 2008, selecting investments across the Haynesville Shale, Permian basin, Eagle Ford shale, Dimmit county and elsewhere that offered exceptional prospective returns.