Lithuania: Crypto is a solution of the future
Government views on cryptocurrency have evolved quite a bit in just the last year alone. Regulators in many countries have gone from believing cryptocurrency was a passing fad to understanding that it is a real financial force to be reckoned with. How they deal with this new reality may determine the relevance of cryptocurrency, in all its forms, decades from now.
To cryptocurrency purists who value decentralization and censorship avoidance, any government involvement in the crypto space is anathema. There are others who are more moderate and pragmatic in their approach. They see the value of cryptocurrency as a replacement for fiat and cash, a replacement that could offer a plethora of benefits ranging from cheaper transactions to greater security. Thus, the rise of central bank digital currencies (CBDCs) as one possible solution that combines the fundamental principles of fiat and crypto.
Lithuania working on a CBDC
Lithuania is just one of many countries now aggressively pursuing a CBDC project source. Most fascinating are the reasons they have given for doing so. According to Bank of Lithuania board member Marius Jurgilas, financial regulators in his country now face a scenario similar to that of "a parent who is disgruntled to see that his 'parental controls' are completely out of date."
Jurgilas has also described the traditional fiat-based financial system as a "solution of the past". This implies that cryptocurrency is a solution of a future. If you are not putting it all together, Jurgilas is essentially admitting that digital currencies will be the money of the future one way or another. He believes Lithuania and the larger Eurozone must start getting involved in digital currencies now in order to keep pace with technology.
Even though not all of Europe is on board with the CBDC concept, Jurgilas is not alone. Leaders from several other countries - including France, Germany, and Sweden - have all expressed similar views. There is increasing momentum throughout Europe toward the inevitability of replacing coins and bills with digital alternatives.
At this point it is important to stop and acknowledge the differences between CBDCs and cryptocurrencies. No world government to date has embraced the idea of replacing its fiat was something like Bitcoin or Ethereum. Central Bank authorities are not jumping on the private cryptocurrency train. Rather, they are interested in CBDCs.
A centrally controlled crypto
The term 'central bank digital currency' was developed to draw a distinction between traditional cryptos, like Bitcoin, and new coins that will eventually be developed and controlled by central banks. Bitcoin is a private cryptocurrency and technology platform. Lithuania's pending CBDC is a government-developed, government-controlled monetary system and platform.
CBDCs and cryptocurrencies do have some things in common. First, they both rely on blockchain as their foundation. Second, they both rely on encryption to protect transaction and personal data. And finally, both rely on some sort of consensus to maintain the integrity of the blockchain.
So where do they differ? Primarily in the political arena. Bitcoin and all its successors were created on a foundation of personal economic freedom. In other words, Bitcoin allows users to freely transact among themselves without any government interference, monitoring, or manipulation. Its pseudonymity and encryption keep government regulators at bay.
Also understand that Bitcoin is completely decentralized. That means there is no central authority that controls it. There is no board of directors sitting at a big oak table determining Bitcoin's value. There is no one capable of manipulating Bitcoin pricing in order to influence national economics.
The dual areas of freedom and decentralization are what set cryptocurrencies and CBDCs apart. A private crypto is completely free and void of government control. A CBDC is not. In fact, a CBDC is just the opposite.
Merely a cash replacement
A genuine CBDC is not at all decentralized. Rather, it is controlled by a central bank. The same Bank of Lithuania that controls fiat in that country will have the same authority to control whatever CBDC is released down the road. The Bank of England will control the eventual CBDC in the UK while the U.S. Federal Reserve will control its counterpart in the U.S.
As far as freedom goes, consumer use of a CBDC eliminates any pretense of it. Just like the current fiat system limits the freedoms of those who use it, so do CBDCs. It is the nature of the beast. Unfortunately, this all leads to the conclusion that a CBDC is really nothing more than a cash replacement.
Yes, CBDCs do offer a bit more security through encryption and immutability. Yes, CBDCs also facilitate faster and less costly transactions. And yes, they can be developed in such a way as to eliminate all the barriers to cross-border transactions. But at the end of the day, they are still restricted and under the purview of government control.
The future of money
To someone who values the freedom and decentralization of private cryptocurrency, the thought of governments adopting CBDCs is rather unpleasant. But the fact is that Marius Jurgilas makes a very good point: cryptocurrency is a solution of the future. It is hard to look at what is going on in the crypto universe right now and not conclude that digital currencies will eventually replace cash. There doesn't seem to be any way around it.
Reaching that conclusion leads to a plethora of troubling thoughts and unanswered questions. At the top of the list is whether Bitcoin and other cryptocurrencies will survive once CBDCs become the norm. No one really knows. Furthermore, there is no way to even get a direction until we see what the coming CBDCs actually look like.
In Lithuania, they are getting ready to launch a test coin in the spring. The test is part of the LBCHAIN blockchain project currently being developed by the Bank of Lithuania. Their LBCOIN will be released in the spring as a collector coin with no value as legal tender. Some 24,000 tokens will be released.
What is the purpose? Bank of Lithuania regulators have chosen the collector coin route for the purposes of testing technology and educating themselves further about how cryptocurrencies work. The coins will have no real value simply because the bank does not want to risk its financial assets on a project that could potentially fail. They see the test project as a tool of learning.
It would seem that a successful test would indicate that Lithuania is on the right track. Success may put their drive to release a CBDC on the fast track. The question is, how long will it take them to get to the end of that track? There are other countries on similar tracks, some of which may beat Lithuania to the punch.
As reported in one of our earlier blog posts, China is all but ready to begin distributing its new digital currency via tests initiated in the next few weeks. The People's Bank of China hasn't released a whole lot of details about the project, but we do know that the tests will be limited to a few major cities and facilitated by four commercial banks and two telecoms.
Cross chain interoperability
While Lithuania and China embark on their test projects, regulators in the British Virgin Islands and the Marshall Islands are on the verge of creating digital currencies that would become legal tender alongside the U.S. dollar. Meanwhile, Venezuela already has its own CBDC in the Petro.
All the existing and pipeline projects lay bare one more serious concern about the future of money: Cross chain interoperability. Such interoperability does not exist right now. If you want to convert one type of cryptocurrency to another you have to conduct two transactions. You need to sell the one crypto then use the proceeds to buy another.
A similar situation exists with fiat, at least when you are paying cash. Let's say you are UK citizen traveling abroad on holiday. You visit a country whose merchants do not accept British pounds as payment. Now you have to use your pounds to purchase whatever fiat you need.
Of course, paying with a credit or debit card eliminates the extra step. You can pay with plastic and let your bank make the conversion on the fly. As such, paying with credit and debit cards is more efficient. That efficiency is a direct result of interoperability among settlement networks.
For CBDCs to eventually replace all forms of fiat, that same level of interoperability must exist. This is a fairly tough nut to crack when you consider the basic tenets of blockchain technology. How do you achieve cross chain interoperability when each blockchain is designed to be separate, distinct, immutable, and totally secure?
Also remember that CBDC blockchains will have to be operable with more traditional technologies initially. Once CBDCs become the norm, it is going to take some time to get everything converted over. In the interim, CBDCs will have to play well with fiat.
We still have a long way to go before CBDCs become the norm. But all indications suggest they eventually will replace cash. Marius Jurgilas understands that. He and his Bank of Lithuania peers understand that crypto is a solution of the future. Fiat and cash are solutions of the past.