Why some want government stablecoins and others do not
Perusing the cryptocurrency news this week revealed some interesting goings-on in the British Virgin Islands, the Marshall Islands, and Japan. It turns out that all three have slightly different takes on the idea of government stablecoins and central bank digital currencies. Their individual stories highlight the reality that in some countries, people want stablecoins while in other countries they do not.
The obvious question here is, why? As with all things cryptocurrency, the answer is not as simple as the question. What it basically comes down to is need. If people perceive the need to have a stablecoin for day-to-day use, they tend to be in favor of any such actions by government to develop one. If they do not perceive a need, they couldn't care less.
It should be noted that public perception doesn't necessarily drive government decisions. It is entirely possible for the majority of the country's population to see no need for a stablecoin yet the government go ahead and create one anyway. Just look at Venezuela. What the government perceives as a need generally drives its decisions. For a bit more clarity, let us look at what's going on in the British Virgin Islands, the Marshall Islands, and Japan.
A new coin in the British Virgin Islands
The British Virgin Islands are a group of islands that are geographically part of the Virgin Islands archipelago in the Eastern Caribbean. Though mostly autonomous, the islands are British Overseas Territories ultimately overseen by the Queen of Great Britain. All island citizens are also British citizens.
The British Virgin Islands has used the U.S. dollar as its official fiat since 1959. Things have worked well ever since. Adopting the U.S. dollar has made it extremely easy for the British Virgin Islands to welcome tourists from around the world, but especially those from the U.S. Now it appears they are ready to take things one step further by launching a stablecoin pegged to the U.S. dollar at a rate of 1 to 1.
It is hoped that introducing their stablecoin - which will be known as BVI~LIFE - will benefit citizens domestically in that it will speed up financial transactions across the islands. British Virgin Islands officials also hope the stablecoin will reduce transaction fees for digital payments. Internationally, they hope to make the coin available to tourists who might want to use it on holidays rather than carrying fiat.
The coin's name was derived from the partnership between the British Virgin Islands and its technology partner, LIFElabs. It turns out the company is also working on what has been called a 'rapid cash response' fund that would provide financial aid in the event of a national emergency. It is not clear exactly how much will be in the fund, who will administer it, etc.
By all accounts it seems that the British Virgin Islands is ready for a government-issued stablecoin. Whether or not pegging the coin to the U.S. dollar is a wise idea remains to be seen. However, the U.S. dollar is as stable an asset as one could hope for. The fact that it is the world's preferred reserve currency means any stablecoin backed by it is at a low risk of failure. Now it is just a matter of whether people actually want to do business with BVI~LIFE rather than fiat.
A new coin in the Marshall Islands
Half-way around the world are the Marshall Islands, an independent island nation that is also designated as a U.S. associate state. The Marshall Islands are geographically part of Micronesia, way out in the Pacific Ocean just west of the international date line.
The crypto world learned back in September 2019 that the Marshall Islands published a paper outlining a cryptocurrency project researchers were in the process of developing. In that paper it was revealed that the nation plans to issue the Marshallese Sovereign (SOV) in the near future. It will officially be a CBDC.
Like the British Virgin Islands, the Marshall Islands currently relies on the U.S. dollar as its fiat. However, their cryptocurrency plans call for eventually turning away from the U.S. dollar. This is where they differ from the British Virgin Islands. Where the British Virgin Islands intend to keep the U.S. dollar and operate BVI~LIFE alongside it, leaders in the Marshall Islands hope that SOV will eventually make the dollar irrelevant.
SOV as legal tender
Right now, there appear to be no plans to officially abandon the dollar in favor of the new digital currency. However, SOV will be recognized as legal tender when it is finally issued. Giving the digital coin legal tender status is not only big, it is game changing.
Legal tender is a currency that is recognized by government as a legal means for settling debts. If you pay a debt in the Marshall Islands using U.S. dollars, that debt is considered legally settled once and for all. That will soon be the case for SOV as well.
At the time of this writing, there did not appear to be any other countries that recognized a digital currency as legal tender. Venezuela's government may recognize the Petro, but no one knows for sure as the status of that particular stablecoin is quite murky.
As for the impetus behind the Marshall Islands' cryptocurrency project, it boils down to being able to transact business more easily across the islands. As you might know, cross-border transactions are difficult enough when geographic areas share land borders. Transacting business between islands is even more challenging - even when those islands are part of the same country.
Moving to SOV will make it easier to facilitate digital payments between parties regardless of their actual geographic location. As an added bonus, they will be less dependence on financial grants made by the U.S. government to keep the Marshall Islands economy moving. With its own sovereign legal tender, the islands will have greater control over their own economics.
The only question surrounding SOV is what will actually back it as a stablecoin. From the limited information we now have, it appears as though the coin will have no limits in terms of its supply. Its value will automatically increase by 4% annually as a means of protecting it against crypto volatility.
No stablecoin in Japan
Our global review of government-backed stablecoins takes us to Japan, where it has recently been learned that the push for a government stablecoin has stalled. In a speech in early December 2019, Bank of Japan Governor Haruhiko Kuroda made it clear that there was no need to introduce a government-backed stablecoin at this time.
This is not to say that Japanese developers are not working on a stablecoin. They actually are. They eventually hope to come up with a CBDC that is ready to go at a moment's notice. The thinking is to develop the project now, then wait until there is enough public demand to release it.
According to Kuroda, the lack of need for a CBDC in Japan is directly related to how the Japanese public perceives cash. Japan is one of only a small number of countries in which the amount of outstanding cash in circulation is actually increasing. In the simplest possible terms, Japanese consumers still prefer to do business in cash. That means they are relying on fiat more than ever before.
Japanese culture is traditionally resistant to systemic change. This is not a bad thing as it preserves cultural traditions that are thousands of years old. In terms of day-to-day economics however, that resistance has created a scenario that is making Japan increasingly more unique in its preference for cash.
Private digital currencies
Despite the government's reluctance to issue a CBDC at this point, there is another curious phenomenon taking place in Japan: the rise of private digital currencies denominated in Japanese yen. Rather than buying digital currencies valued in U.S. dollars, like Bitcoin for example, Japanese consumers are more interested in coins valued in their native fiat.
For their part, the government is actually encouraging the development of private digital currencies. Even the Bank of Japan is on board. They are encouraging merchants to accept cashless payments while also working with technology developers to increase interoperability among payment service providers. The long and short of it is that the Bank of Japan is on board with private cryptocurrencies as long as they are denominated in yen.
In the meantime, the Bank of Japan says it will continue developing its stablecoin project. They will be focusing mainly on the risks stablecoins pose to traditional financial institutions and fiat currency. Common sense seems to dictate that they will be more willing to issue a CBDC in the future if they determine it will not harm their fiat or their economy.
As these three stories demonstrate, stablecoins are a mixed bag. In some countries, they are seen as a tool for improving economics by facilitating faster transactions with lower fees. In other countries, there doesn't seem to be any need or desire to get into the stablecoin market.
What will become of stablecoins and CBDCs in the future? Only time will tell. It seems inevitable that minted coins and printed bills will eventually be replaced by digital currencies. No one knows how long it will take or what the eventual digital currencies will look like. For now, all we can do is look to the examples set by the British Virgin Islands, the Marshall Islands, Japan, and a few others.