World getting closer to government-backed digital assets

3 June, 2019

We have written extensively on how governments the world over are approaching the idea of digital assets. From regulation to taxation, government leaders are coming to grips with the fact that cryptocurrency, blockchain, etc. are here to stay. Two recent news stories demonstrate where we are at the current time. They demonstrate that we are getting ever closer to government-backed digital assets being commonplace.

Will such assets ever effectively compete with true cryptocurrencies? That depends on public reaction. Government-backed digital assets can never be truly decentralized - which is a core tenant of cryptocurrency - but they can provide the same functionality. The only question is whether or not the general public would prefer to have a true cryptocurrency or a government-issued digital coin.

With the foundation laid, let us look at the previously referenced news stories. The first comes out of Canada and Singapore while the second is out of Russia.

Central Banks settle with blockchain

Coin Desk's Yogita Khatri reported on May 2 (2019) that the central banks of Canada and Singapore completed the very first cross-border payment settlement using digital currencies and blockchain ledgers. The transaction was apparently a trial run intended to demonstrate whether or not the two banks could effectively settle cross-border transactions with digital tokens.

The Bank of Canada (BoC) and the Monetary Authority of Singapore (MAS) agreed that the successful transaction shows "great potential to increase efficiencies and reduce risks for cross-border payments." According to Khatri, the settlement involved linking different blockchain networks from both central banks and then implementing smart contracts to facilitate settlement between them.

Khatri also reported that the project is still considered highly experimental despite the success of this initial transaction. The two central banks will apparently continue working together to improve the system in hopes of eventually using blockchain and government-issued digital tokens to improve efficiency and cross-border transactions.

Cheaper and faster payments

The goal of the Canada-Singapore project is to eventually end up with cheaper and faster payments. The two central banks are hoping their counterparts in other countries will get on board with the understanding that a greater number of partners contributing to development will result in a more robust and equitable system over the long term.

Should they succeed in their goal, the resulting payment system would be capable of linking central bank networks from around the world even if they all use different blockchain ledgers domestically. Payments will be settled without the need for any intermediary as well. As for the digital currencies used to make payments, they will be converted on-the-fly between banks.

The entire crypto universe should take notice of what is happening here. The fact that the BoC and MAS have accomplished a digital transaction settlement without any intermediary bodes very well for the future of digital payments. However, it is inevitable that the system will lead to nearly every developed nation issuing its own government-backed token.

Some of those tokens will be reserved strictly for central bank payment purposes. Others will be introduced to the general public as stablecoins to be used in place of, or in concert with, fiat coins and bills. The simple truth is that once central banks get involved, government-backed tokens are inevitable.

Russia launches security token blockchain

The second story, reported by Coin Desk's Ian Allison, is equally eye-opening. Allison reported on May 22 (2019) that Russia's National Settlement Depository (NST) is on the verge of launching its much-anticipated digital asset ledger. Known as D3ledger, the security token blockchain will be hosted in Switzerland and governed under its jurisdictional authority.

D3ledger will be used to track digital asset ownership. For now, it will focus on just a few assets including a Japanese cryptocurrency, a small number of Ethereum ERC-20 tokens, holdings in a small healthcare company, and crypto's top two players: Bitcoin and Ethereum.

The ledger platform itself will hold digital assets as well. This will allow Russian investors to get involved with the tracked assets as they see fit - without having to go through foreign exchanges. According to NSD regulators, the idea here is to combine public and private networks to offer Russian investors a safer and more secure means of holding and trading their digital assets rather than leaving those assets vulnerable on risky exchanges.

A government crypto account

For all intents and purposes, Russia's D3ledger acts like a government-backed cryptocurrency account similar to a traditional savings account backed by government insurance. The biggest difference here is that the Russian government actually owns the ledger platform rather than just insuring it. Whether or not this is good or bad depends on how you view government ownership of a distributed ledger.

On the plus side, it would appear as though the D3ledger platform does provide a more secure and safe place to store digital assets. The other side of that coin is that it also gives government officials access to private digital assets. Information from the platform could be used to identify crypto owners and the activities for which they use their assets.

Regulators say that the next step is to issue a stablecoin that will exist alongside the digital assets held on D3ledger. The stablecoin will serve as a means of facilitating over-the-counter (OTC) transactions among buyers and sellers. An NSD representative told Allison that the stablecoin will likely be backed by the U.S. dollar or euro rather than Russia's domestic fiat.

A common connection

Both developments are particularly important for the crypto community around the world. If you missed it, the Canada-Singapore and Russia stories have a common connection: stablecoins. In both cases, the governments involved are working toward eventually issuing their own coins.

Taken at face value, a stablecoin issued by a central bank is not all that different from fiat in terms of usefulness, governance, etc. Consider a Canadian coin for example.

For all intents and purposes, Canada could eventually replace the Canadian dollar with a digital token with virtually no disruption. People would gradually trade in their bills and coins for digital tokens which would then be treated as legal tender. Payments would proceed as normal without the need for the outdated bills and coins.

The BoC would still exert the same level of control it now exerts over the Canadian dollar. Regulators would have every opportunity to manipulate both coin supply and value in order to maintain economic stability. But without the need to print bills and mint coins, Canada's stablecoin would be nearly free to produce. Yet the cost savings could easily be dwarfed by the amount of money it would take to maintain the stablecoin's network.

How fast we get there

The point of talking about these two news stories is to simply illustrate that we are getting ever closer to a world dominated by government-backed stablecoins. It now seems inevitable that fiat will eventually be replaced entirely by digital tokens. The only two questions remaining are how fast we get there and whether or not stablecoins will overtake traditional cryptocurrencies.

In terms of the former, worldwide adoption of stablecoins is not going to happen in 2019. It will probably not happen in the next decade. Replacing fiat with a stablecoin is not as easy as copying the Bitcoin core and launching a new coin with it. The world needs far bigger and more powerful networks to make it all worthwhile, and those networks just don't exist yet. It is going to take some time to build them.

As for the latter, it's hard to imagine government-backed stablecoins ever replacing pure cryptocurrency. The whole point of cryptocurrency is to have a monetary system free of government interference. That is why cryptocurrencies are decentralized. People who invest in platforms like Bitcoin and Ethereum because they want to avoid centralized investments are not going to change their minds simply because governments start issuing stablecoins.

The most likely scenario is that stablecoins will replace fiat while cryptocurrencies continue to appeal to those who want to participate in a decentralized monetary system, whether that is to make payments or use crypto as a store of value.

The choice will be yours

As the world moves closer to government-backed stablecoins, the average consumer could help his/her own cause by educating him/herself on blockchain, cryptocurrency, and stablecoins. What we are talking about here runs far deeper than purchasing some bitcoin so that you can play Mega Moolah at your favorite online gambling site. It goes to the very core of how people pay for things.

It is quite clear that stablecoins are on the way. At some point, you will be given a choice as to whether you embrace them or not. At some point after that, stablecoins will no longer be optional. They are eventually going to replace paper bills and coins one way or another.

In the meantime, continue to enjoy using your favorite crypto as you always have. Play Mega Moolah with your bitcoins. Use your Ethereum to download your favorite music. Continue putting money into stockpiling Bitcoin Cash in the hopes of turning a tidy profit down the road. Whatever works for you is just fine.