Cryptocurrencies have been gaining momentum for some time, with wildly fluctuating valuations and various initial coin offerings. And now, with the likes of Facebook announcing its plan to develop its own cryptocurrency, Libra, there is clearly a growing view that cryptocurrencies have a big future as part of the evolution of e-money.
These digital or virtual currencies use cryptography for security and generally operate on decentralised systems based on blockchain technology, a distributed ledger enforced by a disparate network of computers. While Bitcoin is the best-known cryptocurrency, others include Litecoin, Namecoin, Ethereum and Cardano.
One of the most striking developments in recent years is that several countries have started to develop their own national cryptocurrencies.
Sweden is developing a blockchain-based version of its currency, the e-krona. Sweden’s central bank, Riksbank, has said the e-krona would not be used for major transactions and transfers between individuals, companies or authorities.
The initial focus is on an e-krona that “constitutes a prepaid value without interest and with traceable transactions”. The traceable element suggests the e-krona may be a true cryptocurrency. In other words, a digital or virtual currency that uses cryptography for security.
Iceland, meanwhile, has become the first country to officially allow its currency to be used as electronic money over blockchain. The Financial Supervisory Authority of Iceland recently approved Reykjavik-based Monerium to provide fiat payment services for the Icelandic krona on a blockchain.
This means Monerium can provide fiat payment services for the Icelandic krona on a blockchain throughout the European Economic Area. This use of blockchain boosts security and enables cross-border payments without a financial intermediary.
Monerium will initially operate using the Ethereum blockchain, but could operate across public and private distributed ledgers in the future, allowing expenditures and transfers to be made without an intermediary.
Another country that has embraced cryptocurrencies is Venezuela. Following a period of hyper-inflation, many people there are turning to Bitcoin and other cryptocurrencies as an alternative to the Venezuelan bolivar. The country has also launched a state-based cryptocurrency called Petro, in an effort to bypass US economic sanctions. However, Petro appears to be struggling to make an impact.
Russia’s central bank is also thought to be considering its own cryptocurrency.
The most significant national cryptocurrency, however, is likely to come from China. The country was reported to be the first country in the world to test a national cryptocurrency in 2017 when its central bank, the People’s Bank of China (PBOC), carried out mock transactions of a prototype currency between some the country’s commercial banks.
In August, it was reported that the PBOC was close to issuing the cryptocurrency. Speaking at an event, Mu Changchun, deputy director of the PBOC’s payments department, said the intention is that the cryptocurrency would replace cash in circulation and support the internationalisation of the yuan.
The PBOC has registered patents that point to consumers and businesses needing to download a mobile wallet and swap their yuan for the digital money, which they could then use to make and receive payments. The PBOC will also have the ability to track every time money changes hands.
Interestingly, like other central banks, the PBOC has voiced concern about Libra, saying it must be put under central bank oversight to prevent potential foreign exchange risks and protect the authority of monetary policy.
But the fact that one of the largest and most powerful economies is actively pursuing a national cryptocurrency is hugely significant, suggesting that crypto isn’t going to remain a niche area for long.
While Venezuela has struggled to make an impact with Petro, the work being doing in Sweden and Iceland gives cryptocurrencies more legitimacy than previously.
And while the loss of a decentralised approach may not be welcomed by crypto enthusiasts, the use of blockchain technology to ensure these virtual currencies are secure and flexible could see cryptocurrency become a more significant economic force.