Sovereign cryptocurrencies: utopia or the meaning of history?

by bold-lichterman

After Bitcoin, FedCoin? The acceleration of the deployment of blockchain technology and the various cryptocurrencies associated with it is leading to the appearance of a new phenomenon: sovereign cryptocurrencies.

Considered a few months ago still as a dangerous utopia, even a naive oxymoron, except for the thurifers of a total libertarianism, cryptocurrencies seem to have reached a milestone with the creation of PetroCoin by Venezuela in January 2018, which raises a question. news: what is a sovereign cryptocurrency? First of all, does it deserve the name of cryptocurrency when it is refused by central banks to Bitcoin and other Ether. How do these cryptocurrencies work? Is there an underlying political purpose?

The controversy over the concept of cryptocurrencies

Who says currencies, says bank, who says bank says central bank, as the song would say. Therefore, only instruments issued by central banks would deserve the denomination of “money” because only a central bank can guarantee the issuance of its currency. In fact, we come back to the question of the prerogative to “coin money” or the privilege of “issue money”.

Let us note first of all that this was not always the case that if the existence of money is – almost – as old as that of the State, it is not the same with central banks, relatively recent since the first establishment to be able to be named as such is the Bank of England in 1694. In fact, it was not until the 19th century that the power of issue was entrusted to an institution separate from the State.

Again, until the 20th century, these institutions were not all emanations of the State, even if they were endowed with privileges: remember the distribution of the capital of the Banque de France until 1945 in the hands of private shareholders or that of the Federal Reserve Bank of New York which is held by the main commercial banks of the United States. In short, if central banks have for some time taken on an increasing importance in the economy and its financing, their role as such is relatively recent in the eyes of human history. It is therefore not so much the “power to coin money” that differentiates a central bank from private money or Bitcoin (or other); but rather the liberating force of money recognized by law.

It is because the euro is the currency of the French Republic that it has this legal prerogative that Bitcoin and other Ether do not have. It is in this sense that one cannot assimilate the euro, the dollar or other currencies to these “cryptocurrencies” which, for their part, do not have this essential legal characteristic; these “currencies” are only these monetary agreements between the parties, an agreement which is not opposable to third parties and which above all depends on the goodwill of each of the parties to respect the agreement. The fact remains that these serve today as exchange value, as formerly gold, shells or other precious goods.

This exchange value has effect only between parties who accept it. Without it being possible to “get rid of his debt” in this form, except with the agreement of the creditor (it is bad for a debtor who has settled his debt in bitcoin to go to court to have it recognized that he has validly freed himself from his debt. debt if its creditor, after receiving the bitcoins, considered that this payment is not worth releasing the debt). In fact, the economic characteristic of a currency lies in its acceptance.

As the American economist says Hyman Minsky, “Everyone can create money; the problem is to get it accepted[1]. Remember the assignats under the Revolution and their forced course but which were never “accepted” as money, even at a steep discount compared to this legal tender. This is indeed what both the IMF and the ECB emphasize when they present the characteristics of a currency.[2].

The typologies of sovereign cryptocurrencies

At first glance, and given their “disruptive” nature, cyber currencies should not be favored by central banks, any more than governments. Moreover, some central banks refuse to talk about cryptocurrencies and prefer to talk about crypto-assets. And yet, after having criticized or at least worried about this phenomenon, more and more States and central banks are reflecting on the advantages that cryptocurrencies would bring them … if they master the issue and the management! A BIS document caused a stir in this regard in 2017.

Although this is not an official position of the Bank, but a study, this document prompts central banks to question the possibility of issuing cryptocurrencies.[3], what the document calls CBCC (Central Bank Crypto Currency). Unlike the currency exchanged by central bank accounts centrally, a CBCC would be exchanged directly between the payer and the payee without a central intermediary using blockchain technology.

The BIS has proposed a consumer-oriented CBCC for retail transactions and a “token” wholesale CBCC currency for institutional digital settlement of transactions. In fact, the idea of ​​central banks issuing cryptocurrencies is being studied by some central banks and universities, like the FedCoin project.[4]. But more fundamentally, this perspective is part of the logic of the disappearance of cash.

The case of Petro

A first country has taken the plunge by issuing a sovereign cryptocurrency in the form of an ICO. This is Venezuela with the Petro, the value of which is “guaranteed” by the country’s oil reserves according to the terms set by decree n ° 3.196 of December 8, 2017[5]. The terms of this guarantee like those of access to this “guarantee” are not, however, the clearest.[6], raising concerns about the effectiveness of this right for Petro holders. What is particular in the case of the Petro is the issuance of an asset backed cryptocurrency, in this case oil.

The case is not new since we have already seen cryptocurrencies backed by gold, such as Vaultoro or Royal Mint Gold, and in particular on mines in operation, or even not operated but with exploration work[7]. Most economists but also cryptocurrency specialists are however very critical of this Venezuelan initiative, considering that it is at best an attempt to circumvent US sanctions, at worst a scam.[8]. Chinese rating agency appraised Petro concluding that issue will have little effect on Venezuelan economy[9].

The other projects

Venezuela is not the only country to want to issue a digital currency. This is for example the case ofIran, which recently indicated that it wanted to create a national digital currency, but also that of the turkish legislator, who would like to issue a “Turkcoin”, or Marshal Islands. Sovereign cryptocurrency projects respond to considerations that are often far removed from one another. But the most serious projects are those which aim to abolish fiat money with digital money, directly issued by central banks, and therefore bypassing scriptural currencies. In fact, the paradox here is that it is not so much Bitcoin that can be a danger for traditional currencies as central banks themselves with the issuance of fully distributed digital currencies. Such is indeed theWarning launched by the BIS in March 2018 in a report entitled Central Bank Digital Currencies.

[1] H. Minsky, Stabilizing An Unstable Economy. New Haven: Yale University Press, p. 186.

[2] ECB, “What is money? ” https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.fr.html and IMF, “What is money? »September 2012.

[3] M. Bech & R. Garratt, Central Bank cryprtocurrencies, BIS, Quaterly Review, September 2017, p. 55.

[4] S. Gupta, P. Lauppe, S. Ravishankar, “FedCoin, a blockchain backed Central Bank cryptocurrency”, Yale University, 2017: https://law.yale.edu/system/files/area/center/global/document/411_final_paper_-_fedcoin.pdf

[5] Gacerta Oficial from the Republic bolivoriana of Venezuela,: https://fr.scribd.com/document/368026327/Gaceta-Oficial-Extraordinaria-N-6-346-Superintendencia-de-criptovidisas-y-detalles-del-petro : “Each Petro token consists of a contract to buy / sell a barrel for a token or any other commodity that the Nation will decide”.

[6] “The holder of petro will be able to realize a market-value exchange of the crypto-asset for the equivalent in another cryptocurrency or in bolívares [Venezuela’s fiat currency] at the market exchange rate published by the national crypto-asset exchange. “

[7] For a list of cryptogold, see: http://www.goldscape.net/gold-blog/gold-backed-cryptocurrency/

[8] J. Karsten & DM West, “Venezuela’s petro undermines other cryptocurrencies”, Brookings Institute: https://www.brookings.edu/blog/techtank/2018/03/09/venezuelas-petro-undermines-other-cryptocurrencies-and-international-sanctions/

[9] http://en.dagongcredit.com/index.php?m=content&c=index&a=show&catid=20&id=4950

This article was posted on LinkedIn

The contributor:

Sovereign cryptocurrencies utopia or the meaning of historyHubert de Vauplane

Partner at Kramer-Levin (Financial and Banking law, Alternative Financing, Asset Management, Digital Payment)