Can GovCoins usurp cryptocurrencies?

6 mins read

By Katerina Michael

GovCoins are considered the most important financial innovation since the invention of banknotes – it is the response of central banks and national governments to cryptocurrencies that rose rapidly during the last few years.

Progressively, more digital currencies are being heard and commented on, with bitcoin as the main protagonist.

On the one hand, bitcoin and digital currencies may be seen as a means of money laundering or illegal activities, but on the other, the adoption of blockchain technology (on which bitcoin is based) by large organisations.

Banks and investor financing startups aim to support online financial services and products to build this technology and provide cost-efficient services for any customer.

Technology has undoubtedly infiltrated the financial sector for good.

Bitcoin has become a capitalisation currency of $1 tln, PayPal has more than 392 mln users, and the story goes on.

Now, digital currencies seem to be slowly entering national governments, which, in cooperation with central banks, are preparing to launch the so-called “GovCoins.”

The goal of GovCoins is to make the economy more functional but also to regain lost power.

After all, what cryptocurrencies actually do is decentralise the economy, as they are not controlled by any central bank and are not accountable to any authority.

This will be the noticeable difference with GovCoins, which, although digital currencies, will be directly under the control of central banks or national governments.

The idea is simple; instead of having an account at a commercial bank, the citizen could do the same by cooperating with their country’s central bank through a distinct platform, which could look like Alipay or Venmo.

Instead of writing cheques or paying electronically with their cards, they will use the cheapest way of doing transactions through the central bank.

And, of course, their money will be fully guaranteed by the state and not by a private commercial bank.

One of the main motivations behind the creation of GovCoins is the fear that central banks and governments will lose control of the economy and the ability to intervene, especially if the trend towards cryptocurrencies extends to the masses.

Another incentive is the promise of a better financial system.

Ideally, money provides a reliable stock of value, a stable unit of measurement and an effective payment measure.

Universal payment

But today’s currency is not doing well in all areas. Unsecured depositors can face a very serious problem, for example, in the case of a bank collapse.

Bitcoins are not widely accepted, and credit cards are expensive.

Government e-currencies would be highly efficient, as they would have a state guarantee and use a cheap, central payment hub.

As a result, GovCoins would reduce the operating costs of the global financial sector, making it financially accessible to 1.7 billion people without the necessity of bank accounts.

Government digital currencies could also expand government toolboxes, enabling them to make direct payments to citizens and reduce interest rates below zero.

For ordinary users, the appeal of a free, secure, instant, and universal means of payment is obvious.

It is indeed an attractive idea, but at the same time carries many risks.

If left unrestrained, GovCoins could quickly become a dominant force in the economy of a government.

They could further destabilise retail banks because as more people and businesses choose to place their money in the central banks, they will have to find other sources of financing to support their loans.

If retail banks run out of funding, someone else will have to provide business startup loans.

It raises the worrying prospect of bureaucrats influencing the distribution of credit. And in a case of a crisis, bank runs could emerge.

Additionally, GovCoins could be turned into a supervisory control monitor over citizens by imposing, for example, direct e-penalties in cases of misconduct.

They could even change geopolitics by providing a means of cross-border payments and alternatives to the government currency or the global deposit currency.

The opportunities presented but also the risks are frightening.

China, which pays so much attention to control, limits the size of the e-yuan and tries to suppress private platforms such as Ant.

Open societies also need to be vigilant, setting limits, such as on digital currency accounts.

Governments and financial companies need to prepare for a long-term shift in the way money works, strengthen privacy laws, reform central banks, and prepare retail banking to play a more regional role.

Katerina Michael is Head of Content at www.ecredo.com