Shifting from Green to Digital Currency

With inflation rates reaching up to 1,000,000%, Venezuela, once counted among the richest nations of South America, is facing the most extreme monetary crisis of our time. The country is in ruins, the people are on the verge of starvation and the infrastructure is rapidly falling apart. Various reasons have constituted to this current crisis which include over-dependence on oil as well as sanctions from western countries, but what landed the final knock-out blow was the gross mismanagement of the country’s national currency, the Bolivar. For over a decade, the Venezuelan governments have instituted strict capital, price control and foreign exchange over its currency. The Bolivar’s worthlessness has also been compounded by the rampant printing of currency to finance a government deficit of nearly 30%. Out of the various suggestions from the IMF and western contemporaries, the suggestion of implementing a Digital Currency seems like the most lucrative and there are quite a few reasons for this.

Digital Currency is a payment method that exists only in digital form and is not tangible. It can be transferred between entities with the help of technologies like smartphones, computers and the internet. It allows borderless, seamless transactions and transfer of ownership and can be used to purchase goods and services and can also be used with well protected, gated online communities. As as result of facing a ‘fiat currency’ that has almost no value, the Venezuelans started turning to forms of decentralized cryptocurrencies such as Bitcoin. Bitcoin is not controlled by any single authority, but is monitored and maintained by all the members and miners present in the system. The main advantage of this is that the value of the currency is not affected by a governments’ actions, inactions and competencies, the main risk though is that there is no value guarantee of the currency, but this is one of the least concerns of the citizens of the South American country who are struggling to even pay for a single loaf of bread.

 When it comes to cost and efficiency, shifting to digital currency is a no-brainer. Moving towards a cashless society seems like the obvious and most logical way forward. But when it comes to privacy and freedom, it is extremely tough for it to beat cash. Cash brings with it a great deal of anonymity which helps in making sure that all transactions done through it become extremely tough to trace back to the person. Cash also brings with it a sense of certainty; very rarely must you have heard that a legitimate 100 Rupee note has been declined. In 2016, the total number of card transactions in the UK outnumbered the total number of cash transactions, for the first time in History. In Sweden, cash transactions only amounted for 2% of all the transactions that took place in the country. As the world is moving towards a cashless society, the concerns over government and corporate surveillance is also growing rapidly . Imagine a situation where any payment at any doctor’s clinic, bookstore, liquor store etc, could be traced back to you almost immediately.

 The familiar and often heard concept of Know Your Customer(KYC) is equally as worrying as the tracking done by social media platforms and marketers on online platforms. Through this, the government has the right to extract any information from financial institutions that conduct these transactions, if they deem them to be suspicious or against the interest of country or the law of state.

Furthermore, by looking at the statement of transactions of a person, anyone could get information such as workplace details, based on spending patterns and salary credit transactions, marital status and number of kids, based on variety of items purchased, home addresses, based on proximity of shops with maximum transactions, mode of transportation, through cab payments, level of education through magazine subscriptions, political affiliations based on political donations and an endless number of other things.

France recently rejected the launch of ‘Libra’, a cryptocurrency developed by Facebook. Citing that it can be dangerous to consumers, and that it is a systemic risk to France. The Finance Minister of France, Mr. Bruno La Maire stated that the monetary sovereignty of the country will be at stake. Governments of the EU, UK and USA said that they might not have any choice but to bail out Facebook if Libra goes off the rails as it is too big to fail. Le Maire also said that besides the risk of countries having to bail out the currency if it goes under, other risks include harder-to-track money laundering and terrorism financing. He urged Facebook to look at creating a separate “public digital currency” instead and that due to these conditions they could no allow the development of Libra on European soil.

 Central Bank issued Digital Currencies(CBDC’s) or national digital currencies are virtual currencies that are issued and controlled by a federal regulator. Hence, they are fuelling the control of the state. Unlike counterparts like Libra and Bitcoin, CBDCs are not decentralised and hence they form a new category altogether, a category called Digital Fiat Currency. Each CBDC unit acts as a digital equivalent to paper bill and is powered by Blockchain Technology. This technology brings with it the security as well as transparency which have been points of debate on the topic of using digital means and technology for the backing the monetary system of countries. Most of the developed countries have already rolled out their digital currencies and those who haven’t are in advanced stages of research and development. But there are also countries such as Japan and Switzerland that have decided to dismiss the idea altogether. Masayoshi Amamiya, the Deputy Governor of Bank of Japan states that such digital currencies are unlikely to improve the existing monetary systems.

 The government of Venezuela, in 2018 launched a national cryptocurrency called the Petro or Petromoneda. The President of the country, Mr. Nicolas Maduro stated that 100 million Pesos backed by an equivalent number of barrels of oil were about to be issued. He said that several other fiat currencies such as the Russian Ruble, Chinese Yuan, Turkish Lira and Euro would be freely convertible with the digital currency. Other than Venezuela, countries such as Senegal, Tunisia and Marshall Islands have adopted a national Digital Currency as well. The blockchain based eCFA of Senegal is fully dependent on the Central Bank and can only be issued by an authorised financial authority. It was designed to be distributed alongside paper currency as legal tender. Tunisia’s blockchain technology for its digital currency e-dinar was ironically developed in one of the rejector countries, Switzerland.

 A start-up called eCurrency Mint, backed by eBay founder and philanthropist Pierre Omidyar, is pitching a technology that would let central banks issue digital currency with attributes of bitcoin and physical cash. As with any fiat currency, the supply of eCurrency would be determined according to each country's monetary policy. For banks, eCurrency could help save money on cash-handling activities, reducing the need for some tasks performed by tellers and couriers. The proposal dispenses with one of the defining characteristics of bitcoin (decentralisation ) but, at least in its default implementation, may improve on another (the ability to transact without being traced). eCurrency Mint said its technology, as designed, doesn't let a central authority track the ownership and usage of the digital money. This may appeal to users who value their privacy. But it could be a tough sell for governments and the company says individual countries could implement the technology differently.

 India has joined the ranks of the states that are actively researching CBDC’s, the RBI has confirmed the creation of an inter-departmental group tasked with analysing the usefulness of issuing a rupee-backed digital currency. Cost considerations were a huge factor in this decision as the cost of printing currency in India is very high at approximately 6.3 billion rupees in a year. Other factors also include changes in the payment industry as well as the rise of digital tokens. The idea of Central Backed Digital Currencies looks very promising, the issues of digital counterfeiting and ensuring privacy will have to be looked into, steps to make strong blockchain technologies available and more adaptable will have to be taken for this purpose. The world will possibly see the next game-changing revolution in the monetary sector and the countries that are most equipped and prepared for this will have the maximum advantage.