With Russia and China both embracing the idea of sovereign cryptocurrencies, it’s time to ask a simple question: Why is a technology threatening to decentralize money so attractive to highly centralized, authoritarian regimes?
Last weekend, Argumenti i Fakti, a pro-government newspaper, quoted Russian Communication Minister Nikolai Nikiforov as saying President Vladimir Putin had ordered the swift launching of a “crypto-ruble.” According to the report, Nikiforov said the currency would use “Russian cryptography” and would be impossible to “mine” like bitcoin because it would be “a closed model with a definite volume of regulated emission.” This follows statements by Central Bank Governor Elvira Nabiullina and Finance Minister Anton Siluanov, who stressed the need for the Russian state to bring cryptocurrency emission and use under control.
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Nikidforov’s vague description of the crypto-ruble sounds similar to recent unofficial Chinese proposals. Yao Qian, deputy director of the People’s Bank of China’s technology division, has discussed a central bank-issued electronic currency for which commercial banks would administer “wallets.” Other Chinese officials and state-affiliated researchers have also echoed the idea.
To those who believe bitcoin’s main innovation is the exclusion of a central authority — a peer-to-peer system in which transactions are validated by “miners” — the interest of China and Russia is baffling. But those governments aren’t looking to give up control to the blockchain. On the contrary, they are trying to figure out how to lower the cost for a centralized issuer to control everything that’s going on in the financial system.
The electronic money we use today is produced by private banks: It is, essentially, their liabilities to each other. As a recent Bank of International Settlements paper pointed out, “Cash is the only means by which the public can hold central bank money. If someone wishes to digitize that holding, he/she has to convert the central bank liability into a commercial bank liability by depositing the cash in a bank.” Cash, however, has disadvantages for both central banks and governments. For one thing, it’s costly to print, mint, distribute and destroy. Changes to the banknotes and coins can take years to administer. Theft and robbery are risks. At the same time, cash is anonymous; criminals and tax evaders depend on it.
All these problems and some others — such as the time lags in a traditional electronic payment system as money moves between banks — can be solved if a central bank can issue its own cryptocurrency and have transactions registered in a bitcoin-like distributed ledger, verified by central bank-approved agents. If that sounds like a version of the traditional banking system, there is, potentially, a big difference thanks to the verifiers’ more limited role than that played by commercial banks. “With a lower entry hurdle to becoming a transactions verifier in a distributed system than to becoming a member bank in a tiered system, we would expect more intense competition in the provision of payment services,” Bank of England’s John Barrdear and Michael Kumhof wrote in a paper last year. “To the extent that existing systems grant pricing power to member institutions, this should ensure that transaction fees more accurately reflect the marginal cost of verification.”