The number for cryptocurrencies have exploded since the launch of Bitcoin. Since the launch of Bitcoin 10 years back, there are now more than 2000 types of cryptocurrencies or tokens. They are all created and maintained by private sector. For a cryptocurrency to become a mainstream it has to be backed and maintained by a government organization. So the natural question that comes to mind is, will we ever see a national cryptocurrency?
Are they willing to take the step?
One step at a time is all it takes to get you there. -Emily Dickinson
Since the last 10 years, the blockchain technology itself has advanced a lot. Besides the development of currency there are many other Distributed Apps (DApps) that have been developed which caters to different sectors like gaming, portfolio tracking, gambling, wallets, exchanges, or auctions.
There are some national governments that are open to the idea of a national cryptocurrency that would get pegged to their respective fiat currency. Swedish national bank and Bank of Japan are working on their own cryptocurrency version aptly called eKrona or JCoin respectively. Some other countries are not far behind. Ecuador, Estonia, Tunisia, Russia and Dubai are others that are working on their own national cryptocurrency versions to enable digital banking. Bank of Canada, Monetary Authority of Singapore, and Bank of England have also examined the idea of using blockchain technologies for international transactions. So, if there has been so much interest by the national banks why have we not seen a national economy functioning on the basis of cryptocurrency. No doubt, there are certain challenges that needs to be addressed before they go "over the hill".
Why the countries are skeptical?
Cryptocurrency currencies take the concept of money, and they take it native into computers, where everything is settled with computers and doesn't require external institutions or trusted third parties to validate things. -Naval Ravikant
There are six challenges that the national governments and bank face before implementing a defacto cryptocurrency. These challenges needs to be worked out before it can be used as a practical unit of money.
- Regulation and Control
Cryptocurrency by nature has lack of regulation. It is a form of decentralized unit of money that is based on trustless concept. The idea of central back to to provide the regulations and the trust between two transacting parties. Regulations are required to protect the local economy and to ensure that it does not become controlled by selected few who then control the economy.
- Privacy
The governments and the national bank needs to ensure that the money is not used for illegal activities. With anonymity that the blockchain technology offers, the government will not be able to bring the people are involved in such illegal activities to justice.
- Incentive
Incentivizing the transactions is at the heart of blockchain technology. For example, Ethereum works as a combination of Ether currency and smart-contract and gas fee as the incentive. A Bitcoin works as a currency with the mining fee as the incentive. It is difficult to implement it as a pure currency.
- Scalability
There is a problem of scalability with cryptocurrency. It tends to be in fixed quantity. Bitcoin has a fixed supply of 21 million and Ether has something between 90 to 100 million.
- Volatility
A national currency cannot be very volatile has it may led to problems like hyperinflation one day and extreme deflation the other. This ties into the regulation and the control of the economy.
- Usability
To be used as a defacto currency, it needs to be understood by the people and there should be alternate ways to use the currency. People need to be educated on how the cryptocurrency can be used. They also have to address the issue on how it can be used for people with lack of technology.
Where we are currently?
Some countries incorporated laws that allows the use of Bitcoin and other cryptocurrencies, not as a legal tender but mostly to hold and transact like a commodity. The picture below depicts where each country is with respect to legalizing the use of cryptocurrency.
Image Credit: Taken from Wikipedia under CC BY-SA 4.0. Modified to include the annotations.
Conclusion
Though currently we do not have a defacto national currency, the government and the national bank acknowledge that the Blockchain technology is one of the biggest innovation in finance and it is here to stay. They are working to sort out the obstacles and developing a roadmap for an official defacto cryptocurrency. We are almost there and it will not be long before we have an official defacto national cryptocurrency.