Cryptocurrencies and Governments

Cryptocurrencies are a trending topic within today’s financial industry. This article seeks to explain what they are, and how they have been used by and against governments.

A cryptocurrency, by definition, is a digital asset that does not exist in physical form, and is not issued by any central bank. This stands in contrast to the conventional fiat system, which for most of us is how we use our money on a day to day basis. In terms of its technical functioning, ownership of a digital coin is stored in a ledger that exists in a computerised database form, aka blockchain. This ledger functions as a medium of exchange based on cryptography, and allows for secure transactional flows, as well as the placement of controls on creating further units of the currency. One of the most well-known examples is Bitcoin, released in 2009 as the first decentralised cryptocurrency.

Beyond the simple transactional value of these for the consumer, governments have used cryptocurrencies in a number of ways. For instance, the government of Venezuela issued its own Petro cryptocurrency in 2018, which it claimed was backed by its oil and mineral reserves. The hope was that using this cryptocurrency would allow Venezuela to circumvent US sanctions and obtain international financing through non-conventional means.

However, cryptocurrencies have also been deployed against governments. For example, an individual using the pseudonym Baldur Odinsson issued Auroracoin in Iceland in 2014. The intention was to distribute them to every citizen of Iceland free of charge. In part, this was a way to criticise the restriction on foreign exchange of currencies adopted after Iceland’s banking crisis. The idea was that Icelanders would be able to sell Auroracoins in exchange for foreign currency, or simply to use it abroad.

The world of cryptocurrencies is therefore as complex on the governmental level as it is for consumers. It offers them some distinct advantages, but can open them up to challenges in the realm of economic policy.