Key Questions Answered
Govcoins, also known as CBDCs (central bank digital currencies), are digital currencies issued and backed by a federal government’s central banks. They are expected to be the most revolutionary innovation in finance since the invention of the ATM, although their development largely goes unnoticed by the general population.
What are Govcoins?
Government-issued digital currencies are tied to established currencies such as the Euro or the Chinese yuan. The term Govcoin is not the label for a particular coin, but rather a collective term for the concept of many different national and regional digital currencies. Govcoins are being developed to facilitate a faster, cheaper, and safer payment system. In some regards, Govcoins are similar to popular decentralized cryptocurrencies, such as Bitcoin (BTC) or Ethereum (ETH). However, unlike cryptocurrencies that ground on decentralization, Govcoins are centralized and regulated by the state.
What are the benefits of Govcoins?
Moreover, Govcoins are not nearly as volatile as most cryptocurrencies and therefore bear little risk. One reason why governments and central banks created their own digital currencies is that many feel challenged by the fast decline of cash and the increasing adoption of decentralized cryptocurrency. In particular, governments are concerned by long-standing companies entering the crypto-space, such as Visa, Mastercard, or Facebook. Among other concerns, anonymous transaction methods could facilitate illegal activities and undermine the financial system.
A sculpture of the Euro in front of the European Central Bank Headquarters in Frankfurt, Germany (Source: NBC News)
What Do Govcoins Do?
Govcoins adopt the blockchain technology first introduced by Bitcoin (BTC) and use it for governance purposes and to cut the global banking system’s operational costs, which amount to roughly $350 per account per year. Through this new payment method, the government can regain some control by monitoring every payment and even the entire transaction history of individuals. This would shift power back to the state and central banks, which currently have the main task of supplying commercial banks with funds, with transactions happening privately through those banks. A person’s money would be guaranteed directly by the state, not by a bank that can collapse. The new system could also be used to mitigate financial crimes such as tax evasion and money laundering.
Central banks argue that by reducing global banking costs, Govcoins would create a more inclusive banking system than most countries currently operate with. This would give the 1.7 billion people currently without a bank account worldwide equal access to this type of transaction service. Unlike credit cards, Govcoins involve no transaction fees and offer affordable loans and other financial perks. Governments that eventually go completely cashless would not need to print or store any more banknotes, which would reduce waste and help the environment. In addition, using solely digital currencies would also be more hygienic — a benefit that has earned increased attention during the current Covid-19 pandemic.
Govcoin users will be able to store their money in a digital wallet in the form of an app intended to resemble Apple Pay or PayPal. As such, users will no longer need bank accounts with commercial banks. Every transaction goes directly through the central bank, making the banking process simple and convenient, which also applies to cross-border transactions. Eventually, Govcoins could also push for a universal currency. Residents of countries with a devaluating currency may choose a stable, valuable currency such as the US Dollar over their native currency.
With the use of Govcoins, governments could also have the power to transform monetary policy. In contrast to current tools such as interest rates, e-accounts would give central banks more precise control over systemic risks and the money supply — enabling them to “nudge” economic behavior. In China’s recent trial, the e-yuan were programmed with an expiry date to encourage direct spending.
Which Governments Are Pursuing Govcoins?
A survey conducted by the Bank for International Settlements, the so-called central bank of central banks, suggests that Govcoin projects are supported by nearly 90% of central banks, and this percentage is growing steadily.
Having cracked down heavily on crypto in early 2021, China is the indisputable leader when it comes to the implementation of Govcoins. The country is the only major economy that has already launched live trials, with over 500,000 people already having received small amounts of the e-yuan. The trial participants need to download an app and present a QR code to utilize these digital funds at certain outlets. Among other reasons, China’s ambition is politically induced, aiming to reduce the power of the US dollar.
Bhamas, Cambodia, and EU
Although most central banks worldwide have at least explored the idea of launching their own digital currencies, emerging markets are often more advanced in their research than developing markets and industrial nations. The Bahamas (having launched the Sand Dollar in late 2019) and Cambodia (having launched the Bakong in 2020) are among the pioneering nations. However, neither the US nor the five biggest European economies (Germany, France, Italy, Spain, and the UK) have made considerable progress.
Among all European countries, Sweden has conducted the most research. The nation is planning to start using the eKrona widely as soon as early 2023. The European Union is planning to launch the e-Euro two years later. Other nations, such as El Salvador, Paraguay, and Panama, took the opposite path and have widely accepted Bitcoin as a payment method.
What is the Future for Govcoins?
As revolutionary as the idea may seem, Govcoins have seen only very preliminary research in most developed nations. If all test phases are successful, much time will still be needed until this new transaction method is a reality for most industrial nations. Many are concerned that today’s stable and most valuable currencies, such as the US dollar, the Euro, and the British pound, could lose in value and power.
According to the Bank of England, even after implementing a Govcoin in the UK, CBDCs would “exist alongside cash and bank deposits, rather than replacing them.” At the same time, many other nations could eventually go completely cashless.
What is the concern over Govcoins?
With the implementation of Govcoins, an immense amount of power over the financial system and citizens would be shifted back to the state, making finance more centralized than ever before. Many experts also have significant concerns about data privacy, since every user’s entire financial history would be known to the state. Suspicious accounts could be shut down in an instant, which would mitigate criminal behavior, but also overstep personal boundaries.
A more centralized financial system
Commercial banks are concerned because, as mentioned above, Govcoins could pose a major threat to their existence. Many people could decide to use their central bank’s cheaper and safer service instead of a commercial bank’s. With the reduction of bank deposits, the financial system would be significantly changed. For example, retail banks would have less access to funding to invest in mortgages and the economy. Eventually, banks could run out of funding, potentially leaving credit distribution up to bureaucratic influence. In a worst-case scenario, bank runs could emerge, leading to the collapse of retail banks.
The effect of Govcoins on the Crypto Market
Another concern, especially among crypto investors, is the effect of Govcoins on the crypto market. On the one hand, this new digital payment method could cause many people to use low-risk, fast, and government-monitored digital currencies, which could hit the crypto market hard. On the other hand, the concerns regarding data privacy and strong centralization may encourage a preference for decentralized cryptocurrencies. Whether the outcome for cryptocurrencies would be positive, negative, or neutral largely depends on governmental regulations, such as China’s recent ban on cryptocurrencies. In any case, the cryptocurrencies most vulnerable to widespread Govcoin implementation would be those that operate only in the digital payment field, such as stablecoins including Tether (USDT) and XRP. On the whole, the crypto market is unlikely to lose its overall value as an investment opportunity.
Govcoins are being designed to offer a fast, inexpensive, and low-risk transaction service. Their introduction would also mean inclusiveness for the countless people who currently lack access to a bank account.
However, many governmental projects initiated to develop a national currency are not very advanced yet. Many developing countries, and especially China, have made more progress in this regard than many supposedly sophisticated western economies. This lack of advancement raises concern that today’s most stable and valuable currencies, such as the Dollar and the Euro, could lose value and power, transferring it to countries like China and the e-yuan.
Moreover, many are concerned about data privacy and a disproportional power shift in favor of the state. These concerns may cause governments to create and expand privacy laws to avert mistrust towards the central banks and to prevent even more people from turning to more anonymous cryptocurrencies. In any case, digital currencies are sure to develop to their full capacities. According to Professor Randall Kroszner of the University of Chicago Booth School of Business, “a digital currency revolution could go in two directions, either a triumph of decentralization and market forces or a triumph of centralization and government monitoring.”