Serious debates about cryptocurrencies provided one area of policy debate emerging out of the COVID-19 pandemic. In December 2020, the economic historian Niall Ferguson declared¹ Bitcoin as the best investment option in light of the coronavirus pandemic due to the nature of pandemics “accelerating” financial history. Bitcoin, which emerged² from a white paper that conceptualized a digital currency based on blockchain technology in 2010, not only led to the creation of a new asset class of cryptocurrencies, it also spawned drastically different responses among regulators and authorities around the world. Recently, China took a hard line against cryptocurrency as an asset class by steadily banning³ cryptocurrency mining, while El Salvador went so far as to recognize⁴ bitcoin as a legal means of exchange. The U.S. is holding ongoing debates⁵ over regulating cryptocurrency, while India similarly displays mixed feelings⁶ about virtual currency.

To keep up with cryptocurrency as a new technological and monetary phenomenon, governments have begun contemplating instituting digital national currencies of their own. Despite the appeal of such a strategy to combat the financial malfeasance that is often attributed to crypto, creating national digital currencies will lead to more political and economic problems than they may be worth. Creating national digital currencies based out of national central banks calls into question the need for commercial banks and raises the specter of authoritarianism amid serious privacy concerns.

In order to understand the threat that cryptocurrency poses to government power, cryptocurrency must be viewed as a monetary phenomenon rather than a purely technological one. Throughout most of the 19th century, metallic silver and gold species cocirculated alongside national fiat currencies. Central banks were still maturing during the gold standard, and metallic currencies offered private transactions a universally accepted means of holding value beyond fiat currencies. It is worth noting that central banking and modern monetary policy emerged in an economic world made up of nation states that were still consolidating at home and administering colonial holdings around the world. Even in the U.S., the dollar did not emerge as a trusted national currency until the National Bank Act of 1863, during the height of the U.S. Civil War. Prior to this, banks and states circulated their currencies alongside the dollar, which led many individuals to favor the Mexican silver peso as a universal means of exchange and holder of value.

In the 19th century, metallic coins were favored over paper by many due to distrust by many national and colonial authorities. Interestingly enough, the blockchain technology upon which cryptocurrencies rely on originated⁷ as a means of safeguarding information from mutual distrustful parties. In other words, decentralized blockchain-based cryptocurrency replicates the role of silver and gold coins as a potential universal currency that can facilitate transactions and hold value irrespective of government fiat money. The era in which gold and silver cocirculated alongside national paper currency was not an era of financial inclusion, civil rights or widespread democracy. Rather, it was a world of competing monarchic empires that ultimately culminated in the First World War.

Issuing a national currency offers a nation state significant political and economic power. On the literal surface, the paper bills of various currencies are adorned with the likenesses of national heroes, famous landmarks and national slogans. This provides a daily reminder of identity with every transaction. Since the end of the Bretton Woods system in 1971, countries issuing currency have had monetary autonomy and the ability to inject liquidity into their economies during times of crisis, such as downturns or war. Yet, the end of the Bretton Woods era also ushered in an era of capital convertibility. Dollars, euros and yen can be converted from one to another. This allows the value of currencies to fluctuate based on market demand and the willingness of consumers and banks to hold them.

The creation of stable fiat currencies also allows for more predictable and orderly banking. Using a standard denomination to valuate debts and deposits allows for accurate records when banks connect savers with borrowers through lending. However, what if there was no longer a need for banks to act in this manner? What if a government’s central bank offered digital currency that all citizens used? What if a government’s blockchain simply held everyone’s money in one central program through digital currency? Such a scenario allows states to maintain monetary autonomy while effectively becoming the only needed bank for all users of its digital currency. Banks, in their current state, would no longer be needed, as all lending would effectively take place through the government’s blockchain.

The past association of cryptocurrency with organized crime is one of the motivating fears for governments seeking to regulate it. Indeed, in 2013, the FBI shut down the infamous Silk Road website that facilitated a marketplace for drugs, guns and money laundering services through bitcoin transactions. Distrusting of governments, criminals have every reason to seek out a universal unit of exchange independent of government purview. Instituting a digital national currency certainly makes money laundering more difficult. However, eliminating the middle role of private commercial banks and eliminating physical cash reduces privacy and raises the likelihood of the government using its currency as a means of potential political oppression.

For tackling crime and terrorism, the suspicious activity reports (SARs) that are designed to alert the government of illicit activity are still made at the discretion of banks as private actors. The creation of a digital currency would eliminate both the need for banks as deposit-taking institutions and remove the need for any SARs to be filed since the blockchain would record all transactions. Restricting citizens to only the use of a digital currency would render every transaction readily knowable to government officials. Surveillance aside, what institutional arrangement would prevent a government from making the authoritarian move to target opponents or minorities from accessing the blockchain? The concern of digital national currency facilitating authoritarianism is not new.⁸

Recently, China’s banning of crypto-mining operations coincided with its issuing⁹ of a digital yuan that allows the Communist government the means of tracking spending and the wealth of any citizen at any time. Currently, Europe is contemplating a digital euro ¹⁰ while discussions in the U.S. have begun over the feasibility of a digital dollar.¹¹

Digital national currency is a potential means of authoritarianism, and the context of the pandemic further highlights the risk. In response to the COVID-19 pandemic, governments across the world at different levels utilized lockdowns to contain the virus. However, multiple indicators show that authoritarianism grew substantially during the pandemic. The anti-corruption organization Transparency International has warned¹² that authoritarianism increased in Europe and the developing world as a result of lockdowns. Freedom House rankings corroborate¹³ this finding and note that authoritarianism jumped substantially as a result of lockdowns and government use of emergency powers. While authoritarianism would prove an oversimplification to reduce all political turmoil of 2020-2021 to the COVID-19 pandemic, the pandemic cannot be dismissed as it has exacerbated existing political tensions in their respective national contexts. When viewed in relief of governments expanding arbitrary power, regulatory interest in issuing national digital currencies must be viewed as a risk factor for authoritarianism.

For banks looking toward a future filled with digital national currencies, history issues a warning. Modern commercial banking did not always exist. Goldsmiths and small lenders in the Middle Ages first served as the middlemen between savers and borrowers and were often at the fringes of society. Coins of the early-modern period and before bore the faces of sovereign monarchs and could be used virtually anywhere due to their accepted numismatic value. Digital national money could potentially fulfill the same role and relegate modern commercial banks back to the fringe of the financial system. The past two years have shown that risk is often underestimated. Authoritarianism is one of those risks, and it is a risk connected to the issuing of national digital currency.

Dr. Ian Oxnevad, consultant, ioxne01@gmail.com

1. Andrew Bary, “Why Bitcoin Is the Best Investment Opportunity Post-Pandemic,” Barron’s, December 4, 2021, https://www.barrons.com/articles/why-bitcoin-is-the-best-investment-opportunity-post-pandemic-heres-what-will-drive-the-price-higher-51607134443
2. Matt Frankel, “If You Invested $1,000 in Bitcoin 10 Years Ago, Here's How Much You'd Have Today,” The Ascent, May 8, 2021, https://www.fool.com/the-ascent/buying-stocks/articles/if-you-invested-1000-in-bitcoin-10-years-ago-heres-how-much-youd-have-today/
3. Samuel Shen and Andrew Galbraith, “China's ban forces some bitcoin miners to flee overseas, others sell out,” Reuters, June 24, 2021, https://www.reuters.com/technology/chinas-ban-forces-some-bitcoin-miners-flee-overseas-others-sell-out-2021-06-25/
4. Gian Volpicelli, “El Salvador’s Race to Be the Bitcoin Capital of the World,” Wired, June 30, 2021 https://www.wired.com/story/el-salvador-bitcoin-race/
5. Thomas Franck, “U.S. Treasury calls for stricter cryptocurrency compliance with IRS, says they pose tax evasion risk,” CNBC, May 20, 2021, https://www.cnbc.com/2021/05/20/us-treasury-calls-for-stricter-cryptocurrency-compliance-with-irs.html
6. Samuel Wan, “India’s Conflicting Messages On Crypto Renews Fears Of A Ban,” Bitcoinist, July 6, 2021, https://bitcoinist.com/indias-conflicting-messages-on-crypto-renews-fears-of-a-ban/
7. Vipin Bharathan, “Blockchain Was Born 20 Years Before Bitcoin,” Forbes, June 1, 2020, https://www.forbes.com/sites/vipinbharathan/2020/06/01/the-blockchain-was-born-20-years-before-bitcoin/?sh=5e8bc3ef5d71
8. Ian Bogost, “Cryptocurrency Might be a Path to Authoritarianism,” The Atlantic, May 30, 2017, https://www.theatlantic.com/technology/archive/2017/05/blockchain-of-command/528543/
9. James T. Areddy, “China Creates Its Own Digital Currency, a First for Major Economy,” The Wall Street Journal, April l5, 2021 https://www.wsj.com/articles/china-creates-its-own-digital-currency-a-first-for-major-economy-11617634118
10. “A digital euro” European Central Bank, https://www.ecb.europa.eu/paym/digital_euro/html/index.en.html
11. Rakesh Sharma, “Fed to Release Paper Exploring Launch of Digital Dollar,” Investopedia, October 4, 2021, https://www.investopedia.com/fed-to-release-paper-exploring-launch-of-digital-dollar-5204490
12. “Will The Legacy of COVID-19 Include Increased Authoritarianism?” Transparency International, May 29, 2021, https://www.transparency.org/en/news/will-the-legacy-of-covid-19-include-increased-authoritarianism
13. Sarah Repucci and Amy Slipowitz, “Democracy under Seige,” Freedom House, https://freedomhouse.org/report/freedom-world/2021/democracy-under-siege