In the past 6 months, there have been a steady stream of Governments and central banks around the world who have begun talking about their own sovereign cryptocurrencies. Countries as diverse as Sweden, China, Australia, Kazakhstan and even Venezuela have all muttered something toward this goal. Venezuela has actually done it! But what are they really talking about?

This piece is going to dive into this subject from a sovereign motivational and technical point of view in an attempt to tease out what a Sovereign Cryptocurrency (SC) may look like.

The war on cash

An official from the Riksbank of Sweden recently came out with a statement saying that their head long plunge into a cashless society risks leaving the economy in the hands of private banks and card processors who will end up being solely relied upon to process ALL transaction. This was a cause for concern.

For example, a political or technical disruption to the SWIFT system could render the Swedish economy vulnerable. In short, with the interest of retaining a healthy of diversifying the transactional channels, a role cash played an important part in, the Riksbank of Sweden is looking into the merits of an SC.

This example highlights the major, (and we are left to assume innocently overlooked) vulnerability of abolishing cash and leaving economies to rely completely on the honesty and reliability of the banking system.

Arguably Sweden is not conducting a war on cash in the same vein as countries like Italy and Spain and Australia, just to name a few. The Swedes are just happy enough to do away with cash and put it all on their cards. This may have been either due to a successful push by card companies to saturate the nation with payment terminals, or the reduction of fees by the same card companies smoothing the path to adoption by merchants, or it could be just the nature of the population to adopt this convenient form of payment over cash, I think it is most likely a combination of all these factors.

In Italy, as an example of the more typical push to cashless, it is being pushed by a combination of Government and the big banks behind them. The most sited is the 3 prong argument of terrorist financing, tax evasion and money laundering. There they have limited cash transactions to €999.99

According to the abroad.cash website, the limiting of cash payments is well underway in Europe with a bulk of the initiative focusing on the southern countries. The trend though seems clear toward a reduction of the physical cash component. The population of Europe's largest economy, Germany, though will be a tough nut to crack for the central banks.

The Real war on cash

There are other motivation for reducing and eventually eliminating cash from an economy. These are only hinted at in highly technical terms in the financial media. In ways meant to leave a bulk of the population uninformed about this. These motivations stem directly from banks and governments.

Let's break this down because we have an intersection of interests of the real powers behind the scenes.

ZIRP and NIRP. Not your friends

Welcome ZIRP - Zero interest rate policy and NIRP - Negative interest rate policy.

Interest rates are the effective cost of money. It is the reward given to a creditor to forego control of capital for a certain amount of time, and a compensation for the risk that the capital is never returned. Just by its very nature, it is a fallacy that interest rates can be zero or negative. But welcome to macro economics 21st century where up can be down and black can be white.

In a free market economy, interest rates should float on the open market. Being the cost of the very thing that is used to value everything else in the economy, this measure has an enormous influence on the operations of a economy. When we talk about the globalised interlinking of economies as we have today, this influence is even more exaggerated.

Now I have to hold myself back because economics is like football. Talking about the emotional equilibrium of the star striker of a team when discussing the state of the league tables, usually has the effect of excluding 99% of the audience from the discussion.

In the most simple terms, central banks try to keep their economies stable and prosperous. They have a toolbox of sorts to achieve this. But their toolbox is pretty lame. It only contains a hammer. That hammer is interest rates.

Since the dot com bust of 2000, they (the major central banks of the world) have been bashing away with this hammer (reducing interest rates) trying to fix the global economy. It sort of worked till 2009 when it all fell over again. Most major economies around the world currently have historically low interest rates and their economies are only just limping along. More hammer is obviously necessary. But how to go to, and below 0%?

The interest rate I am referring to has a lot of derivative uses. The interest rate you get on your savings at the bank, the interest rate you pay for your credit card debt, and the mortgage interest rate to name the best known.

If your savings account had negative interest rates, that would mean instead of earning money for putting your money into a bank, you would be paying the bank money instead! We already pay a lot of fees for our bank accounts, so if the last possibility to earn something for this privilege we give to banks is reversed into the final fee, there is a high probability people would close their accounts, or at the very least hold the very least amount of money in them. The only exit they have is to retreat into cash. Cash may not earn any interest, but there are no fees.

If cash is eliminated, there will be no exit from the banking system!

Financial surveillance

Now, the banks have no issue at all with ALL transactions being funneled through their books. It is their wet dream come true. We on the other hand we will most probably face more fees and a reduction in the quality of banking services. Simply because banks are masters of collusion, and the only real competitor that keeps them honest is cash.

But the real wet dream is tax. The lifeblood of any government, be them honest or tyrannical.
Assuming the most honest government, taxation will be hugely simplified if a realtime blockchain record of all transactions can be collected by the government. Tax cheating will be eliminated (except if you are a bank, and maybe some favourite corporations ;-)

But if you turn this over to the dark side, then the real wet dream is surveillance and control.
Even with something as simple and personal as a parent giving an allowance to their child will be known by the government. What that child spends their money on, where and when, will all be known. But it will not be know to the parent. This knowledge will only be available to the government and anyone who is close to them (i.e. banks and major corporations).

The tyrant would find it a small hop to weaponize this tool. To financially punish anyone by excluding them from the cashless financial system. Imagine the cards in your wallet suddenly stop working and no cash to fall back onto. It will be the most potent form of non violent government (and corporate) coercion ever known.

Anybody with any semblance of dignity, respect and sense of privacy should be frightened by any policy to remove the vital role cash plays for the citizenry from our financial landscape. Kiss goodbye to real freedom of speech.

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Sovereign Cryptos

Anyone who has delved into the bitcoin rabbit hole knows what makes bitcoin tick. I will not go into it here since better writers than I have laboured over it many times already. If you are not aware of the basic architecture of bitcoin, or the fine balance between game theory and financial motives that make bitcoin work, then the next part of this essay may lose you.

So let's take a speculative look at what a Sovereign Cryptocurrency (SC) would look like.

An SC will most definitely be different to bitcoin in almost all regards except the part that make it the most efficient transaction clearing network ever. Governments will retain the “blockchain” moniker mainly because it has a trustworthy marketing quality and will help convince the masses that their SC retains all the best parts of bitcoin but is better because it is backed by something. This will be totally wrong and designed to mislead.

Distributed

It will be almost certain that an SC will not be distributed in the fashion of bitcoin. Distributed in the context of bitcoin is the ease with which one can become a bitcoin miner (an entity that supports the network by participating in the vital task of verifying transactions).

Simply download a piece of software and a copy of the bitcoin blockchain and run. No aproval or identity required. The more distributed a crypto is, the more trust it inherits, or conversely the more difficult it gets to find and collude with enough likeminded untrustworthy parties to undermine the blockchain.
The government would not call what they do with the monetary system today as undermine, but in the cryptocurrency world, that is exactly what they do on a regular basis.

And undermine the blockchain is exactly what the government wants to do. Undoing transactions on the blockchain, or silently adding more tokens to the system and awarding them to certain parties, can only be achieved like this. Humanity is yet to experience a government and banking system that would be happy to forfeit this ability willingly. Just as a footnote to this, gold is trusted because of its physical chemistry. It forces honesty by its very nature.

Free addresses

To participate with bitcoin all one requires is a public/private key pair, sometimes referred to as a wallet. To get one of these, all one has to do is run a small script on your browser and you will theoretically have a fresh unique key with which you can receive bitcoin. You do not have to be connected to the bitcoin network, or even the internet to generate one. You do not have to give your name, DOB, nationality or any other personal information. And there is no limit to how many key pairs anyone can have. Anyone can send bitcoin to your address with no limit on the amount or reason for the transaction. The bitcoin system is completely agnostic to its users by design.

This will not be the case with an SC. There will almost certainly be some kind of linkage between you as an identifiable person and your public/private key pair. This will enable the government to easily inspect every transaction you ever make for all time.

I expect that there will be an entire elaborate tiered system of wallets in an SC. The keys the average user will get will be easily traceable by the government or approved entities, while other keys will have more restrictive access to trackability. And some will be completely private, basically invisible to tracking, a backdoor account if you will. Only available to the most well connected people and entities.

One thing will be almost certainly built in, the ability for the government or approved body to flick a switch and freeze a key. This will be active instantaneously on the system.
Depending on the tyrannical nature of the government, this tool will be employed in varying ways, but be warned, it will exist and will be used!

The future for Banks

An SC automatically inherits the ability to disintermediate about 90% of the business of banks. If we assume that governments and banks are virtually 2 sides of the same coin (no pun intended), then banks will be involved in some way no matter how superfluously bureaucratic that roll will be. They may morph into some key management agency taking a cut from managing our keys for us, i.e. doing the back office grunt work in deciding who gets what kind of key and what the status of that key is. Also creating reports on users account behaviours and aggregating real time economic activity metrics based on analysis of the blockchain. Basically a paper pushing machine to justify fees etc…

Banks will probably retain their current vital function in the fractional reserve banking system (hatched up after WW2 by bankers for the benefit of bankers at the detriment of us) under which we operate today. If you do not know what fractional reserve banking is, then google it. It will pop your eyes open, and you will never be the same again, you will definitely understand the necessity of bitcoin afterwards.

Hello ZIRP and NIRP

Cash is protection against too much of this financial alchemy that I described above. It is a refuge from these policies. Any SC will not be protection against this policy, in fact, it would be a massive enabler.

Race against time

I think that banks and government are in a race against time regarding cryptos. Today we have about 1600 cryptos in existence and more coming. Admittedly most of them are scams or frauds, but amongst them are some very interesting projects that will transform the online landscape and our societies as a whole.

Of these are cryptos that are aiming to be transactional currencies - replacements to traditional sovereign currencies that operate outside government control and supervision. Most if not all of these enhance and extend the basic architecture of bitcoin making them as attractive, publicly accessible alternatives to the traditional sovereign controlled currencies.

They operate with free participation and are decentralised in the tradition of bitcoin. In order for SC’s to be more attractive than these open cryptocurrencies, they must appear and be adopted before the open cryptocurrencies become too widely adopted or else they will always exist on the edges of the economy as safe haven alternatives.

Though, just by the act of creating an SC, governments will be indirectly be endorsing the validity of open cryptocurrencies spurring their adoption further. Only time will tell how this plays out.

I have always asserted that the adoption of open cryptocurrencies will be accelerated by the failure of sovereign fiat currencies, and in the current environment of the mediocre success of the unprecedented extraordinary monetary policy experiment of NIRP and ZIRP and extreme money creation by central banks around the world(disguised with names such as quantitative easing, etc..) seems this is almost bound to continue.

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Conclusion

Money is one of the oldest a tools ever invented by humanity. It has enabled the rich economic interaction that has rapidly driven human development to what we see today. By it’s very nature, money is power. Power over money is power over humanity. The core reason for banking was necessary to empower the invention called money to reach its true potential, but banking has also subverted money toward the betterment of the ruling class at the cost of the betterment of humanity. The amazing invention of Bitcoin has shown humanity a new way to have the benefits of money while removing the potential for money to subverted as it has been. To build a new type of money on top of the internet that decentralises the power of money democratically to everyone. It removes the need for banking and in such removing the distorting effects of centralised banking and its corrupting influence on power and government.

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The essay is speculative. I present no evidence to back any of my ideas. All I have done here is to extrapolate the history and human nature behind banking and government and applied it to the potential, both great a terrible that bitcoin has unleashed onto humanity.

If this essay has inspired you, great! Share it and get educated on this new revolution.
If you are still scratching your head about what it all is, then I hope this essay will spur you to look at bitcoin and true blockchain technology a little more carefully and learn how it will impact you and your family.
If you have something to add to this essay either contradictory or complementary, I encourage you to share your thoughts with the community on the comments section.