In 2012, the Royal Canadian Mint introduced ‘MintChip’, a blockchain-backed payment system designed to enable the rapid, peer-to-peer, low-value exchange of Canadian Dollars without the need for physical cash or third-party transaction fees. While MintChip represented a laudable development of fiat currency payment systems, it – and other proposed government-backed cryptocurrencies, such as in Scotland – miss the point entirely. To be successful, a digital currency needs to complement existing fiat currencies, providing a genuine alternative free of the heavy regulation, transaction fees, and exchange rate issues that characterize sovereign currencies. Government-created digital currencies therefore represent a threat to the integrity of the global digital currency ecosystem.
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A recent article on this very website reported on the New Economic Foundation (NEF) for Scotland to create its own digital currency in preparation for a potential further referendum on that nation’s status within the UK. The sagacity of such advice for the Scottish Government has been frequently highlighted.
During the 2014 Referendum, in which Scots voted against leaving the Union, one of the major issues was that of currency. Scotland’s then-First Minister, Alex Salmond, maintained that Scotland would be able to keep the Pound Sterling in a loose currency union with the rest of the UK; meanwhile, British Chancellor George Osborne and various European officials suggested that Scotland would be unable to keep the pound and instead, provided it wanted membership of the European Union, the fledgling nation would have to join the Euro just like any other state wishing to join the bloc. With polls showing consistently that economic concerns were amongst the most important factors in the subsequent ‘No’ vote, the issue was not one of mere semantics.
With Scotland’s current First Minister, Nicola Sturgeon, set to win a landslide victory for her Scottish National Party (SNP) at the forthcoming Scottish Parliament Elections, the issue of independence is quietly resurfacing – though there is reluctance among the SNP’s leadership to commit to another referendum until some of the concerns which led to 2014’s ‘No’ vote have been addressed. Hence the advice from the NEF that Scotland should create a digital currency, to smooth its transition from GBP to whatever currency it ends up with, appears timely and attractive. But while advocates of an independent Scotland are understandably enthusiastic about the idea, the impact of a new government-backed digital currency may provoke concern among the rest of the cryptocurrency community.
A Scottish digital currency would not represent the first government-backed experiment with digital money. In 2012, the Royal Canadian Mint, a crown corporation 100% owned by the government of Canada, announced a project known as ‘MintChip’ – a digital currency underpinned by the state – in a bid to capitalize on the growing trend of cryptocurrency payments. MintChip was not, however, a ‘true’ digital currency: unlike Bitcoin, DNotes, and other digital currencies, MintChip did not have inherent value, but rather derived its value from the Canadian Dollar.
The MintChip project failed in mid-2014, and the Royal Canadian Mint sold the protocols and brand that underpinned the currency on to the private sector. Since then, the entire project has gone dark. In many ways this may be interpreted as a blow for the wider digital currency community: MintChip served as an intermediate stage between traditional fiat currencies and digital currencies, which might have served to bolster public confidence in blockchain backed peer-to-peer payment systems.
But while MintChip had many positive attributes, it rather missed the point of true cryptocurrencies. First, value was injected into the system, and controlled by, the Royal Canadian Mint at all stages. This value was not inherent to the cryptocurrency, but was subject to the fluctuations and exchange controls of the Canadian Dollar. MintChip’s utility was therefore limited to being a digital medium of exchange for use within Canada’s borders. True digital currencies, however, represent a store of value and medium of exchange that is independent of the prohibitive transaction costs and the many issues associated with exchange rates. Thus, true cryptocurrencies go a long way to circumventing the barriers presented by national borders, globalizing small-scale transactions and representing an opportunity to make international trade cheaper, easier, and more democratic. Without these global advantages, MintChip could only offer a small sample of the advantages associated with Bitcoin, DNotes, and other cryptocurrencies.
MintChip was also open to be subjected to arbitrary controls by the Canadian Government, up to and including legal limits to the size of MintChip transactions. Thus the system did not run parallel to sovereign currencies in the same way that a true digital currency ecosystem does. This lack of independence from government control and interference meant MintChip was vulnerable to over-regulation which would stifle the innovation that characterizes the digital currency space.
Digital currencies doubtlessly need government support – regulatory systems which are favorable to their mining and exchange, financial support for research and development in burgeoning digital currency industries, and governmental trust in digital money – and are indeed most successful in those countries, like Canada and the UK, where governments are open to the prospect of a robust digital currency ecosystem that complements fiat money. But most would argue that there should be a healthy distance between the issuers of sovereign currencies and the digital money community. The core economic and social benefits of digital currencies are derived from their inherent imperviousness to meddlesome third-party intervention; the suggestion that governments might introduce digital currencies of their own threatens the long-term sustainability of these benefits.