[Update: And now, the Federal Reserve, is considering introducing a digital currency. Update2: And in 2018, about a half dozen other nations (e.g., Venezuela, Iran, Turkey, etc.) making plans to do so as well.]
Once again, there is a report of yet another nation announcing plans to issue their central bank currency in digital form. This time, reportedly, it is Russia with their planned government-backed digital currency (a “fedcoin”) that is being referred to as the CryptoRuble. However, no timeline was shared and more than one year has passed since there were earlier reports of such a development being planned. (Update: Another report, referencing the source.)
Make no mistake, these fedcoins — state-issued electronic tokens, are tools of the state being strategically introduced to limit the exodus of value into Bitcoin and other digital assets beyond their control.
Fedcoins are not in any way similar to Bitcoin or other decentralized digital currencies though. Fedcoins are instead designed with absolute central control. For a user, they can prove to be riskier than a bank account even, especially considering law enforcement’s proclivity towards unwarranted civil asset forfeiture.
If a fedcoin is an inferior product to Bitcoin, then why would anyone voluntarily choose to use them? If you would ask that question then, well, you’ve forgotten who you are dealing with. The state, once getting their fedcoin launched and relatively widely used, will simply use regulation to try and squash the spread of digital currency.
And they will fail.
The fundamental and unethical nature of their money will remain unchanged. It will be imposed by force, and its supply will be managed by a secret process. It will be as unreliable as all fiat currency ever was. This is the very definition of lipstick on a pig.
In fact, the emergence of fedcoins may even accelerate the adoption of Bitcoin. While the state can block centralized exchanges from operating within that nation and ban those exchanges from using that nation’s banks and state-issued fedcoin, the state will have no reasonable methods to restrict decentralized exchanges from operating. These are where much person-to-person (P2P) trading occurs today, exemplified best by LocalBitcoins, Bisq [NoKYC], HodlHodl [NoKYC], LocalCoinSwap [KYC Optional], Paxful, and dozens more. Future growth in P2P trading will occur as true decentralized exchanges mature and as cross-chain atomic transactions become commonplace — especially after privacy enhancements for them are added.
So essentially, thanks to P2P trading, a fedcoin becomes a very useful onramp to (and offramp from) Bitcoin. And while organizations like the IMF recognize the power of digital currencies,
These systems allow for peer-to-peer transactions without central clearinghouses, without central banks.
they fail to recognize how additional “e-money” (“digital payments in existing currencies”) options enable further traction and growth of P2P exchanges.
For instance, even though the Central Bank of Kenya issued a “stern warning” on Bitcoin — something that forced the largest Kenyan exchange, BitPesa, to stop serving the Kenyan market, the level of P2P trading volume in Kenya has simply skyrocketed by more than ten times since the December, 2015 warning was issued.
This has happened because M-Pesa, the mobile e-money used in Kenya is particularly good for P2P trading to and from Bitcoin. M-Pesa works great as an offramp for those selling Bitcoin as payment reversals (similar to credit card chargebacks) are relatively rare. And mobile e-money works great digital currency onramp as well since an M-Pesa account can be loaded with cash at the nearest agent (teller) kiosk —which are on nearly every street. Most fedcoins announced to-date essentially will not differ much when compared to Kenya’s M-Pesa.
And since the use of the fedcoin is only one digital currency onramp/offramp method, it can’t be used by the government as a digital currency chokepoint as those those wishing to maintain financial privacy will continue using cash as their onramp/offramp, operating outside both the banking and fedcoin networks.
Simply put, fedcoins are complementary gateways for digital currencies, regardless of the regulator’s intent.
[Edit: Minor corrections in Feb, 2018: Added HodlHodl exchange. Minor corrections in Oct, 2019: Added LocalCoinSwap exchange and added KYC/NoKYC qualifiers.]