Why Can A Truly State-Run Cryptocurrency Never Be A Thing? Pros And Cons

News, Opinion, Regulation | September 22, 2020 By:

Bitcoin and cryptocurrencies, born in its image and likeness, have always been considered primarily as means to get rid of the obsessive control of the state. Complete decentralization – that is, the ability to do everything without the presence of a superior authority in the person of, for example, a state bank – has been and remains one of their main advantages. But paradoxically, what was created as a “tool against the government”, at some point, took possession of its interest. States one after another began to argue what they would have won if they had borrowed their own state cryptocurrency, controlled by themselves. Conversations on this topic were conducted in the United States, China, Europe, and numerous countries contemplating creating a state-run cryptocurrency which carries a lot of advantages as well as drawbacks.

How does it work?

To understand how it works and what benefits it provides, it is easier to start with what is already known. Think about how Bitcoin works. There, everything revolves around a kind of “ledger” – a long list containing absolutely all money transfers ever made. A user who wants to transfer funds from wallet X to wallet Y communicates his intention to everyone around him and confirms this with a cryptographic electronic signature serving as a secret key to wallet X. Next, the miners – participants who are willing to spend the power of their computers on maintaining the same list – check if there is enough money in X to transfer, and jointly add the operation to the list. That’s all. This is how bitcoin works – no Fed, no central banks, no presidents.

The state cryptocurrency should work a little differently. First, the central bank determines the amount of funds circulating in the system. Secondly, the list of operations (the same “ledger”) should also be at the exclusive disposal of the central bank: only it has the right to make new entries in it. Finally, thirdly, there is no need for miners: as a last resort, in order to increase the throughput of the system (the maximum number of transfers per second), ordinary banks can be involved in accepting transfers.

This is the theory. But that’s exactly how state-run crypto could work. But here goes another question – why would countries establish a cryptocurrency? Why fence another electronic system in addition to the many existing ones? The answer to this question is not easy, but on almost every point in favour of state cryptocurrencies.


So, first of all, it will get rid of the main headache associated with cash: counterfeiting and theft. As long as cash exists, it will be counterfeited and will be stolen. Thefts are indestructible as long as there is something to profit from at the checkout. Counterfeiters are also ineradicable, for here we have a classic competition between a shield and a sword: the protective features added to banknotes and coins sooner or later manage to be reproduced, but the defence cannot be made too complicated, since ordinary people will not be able to use it. Counterfeiting and scam remain one of the biggest problems in the financial system, thus leading more people to using cryptos frequently.

But cryptocurrency cannot be counterfeited in principle: in order to find a secret key to a wallet, an unrealistically large amount of calculations is required. And stealing it – if we are talking about the state cryptocurrency – makes no sense. A citizen from whom, for example, a phone with a wallet program was stolen, simply has to call his or her favorite bank and ask it to cancel the wallet and the last transactions on it. This cannot be done with Bitcoin, because there is no autocracy. But with the state cryptocurrency – it’s easy!

Further, thanks to the state crypto, the state and citizens will get rid of the intermediaries in the face of card companies that are firmly sitting on the neck of society. Although a plastic card is a good replacement for cash, it is not ideal. Card transactions are expensive and incomplete (in the sense that you can’t just transfer the amount from card to card), and all because they go through card operators: VISA, MasterCard, etc. The state cryptocurrency will become a universal electronic money system without intermediaries. This means practically zero transaction costs, fantastic speed, absolute functional identity with cash, plus the ability to tie all municipal payments and settlements to the state crypto.


The third point – well it might be deemed as an advantage but gives a state more power. There is a fear that having got absolute control over cash flows – after all, the state cryptocurrency allows the central bank to know about every penny spent, literally! – the state will be able to control the bankers. Everyone knows this problem: in order to lend, banks have the right to operate with more than they actually have, and it happens that this “non-existent money” inflates “bubbles” (remember the recent financial crisis). With a state crypto, each monetary unit will be registered by the state. Perhaps this will make the economy more stable.

By and large, there is also one drawback: the disappearance of anonymity. State cryptocurrencies can be constructed so that small transactions will be anonymous, while large ones will contain information about the parties. Where to draw the line of anonymity is decided, of course, by the authorities, which is a minus from the point of view of a citizen. But if we discard paranoia, then even this point turns out to be in fact an advantage – both for the state and for society. With the disappearance of anonymity, it will be easier to track money laundering, bribes, extortion, in general, any shadow flows and operations that are currently carried out through cash.

Summarize all this – and you will understand why the authorities of various countries are studying the phenomenon of cryptocurrency with such attention today. China, it turns out, is closest to launching its own currency. But there are a lot of doubts from the experts about creating a state-run crypto, which in their opinion will lead to more control from the state.