The world is changing.
Governments all over the world are beginning to take notice of blockchain and starting to see its potential. In fact, some governments are even starting to adopt cryptocurrencies themselves.
It’s not just a handful of countries either — just about every country in the world is testing out crypto in one way or another. Some have even developed their own Central Bank Digital Currencies (CBDCs).
How are governments using blockchains and CBDC today? Let’s take a closer look at the current state of governmental adoption of this technology.
What is CBDC?
Central bank digital currency (CBDC) is a form of cryptocurrency issued by central banks. It’s different from regular cryptocurrencies since it’s intended to supplement traditional fiat currencies (instead of an alternative payment form). It has been proposed as a way to increase the efficiency of central banks, reduce their costs and better manage monetary policy.
CBDC is one of the most debated topics in the blockchain space. The Bank for International Settlements (BIS) stated in a 2018 report that “central bank digital currencies could improve the control and security of payments” while also helping “fight financial crime more effectively”. The BIS report stated that a CBDC could potentially reduce the costs of issuing and circulating cash, since it would eliminate the need for physical notes and coins.
Why do governments prefer blockchains over cryptocurrency?
The rapid rise of cryptocurrency in investments and in relevance has ensured that governments cannot ignore it. While it is believed that governments are opposed to decentralized currency, they are becoming increasingly interested and involved in cryptocurrencies — as they try to understand the technology and how it can be used to their advantage. Meanwhile, many governments around the world have been trying to introduce stricter regulations on digital currencies, due to concerns like financial fraud and cyber crimes.
The problem they face with regulating cryptocurrencies is that they’re conducted over a peer-to-peer network. While governments have been successful in regulating venues such as the Pirate Bay and Silk Road, there are many digital currencies and more keep popping up every day! Many proposed regulations come from the possibility of cryptocurrency commodities tumbling and harming the economy.
The most straightforward way governments could impose regulations is by taxing any used fiat money to cash out a virtual token. Fiat refers to conventional currencies issued by governments — money that’s backed by the full faith and credit of a country. By default, governments protect borrowers of currencies. The main problem with this is that if it is applied to individual tokens, a cryptocurrency owner could simply turn to another coin and cash out.
Here’s why governments are eyeing blockchains.
Blockchain is like a digital database that acts as an electronic transaction log by recording the details of each financial exchange. The main difference between blockchain and cryptocurrency is that the former is a technology while the latter is an asset. This difference is why government officials are more likely to favor blockchain technology.
This is because blockchain technology has the potential to make government processes faster, cheaper, and more efficient. The difference between the two is subtle but important. Governments are exploring how blockchain technology can help them keep up with the ever-evolving digital world.
What a blockchain-based government would look like:
- Efficiency & Speed in Central Banks — Real-time gross settlement is a continuous process that updates financial transactions as soon as they occur. Central banks can use blockchain technology to speed up this procedure with enhanced security measures.
- Smart Cities — A smart city uses information technology and data to integrate and manage physical, social, and business infrastructures in order to streamline services for its inhabitants. It also ensures efficient utilization of available resources by this means.
- Smart Contracts — Automated e-government processes self-execute contracts by using blockchain technology to function. This means they can automatically verify and enforce the terms of the contract. This would reduce the risks of errors and chances of corruption.
- Efficient Taxation — Smart contracts can simplify the tax collection process by automatically matching data on income transactions with information about a person’s taxes and social security. Automated tax collection and coordination between agencies bring efficiency, speed, and security to the process.
- Empowered and Informed Citizens — Blockchain gives citizens more control over their data because it increases transparency. They could use blockchains to access services, store, and manage important data securely etc.
- Enhanced Cybersecurity — A digital identification system makes it much harder for hackers by heightening security around contracts, data, and personal information.
The current issues with Blockchain technology.
Every technology comes with its own drawbacks and blockchains are no different. Here are some current issues that Blockchains are dealing with:
- Data Modification- To modify data on Blockchain technology, the codes need to be rewritten on all of the blocks, which is time-consuming and tedious. This makes modifications difficult once data is recorded.
- Limited Scalability- Transactions are dependent on network congestion. The higher the number of people in a network, the slower it would function. One solution is to use blockchains to only store and access information and not to perform transactions.
- Private Keys- To access data stored on blockchains, a private key is issued to the user and it is their responsibility to keep track of it. There is no way to recover it if it’s lost.
Governments which endorse blockchain usage.
Blockchain is a relatively new technology. It has the potential to revolutionize numerous industries, but it’s still in its infancy. As a result, only a handful of governments have implemented it. However, that number is expected to grow rapidly as more countries recognize the benefits of using blockchain technology.
Some factors that heralded CBDC research in countries that previously had no firm stance on them are declining cash usage, a global pandemic, and a desire to keep up with other central banks. Apart from these, countries that are eyeing CBDCs are also doing so to skirt sanctions or control from other countries.
There are many governments that not only use the blockchain in one way or another but are also looking at ways they can implement this technology into their daily operations.
- In 2021, El Salvador became the first nation to officially adopt Bitcoin as its legal currency.
- Venezuela and Turkey are currently researching and implementing CBDCs to combat inflation.
- Both Iran and Cuba have devoted significant technical resources to the development of their own CBDCs.
- Palestine plans to issue a digital currency to navigate Israel’s control over the state.
- Countries like Malta, Belarus, and Switzerland have all been at the forefront of blockchain adoption.
- China has a hardline stance against cryptocurrency but they recently introduced their own CBDC called Digital Yuan, in their economic ecosystem.
Like China, governments of India, France, Russia, and the United States were previously against the adoption of crypto. However, recent updates point to a softening in their stance. All the aforementioned nations are now looking to regulate and use cryptocurrency to their advantage, instead of entirely banning its usage.
Governments around the world are still navigating how they can use this technology to improve both their operations as well as their citizens’ quality of life. As governments struggle to deal with issues like data breaches and cybersecurity, they’re gradually turning to blockchain technology.
Governments which strongly oppose cryptocurrencies.
Cryptocurrencies are controversial. People having access to a decentralized currency can help them avoid government oversight — which is why many governments are opposed to them. Cryptocurrencies make it harder for governments to control their citizens’ money, neither can they impose taxes and other fees on transactions.
Governments have been slow to accept cryptocurrencies. They are concerned about price volatility and the potential for criminal activity. The biggest concern behind people using crypto instead of central bank-issued fiat currencies is that governments could lose control and authority over their money supply and monetary policy. This has prompted 8 countries to entirely ban cryptocurrency: Algeria, Bangladesh, Egypt, Iraq, Morocco, Nepal, Qatar, and Tunisia.
All the aforementioned governments have banned their citizens from trading in cryptocurrencies or using them as a means of payment. They are strongly opposed to the adoption of crypto due to its users enjoying a degree of anonymity that is not available with traditional currency.
2023: Future Of Governmental Adoption Of Crypto
Cryptocurrency has grown into a multi-billion dollar industry that is constantly evolving. Governments around the world have begun to take notice, with many governments announcing plans to develop their own cryptocurrencies or regulate and implement existing ones.
As the adoption of cryptocurrency in 2023 continues to grow, so do government regulations. Governments are beginning to take steps towards adopting cryptocurrencies as legal tender. They are also creating laws that regulate exchanges, ICOs, and other aspects of the industry.
Cryptocurrency is still in its nascent stages. It’s only been around for a decade and has yet to be widely adopted by any major country as its official currency. However, that could all change in 2023, with the global economy amidst a period of uncertainty.
The world of cryptocurrency is still under development, and it’s unclear how things will unfold. But there are several indications that governments around the world will play a major role in shaping this emerging technology.
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