central bank digital currencies

When Venezuela created its own central bank digital currency (CBDC) in an attempt to stabilize its faltering economy and out-of-control inflation, it posed some interesting questions. 

Are CBDCs a viable financial solution for failing economies?

Could this be something that every country should implement?

Does the centralization of CBDCs go against everything cryptocurrency stands for or are they the future of widespread crypto adoption?

It’s not just failing economies looking into CBDCs either. The Bank of England released a paper discussing the merits of a national cryptocurrency. Switzerland requested a study on the benefits of launching an e-franc and Canada published a framework for a CBDC.

Is there a future where every country launches its own digital currency?

What is the Definition of a CBDC?

A central bank digital currency is a cryptocurrency issued and controlled by a government, central bank or federal regulator. It’s basically a homegrown cryptocurrency dedicated to and ran by a country.

One of the main drawbacks of widespread crypto adoption is the lack of regulatory control. The implementation of nation-state CBDCs across the board could immediately fix those problems. They could be fully regulated by the state. CBDCs are not decentralized like many cryptocurrencies and represent real money in a digital way.

Governments or central banks would become not just the issuer of the digital currency, but also the regulator. It may offer the security and stabilization that is sometimes lacking with fluctuating digital currencies such as bitcoin. 

Venezuela Launches Petro CBDC

When news broke that Venezuela was poised to launch its own CBDC called the Petro, it was met with varying levels of suspicion and controversy. When announcing the launch of the petroleum-pegged Petro, Venezuelan President Nicolas Maduro took a swipe at the US and laid out his vision:

“They’ve dollarized our prices. I am petrolizing salaries and petrolizing prices. We are going to convert the petro into the reference that pegs the entire economy’s movements.”

venezuela petro

However, the petro cryptocurrency is shrouded in controversy. It has been called a scam by the American authorities, who claim the country is using the petro to skirt US sanctions. Many crypto-enthusiasts have also slammed the idea due to its centralized nature. All of these criticisms are valid. 

But could this concept work for other nations who are dealing with collapsing economies or would it spark the end of the decentralized nature of cryptocurrencies themselves?

Pros and Cons of Implementing a Central Bank Digital Currency 

There are arguments on both sides of the coin in regards to the adoption of central bank digital currencies. 

The opinions largely fall into two categories: long-term crypto users who are opposed to the decentralization of crypto; and those who want to see wider adoption and integration of blockchain technologies and CBDCs to bring together a coordinated effort to regulate the industry moving forward.

The Pros of Using a CBDC

Those who seek greater regulatory measures applied to the cryptocurrency industry such as governments, central banks, and some potential investors are more open to CBDCs. Many believe that the pros outweigh the cons.

  • Boosting the economy – The Bank of Canada Economist, Mohammad R. Davoodalhosseini, claims that even large economies such as Canada and the US could greatly benefit from the implementation of a CBDC. Research from the Bank of Canada (BOC) showed that a CBDC “can lead to an increase of up to 0.64 percent in consumption for Canada and up to 1.6 percent for the US, compared with their respective economies if only cash is used.”
  • Stabilizing failing economies – As we have seen with the implementation of the petro in Venezuela, some economies in the oil trade who are dependent and attached to the US dollar can use a CBDC to reinvigorate their economy.
  • Greater regulatory cohesion – If the people who are issuing the CBDC are the same ones regulating it, greater regulatory cohesion will naturally follow. If a handful of countries adopt CBDCs and collaborate together in a coordinated effort, regulating the industry would be much easier than present.
  • Easy access and confidence – The implementation of a CBDC could help to speed up the process of widespread crypto adoption as the risks currently associated with using crypto would be less if backed by an entire country and a central bank. It would create more confidence in the market for investors.
central bank digital currency countries
A map of countries with an active state-issued cryptocurrency. Credit: Coin Telegraph

The Cons of Using a CBDC

Although the introduction of a CBDC seems like a great idea from one point of view, some central banks think they won’t work. Even the Bank of Japan’s (BOJ) deputy governor, Masayoshi Amamiya has criticized the idea of central bank digital currencies. Here are some of the cons involved with issuing a CBDC:

  • Expensive setup costs – One of the major concerns for Masayoshi Amamiya and other central banks is that creating a CBDC is a costly affair. It’s not only banks that would be expected to implement new technologies but also the entire public sector, middle-men, and customers. As a CBDC is a state-run enterprise, taxpayers would be footing the bill.
  • Loss of financial privacy for users – The most discussed negative issue against CBDCs is the centralized nature of the concept. Most long-term crypto enthusiasts and other anti-establishment types champion bitcoin and other cryptocurrencies because of their privacy and independence from central banks. A CBDC goes against that philosophy.
  • Knock-on effect to pre-existing financial systems – Although introducing a CBDC may work for failing economies, it’s not efficient for larger nations that currently have a massive presence in the global financial markets and successful pre-existing financial systems. 

The Imminent Future of CBDCs

At the time of writing, the only nations using a CBDC are Senegal, Tunisia, Marshall Islands, and Venezuela. Although Iran has also been researching the possibility of introducing one for similar reasons to Venezuela. 

Central Banks might well feel they are being left behind in regards to distributed ledger technology that could very well revolutionize the global financial markets as we know it. Thailand is one such nation that is embracing blockchain and considering its own CBDC. When recently talking about the issue with the Bangkok Post, a spokesperson for The Bank of Thailand said:

“Technological changes are having a major impact on financial services. The Bank of Thailand and local financial institutions agreed to launch a project to raise technological readiness in adopting new financial technologies to enhance operational efficiencies. Creating an ecosystem conducive for collaborative learning in technology will be an important driving force towards a digital future.” 

Although Thailand is currently only in the planning stage, they believe that by early next year, their very own central bank digital currency will be unveiled. 

Conclusion

Central bank digital currencies are an interesting alternative for failing economies with struggling financial systems, but not so much for economic powerhouses that already dictate the global markets at this current time. 

However, the evolving nature of the financial markets and distributed ledger technology, plus pressure from governments, central banks and high places who are pushing for greater regulations and cohesion in the crypto marketplace, means that a CBDC could be coming to a country near you sooner than you think. 

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China destroy bitcoin

Welcome to the weekend, folks. Grab a coffee and let’s recap the biggest news stories of the week in cryptocurrency and blockchain.

China Has “Capability” and “Motive” to Destroy Bitcoin, According to Report

A new report this week claims China could destroy Bitcoin. The report, authored by researchers at Princeton University and Florida International University outlines 19 different ways China could attack the Bitcoin network.

Is it based in truth?

Theoretically, yes. The report points to the fact that 74% of Bitcoin mining hash power comes from China. And five of the six largest Bitcoin mining pools are located in the country.

bitcoin mining pools

If those mining pools collectively orchestrated a 51% attack, they would control the network, and bring it down if they wish.

However, it’s important to point out that the Chinese government doesn’t own these mining pools. And the mining pools themselves have little incentive to execute a 51% attack (it would kill the value of bitcoin, making their efforts worthless).

What is concerning is the level of Bitcoin centralization in China.

The report goes on to explain how China’s “Great Firewall” appears to give Chinese miners an advantage. It slows down miners outside China and incentivizes those within the firewall to generate “empty blocks” (the blocks contain no transactions, but the miner receives a bitcoin reward anyway).

This, coupled with cheap electricity in China, is centralizing mining power in one country. And that’s a problem.

Note: the report in question has not yet been peer-reviewed.

Venezuela Is Forcing Citizens to Use Its Controversial Cryptocurrency to Buy Passports

As Venezuela’s fiat currency, the bolivar, soars towards 1,000,000% inflation, the government is putting its faith in a state cryptocurrency, petro.

Venezuela petro cryptocurrency

The petro was created by the Venezuelan government and its value is backed by the country’s oil price to keep it stable. Citizens are now required to pay for passports and renewals using only the petro cryptocurrency.

But the petro isn’t without controversy. Its creators have been accused of ripping off the Dash whitepaper. The US government has also accused Venezuela of using the petro to defraud investors, and critics say the petro pre-sale didn’t generate nearly as much as the Venezuelan government claims.

Cryptocurrencies Pose No Risk to Global Financial Stability

In somewhat brighter news, a report this week concluded that cryptocurrencies are not a risk to the global financial system.

The report carries some weight. It was released by the Financial Stability Board and is backed by the Bank for International Settlements, the world’s oldest financial institution.

However, it does go on to say there may be a tipping point in the future.

If they continue to grow, the report claims, cryptocurrencies may one day pose a threat to the reputation of current banks and financial systems. There may be a risk of exposure if traditional banks adopt crypto on a wider scale.

And there may be risky consequences if bitcoin or other cryptocurrencies become a common payment method.

Price News

The cryptocurrency market suffered an epic $16 billion wipeout on Thursday. It took place in just a few hours, dragging bitcoin down 4%.

bitcoin price
Chart: Coinmarketcap.com

As usual, altcoins bore the worst of the fall. Ethereum, XRP, and others fell in the region of 10%.

That’s all for this week. We’ll be back bright and early on Monday.

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Venezuela petro cryptocurrency
  • Petro is cryptocurrency, created by the Venezuelan government to control inflation.
  • Its value is tied to the price of oil in an effort to keep it stable.
  • Venezuelans are using Dash instead, due to its speed and reliability.

Venezuelan president Nicolás Maduro just ordered every bank in the country to adopt its new cryptocurrency: the petro.

Maduro has hailed petro as a savior to Venezuela’s economic trouble, but the US authorities call it a scam. So what exactly is it and are Venezuelans using it?

An answer to hyper-inflation?

Venezuela’s economy is crippled by hyper-inflation. In July alone, prices rose by 82,766%. The country is now on track to hit 1,000,000% annual inflation.

Millions have fled the country, food and medicine supplies are low, and the army is guarding the Brazilian border.

Maduro’s solution was to replace the hyper-inflated “bolivar” with a new currency, “sovereign bolivar.”

The sovereign bolivar was then pegged to a cryptocurrency, petro.

Petro is backed by oil

The idea is to keep petro (and therefore the new sovereign bolivar) stable by tying its price to that of oil.

One petro is worth roughly $60, the same price as one barrel of Venezuelan oil. The concept was outlined in the project’s white paper, with a view to creating a currency backed by raw materials.

The Venezuelan government set aside five billion barrels of oil to back the currency.

Pre-mined

Petro is entirely controlled and produced by the government. It was pre-mined before Maduro announced a crypto sale.

According to the government, the pre-sale generated billions, but there is no record of this claim.

Why is petro controversial?

When Maduro created the new sovereign bolivar and petro, it devalued the old currency by 95%. Although it aims to bring stability, Venezuelans are being forced to adopt a wildly devalued currency.

Some have claimed the petro is also being used to sidestep international sanctions. The country is reportedly using the petro to conduct deals with Brazil, although Brazil has not confirmed this.

Donald Trump issued an executive order banning any US companies making transactions in the cryptocurrency.

Why Venezuelans are using dash instead

Despite the hype around petro, Venezuelans are flocking to dash. Dash was built on bitcoin’s source code and aims to be a global, digital form of cash.

The adoption in Venezuela is so rapid, the price has risen 10% in the last 24 hours alone.

According to Ryan Taylor, CEO of Dash Core Group:

“We are seeing tens of thousands of wallet downloads from the country each month. Earlier this year, Venezuela became our No. 2 market, even ahead of China and Russia, which are, of course, huge into cryptocurrency right now.”

Retailers like Subway and Calvin Klein are now accepting dash in Venezuela.

But why dash? The cryptocurrency is faster than bitcoin and more decentralized than petro. As the crisis in Venezuela continues, expect cryptocurrencies to make further headway. Just don’t bank on it being petro.

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Bitcoin Price Could Be In For A Boost As World Cup Fans Descend On Russia
Hotels in the Russia city of Kaliningrad — which will be playing host to some of the World Cup’s games — are accepting Bitcoin as payment. Forbes reports some airlines and travel agents, as well as bars will also be taking the cryptocurrency.

Bittrex Strikes Agreement With Bank To Offer USD Deposits and Trading Pairs
BlockExplorer’s own Tony Spilotro reports “The Seattle-based cryptocurrency exchange Bittrex has revealed that the firm has struck an agreement with a United States bank to allow some of its customers to trade cryptocurrencies in USD, along with making USD deposits to the exchange’s wallets.”

The Humanitarian Side of Bitcoin
International Policy Digest has a thoughtful piece on how Bitcoin can help a socioeconomic crisis such as the one in Venezuela, a country actually going out of their way to ban Bitcoin. “Bitcoin, Blockchain and the whole host of other cryptocurrencies and related media have a real shot at not simply being the ‘next big thing’ as their acolytes incessantly seem to preach. They actually can help change lives for the better through circumventing oppressive state bureaucracies and structures in inspired acts of cryptocurrency-based agorism.”

Litecoin Founder Charlie Lee: LTC Network Extremely Secure, Mining Healthy
CryptoSlate says “Litecoin founder Charlie Lee has taken to Twitter to address community concerns regarding the Litecoin network sparked by a cryptocurrency security site that tracks the cost of launching a 51% attack against proof of work cryptocurrencies.”

Image courtesy of Carty Sewill, http://cartyisme.com/

Despite the Venezuelan government embracing cryptocurrency with open arms – even launching their own oil-backed Petro cryptocurrency in an effort to solve the country’s economic crisis – according to a new report from local Venezuelan media, the country has taken a stand against cryptocurrency mining, outright banning related computer equipment from entering the country.

The report states that the Venezuelan government made a policy change at the end of April that restricts computer equipment such as GPUs or ASIC miners. Customs authorities have been seizing related devices received by air and sea since the change went into effect.

Shipping companies such as Liberty Express and DHL, who ship these mining devices to Venezuela on behalf of their customers, have either updated their pages on restricted products entering Venezuela to include mining equipment or have sent out notices to their customers notifying them of the changes to avoid any inconveniences they may experience as a result of the policy change.

The policy change has already gone into effect, but only on a temporary basis until officials from the National Association of Cryptocurrencies meet with the Superintendence of Cryptoactives and Related Venezuelan Activities to address the issue next week.

Weeks ago, Superintendent Carlos Vargas indicated that the country was evaluating authorizing companies to import digital mining equipment to sell in Venezuela:

“We are in an evaluation process to select and authorize companies that are qualified to import and market digital mining equipment and be responsible for the respective guarantees in our country.”

Vargas warned individuals mining cryptocurrency to be “prudent at the moment of acquiring the equipment since until now no company has been endorsed or certified,” by Venezuelan regulators.

Considering Vargas’ statement, the ban appears to be temporary until the government finalizes authorizing company’s to begin importing mining equipment for resale in Venezuela.