Why Governments Will Turn to Digital Currency and What it Means for Bitcoin

By Kyle Torpey Dec 11, 2014 9:16 AM EDT

NEW YORK (InsideBitcoins) — Bitcoin is an astounding advancement in currency and payment technologies, which means it should not be long until governments begin to adopt these technological improvements in their own monetary systems. Although governments will undoubtedly have some issues with bitcoin in its current form, it’s likely that they will take certain aspects of the tech to improve their own fiat currencies.

While governments usually compete on the stability of their currencies (and economies), it’s possible that the technologies used to implement these new, digital currencies could be an extra battleground.

The benefits of cryptocurrency over current fiat currency tech

So, why would a government want to adopt certain aspects of bitcoin and ecash technologies? There are actually quite a few reasons to look at here, but none of them have much to do with the core reasons people are opting into the bitcoin system today.

Digital bitcoinLet’s take a look at some of the improvements that can be made to fiat currency by shifting towards digital cash:

  1. Digital cash cannot be counterfeited. By choosing digital cash over physical notes, a governing body can protect the integrity of their currency. Although identifying and destroying counterfeit currency has become easier over the years, the reality is that fake dollars, euros, yen, yuan, and other monetary notes continue to pop up from time to time.
  2. Digital cash makes sense for frictionless payments. Credit and debit cards have made spending fiat currency more convenient, but it’s also increased expenses for merchants. A government that created their own digital currency with a centralized block chain would be able to provide free, frictionless payments between holders of that new version of digital fiat currency. In other words, consumers are provided the convenience of mobile payments, while merchants do not have to worry about increased costs (and possible chargebacks).
  3. Getting rid of anonymous transactions in the form of physical cash. Nearly all governments have made it clear that, much like MasterCard, they are not fans of anonymity. Many countries already have restrictions on cash transactions, and various government agencies would love the prospect of having every transaction collected in a centralized database.

The drawbacks of government-issued cryptocurrency

Some have argued that a government transition into digital currency would mean the end of bitcoin, but there are still plenty of advantages of the private, decentralized cryptocurrency over anything a government entity is likely to create. Here are some of the main reasons bitcoin will still compete favorably with government-issued digital currencies:

  1. Government-issued digital currencies will be tools of mass financial surveillance. When governments make the transition to digital currency, you can be sure that anonymity will not be part of the sales pitch. This means bitcoin still holds onto its core value of censorship resistance when compared to all other currencies. There will always be a market for people who do not wish to have all of their financial activity tracked by governments and other third-party institutions. The crackdown on physical cash transactions by governments could actually increase the number of use cases for bitcoin.
  2. Trust is placed in government rather than code. As we are currently seeing in Venezuela, Argentina, and many other countries around the world, the issuance of new units of fiat currency is one of the main problems with government control over a monetary system. Unless a government is willing to take a hands-off approach to the creation of new currency units, the government-issued currency would be at a competitive advantage to the math-based issuance model in bitcoin. Governments who want to take the responsibility of currency issuance out of their own hands could look to bitcoin as a potential reserve currency.
  3. Government-issued currencies are limited by geographic regions. One last point to remember in this increasingly global economy is that fiat currencies are limited by their geographic regions. People in the Eurozone want euros, and people in the United States want dollars. This causes unnecessary friction and increased costs in international payments and money transfers. On the other hand, bitcoin is an international currency with no borders.

The movement of governments towards digital currency is not completely theoretical, as relevant plans are already on the table in Ecuador and the Philippines. We’ll continue to track the transition of traditional fiat into digital currency here at Inside Bitcoins.

You can follow @kyletorpey on Twitter.

  • < The USD is limited to a geographic region?

    Yes. I believe you're implying that the United States isn't the only country where the US dollar is accepted for payments, but there are many places where you cannot buy anything with US dollars. You can pay with US dollars indirectly sometimes, but you must pay an exchange fee first.

  • Icarus

    That’s exactly how it works, they can do whatever they want and have the funding to back it. Whatever they do will be centralised and you will be able to transact offline like you do now with your physical wallet but it will all be reported back, logged and audited by the central bank. I think in the future we will all be dealing with a central bank via intermediaries which will be the current commercial banks. I suspect bitcoin or other mined crypto currencies will remain as they are today, outside the mainstream financial system.

  • Kihhj

    The only thing governments or central banks could do is create some type of colored coins backed by the Bitcoin blockchain. They can’t secure a blockchain without issuing tokens the way Bitcoin does. They can’t just adopt parts of Bitcoin that they like and put it into their own system. It doesn’t work that way,

  • You’re correct, and surprisingly sensible, all things considered ;O)

  • Darth Android

    I don’t really think there’s a need to shun the detractors. Bitcoin needs critics to help find the problems with it so that they can be resolved. A bunch of circle-jerks aren’t really productive nor effective to furthering Bitcoin’s acceptance.

  • Darth Android

    The lost update problem is known as a double-spend in Bitcoin; You release two transactions, making half the network think that you paid person A, and making the other half think that you paid person B.

    What makes Bitcoin work is that it’s a distributed transaction log or ledger, where it is non-trivial to append a new “block” of transactions (it auto-adjusts so that it takes approximately 10 minutes of network processing time for the network to find the “solution” for the next block). When two nodes are comparing their block chains, the node with the longer block chain is defined to be the correct chain.

    In the above example, whichever half of the network finds the next block solution wins. Let’s say a node with the person B transaction finds it – Now the blockchain containing my transaction to person A is only n blocks long, while the blockchain containing my transaction to person B is n+1 blocks long. This new “block” will be distributed across the network, and as soon as it hits any nodes with my person A transaction, the person A transaction will be rejected for insufficient funds (and thus, not included in any subsequent blocks found).

    However, this leaves the problem of two nodes finding the answer at or around the same time, and the network winding up with two chains, one with transaction A and one with transaction B that conflict. This is known as a “fork” of the blockchain, with my transaction to person A and my transaction to person B both having one “confirmation” block. This is not an uncommon occurrence, but the likelyhood that the fork will continue for subsequent blocks rapidly diminishes to nearly impossible since each node will only work on one of the chains – whichever fork of the chain has the most nodes working on it will be more likely to get the next confirmation.

    It is customary to wait for 6 confirmations before considering a particular transaction safe from the double-spend / lost update problem, but different companies or users may wait for fewer or more confirmations depending on what the time/risk tradeoff is for them. In reality, new blocks propagate incredibly fast across the internet, and the window for the chain to fork is incredibly small.

    Bitcoin doesn’t eliminate the problem perfectly, but it is able to reduce it to an acceptable level as long as you can assume that more than half the nodes on the network are operating for their own interests and not colluding.

  • Phantastic

    While I agree with your statement about our entire system being corrupt, you have missed the point. If you study the congressional votes for the last 4 decades, you will see that it is the Republican party that pushes the largess for big-business and the rich far more than the Democrats. In this case, we are looking at the Republicans controlling (or at least trying to control) this spending bill. They are the ones who have added all of the legislative breaks for the banks and big business.

  • Doug Depker

    Exactly, the voting public continues to think that it is the other party’s fault when it is the system. Dems take lots of money from the same rich friends. Our two party hegemony and the exploited system they’ve created are the problem.

  • Eric Muise

    I went to college for programming, and I can say this. Programming pays well, but if they go to digital currency they temptation for it to pay a lot better will be immense. There are enough smart people who can write code to target this, sure it will take a few months of hard work, but the temptation will be huge is all I am saying for some.

  • JohnGarrison

    I’m not sure how you think there would be a lost update problem, considering how the Bitcoin protocol works. Could you clarify?

  • NumberOne1AZfan

    Gold backed crypto version of Bitcoin.

  • JohnGarrison

    I have trouble valuing the opinion of someone who has been fooled into thinking one political party is to blame. Quit focusing on the “enemy” that vested interests would have you focus on, and instead realize the entire system is a farce.

  • Hello Aryeh! This is not the place to be saying anything that isn’t bitcoin positive. Try this subreddit.

  • Our central banker “friends” shall never allow us anything that benefits the average joe. they want control over everything and that is why they went after Bitcoin. It shall eventually end up as digital currency with them in control.

    Revelation 13:16 – And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads: Rev 13:17 – And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name.
    Rev 13:18 – Here is wisdom. Let him that hath understanding count the number of the beast: for it is the number of a man; and his number is Six hundred threescore and six. 666

  • Aryeh Friedman

    How do you prevent the lost update problem on a non-centeralized system (see DB theory if you don’t know what it is)

  • Darth Android

    What do you mean by “counterfeited”? Any finite string can be /duplicated/, but duplicating a bitcoin transaction does not “counterfeit” it. Duplicate transactions are easily identified and rejected/ignored by the network. Cryptography is used to ensure that transactions are not forged, either.

  • Aryeh Friedman

    The USD is limited to a geographic region?!?!?!

    By the way *ANY* finite string can be counterfeited, without a centralized validator, an that’s all a coin is

  • Phantastic

    Just read #2 under “benefits” and you will see why this won’t ever happen in the U.S. The Republicans will NEVER let their rich friends at the banks and credit card companies get their fees taken away.

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