At the same time, other governments are simply moving ahead and already launched their own cryptocurrency like Venezuela’s el Petro, launched on the Ethereum blockchain as an ERC20 token. The Petro is issuing 100 million coins, and each coin will be backed by a barrel of oil.
This begs the question – are we as citizens interested in governments issuing their own cryptocurrency?
Governments and central banks embracing crypto – what could go wrong?
The properties of cryptocurrency are certainly attractive to both centralised and decentralised organisations. For centralised organisations, like central banks, there are multiple benefits that could make life a lot sweeter for the authorities, but would at the same time torment privacy.
Remember, cryptocurrency runs on a blockchain, and regardless if the blockchain is private or public, the organisation or government launching the blockchain will have a real-time overview of who trades with who at all times!
In other words, the blockchain could be the ultimate version of Big Brother watching all its citizens, in real time, at all times.
And that is not the scary part. Governments could decide to convert their fiat currency into a cryptocurrency running on a blockchain without anyone knowing about it.
Think about how you spend your money today, if you live in a developed market economy, chances are you make the majority of your purchases with digital money (payment cards, bank transfers, mobile transfers, etc), not cash. Most fiat currencies that are handled digitally relies on old mainframe systems built by banks. These are clunky old systems that are hard to maintain. The blockchain presents a very compelling alternative for banks to get rid of outdated mainframe systems.
If central banks were to scrap their centralised mainframe systems and migrate to a private blockchain, they could do so without anyone noticing. You will still see the amount of euros, dollars, yen or whatever on your account as if nothing has changed, only now the ledger keeping track of transactions will be a private blockchain, not a database on dispersed mainframe systems.
This is perhaps Edward Snowden’s worst nightmare. Forget about the NSA monitoring internet traffic, this would be the ultimate version of cataclysmic financial oversight know to mankind. “Follow the money” would have a whole new meaning if this was to unfold!
The key assumption for this doomsday scenario is that governments and banks swap mainframe systems with a private blockchain. The scenario changes when using a public blockchain.
Governments and central banks embracing crypto – what could go right?
Say the US government shut down the Federal Reserve Bank and embraced cryptocurrency and blockchain as an alternative to a debt-based, trust-dependent, financial system. The blockchain will show a bunch of wallet addresses and cryptocurrency amounts when looking at the blocks, but nobody would be able to identify who owns access to which wallet address.
In this scenario, all transactions are available to the public, but nobody can identify others. That is as long as you keep everyone from knowing what your wallet address is. But how do you send or receive money if you cannot expose your wallet address?
As previously mentioned, if your wallet address is kept secret, this makes it difficult to send or receive funds. However, if you tie your wallet address to a known identifier – your email, phone number, Facebook, Twitter, or something else – then you never have to share your wallet address with anyone. Sending and receiving money would be as easy as sending an email, text or tweet.
With Blockbasis, users can easily identify others without the risk of sharing wallet addresses. Not only does this process simplify transactions, but it also enhances security.
Additional layers of security
But what if the database in the central bank, Blockbasis, or some other third party that stores information of a person’s wallet address gets compromised? Given the amount of central exchanges and other central systems hacked this is a very real risk today.
To understand how databases storing wallet addresses can protect themselves, it is important to understand what a recovery phrase, private key and public key is. Basically, databases storing wallet addresses would have to store all three safely as it becomes a central point of failure. In case a hacker gets access to the recovery phrase or private key, they have full access to the account. In case someone gets hold of the public key, they cannot empty the account but only see the full list of transactions to and from this address on the blockchain.
The solution to central point of failure is multi-signature, or multi-sig, which allows services like Blockbasis to store users’ keys in different vaults, preventing hackers from accessing other users’ accounts. Hence, if governments were to change a fiat currency into a cryptocurrency with preset rules that runs on a public blockchain with preset rules that cannot be altered or tampered with, they would effectively have democratized the issuance of money, allowing third party financial services like Blockbasis to act as bank. Andrew Levin, a professor of economics at Dartmouth College said, “one important reason for trying to move ahead with a central bank digital currency is to create a payment system that is essentially free for consumers and businesses.” This would be good for competition and in the end benefit the consumer by saving them money.
Some governments are embracing the cryptocurrency movement and consider creating their own country-specific cryptocurrency. Governments issuing their own cryptocurrency would make cryptocurrency more stable and less volatile, making it wide-spread and accessible to all.
Many worry that the government could convert fiat money into cryptocurrency and perform mass surveillance of what people spend money on at any given moment. Others advocate this as long as account holders anonymity is respected. Only time will tell if citizens will support the creation of government cryptocurrencies.
In the meantime, Blockbasis is defining a system in which complex keys are linked to an email address that allows users to make transactions with one another without sharing complicated keys. Thereby, maintaining public key anonymity and hence all recent transactions anonymous. Using multi-sig technology, Blockbasis is able to prevent hackers from compromising user accounts as each key is stored within digital vaults that cannot be accessed without the remaining keys.
If governments were to issue their own cryptocurrency, they need banks to adopt to this change from fiat to crypto. This means new forms of banking will arise, bank 2.0 if you will, and Blockbasis is taking a front seat in that arena. The largest benefit to consumers would be cost savings, as Blockbasis allows users to send and receive cryptocurrency for free, anywhere in the world.