Who Needs a State-Backed Cryptocurrency, Anyway?

Ever since Bitcoin moved out of its cypherpunk niche and other digital currencies started to emerge, governments have been deeply suspicious. The fact that Bitcoin was the currency of choice for financing activities on the dark web created a perfect justification for this suspicion.

 

Never mind the fact that the use of Bitcoin was instrumental in the takedown of Silk Road and the incarceration of its founder, Ross Ulbricht. Never mind either, that most cryptocurrencies are demonstrably nowhere near as anonymous as, say, US dollars in cash. Senior US government officials, including the president and his Treasury Secretary, continue to make reference to how crypto is a vehicle for criminal activities.

 

Of course, criminal activity isn’t the only reason governments are suspicious of cryptocurrencies. The decentralized nature of Bitcoin means there’s no central point of control, which in turn means that governments can’t exert any pressure on the value in the same way that they can with fiat money. A significant part of the role of government is as lawmakers, so as lawmakers, what do they do when they can’t legislate?

If You Can’t Beat ‘Em, Join ‘Em

 

The penny is finally starting to drop. Governments around the world are realizing that they can’t solve the regulatory conundrum through their usual channels. Now, officials are starting to consider their own options for issuing state-backed digital currencies to compete with crypto.

 

This isn’t necessarily a new idea. Ecuador was among the first to issue a national digital currency back in 2015, and the disaster of Venezuela’s Petrodollar is well documented. Switzerland is reportedly investigating the idea of a national cryptocurrency. However, the news that China is planning to issue its own state-backed digital coin sent shockwaves through the US media. It’s even led to speculation that a dollar-backed token could be on the cards.

 

Although they aren’t government-issued, we already have several dollar-backed tokens -Tether, TrueUSD, USDCoin, and all the other stablecoins. Whether government-issued or not, using them doesn’t protect from fluctuations in the underlying currency. If the much-rumored US recession hits, the value of USDT and all the others will sink with the dollar. Even a coin like Libra, which has proposed backing by a basket of currencies, won’t necessarily be immune if a recession on the scale of the 2008 financial crisis hits.

 

So, although governments are preparing to arm themselves with state-backed currencies as the weapon of choice in a completely unnecessary global finance war, don’t get too excited. There’s nothing to indicate that these new variants of crypto are going to offer any wealth-preserving benefits to Joe Public.

A New Breed of Cryptocurrency

 

Saga, a project packing some serious economic and financial expertise, recently announced it’s launching its SGA token. It’s introducing a new kind of cryptocurrency that doesn’t fall into any of the categories discussed above. Saga has some properties of a stablecoin but utilizes a completely unique monetary model.

 

At the point of launch, Saga tokens are backed by reserves, based not on a single fiat currency but on the value of the Special Drawing Rights established by the International Monetary Fund. However, underlying Saga is a smart contract that serves as a liquidity manager and dampens the effects of volatility in the token. The smart contract will issue SGA tokens and offer to buy them back according to supply and demand.

 

The percentage of market cap covered by reserves diminishes over time, as a direct function of increased consumer confidence in the SGA economy.

 

The project has an advisory board that reads like a “Who’s who” of the financial and economic sectors. Notable members include Jacob A. Frenkel, former Chairman of JP Morgan Chase, and Professor Myron Scholes, Nobel Laureate in Economics.

A Single, Stable, Global Medium of Exchange

 

The potential of a currency like Saga, ultimately untethered to any national currency and completely economically independent, is fascinating to ponder. Consider that international trade is currently in significant growth, with world merchandise exports totaling nearly $20 trillion in 2018, and up 10% from the previous year. Every single cross-border transaction results in a foreign currency exchange, incurring fees, and subject to fluctuation.

 

Even on an individual level, this is true. If a British consumer wants to buy goods from a seller in Korea on the Amazon marketplace, they could end up paying more or less depending on the latest developments around Brexit.

 

Increasing global trade will only result in rising forex costs and increased friction. Solutions like RippleNet exist to solve this problem by using XRP as an intermediary exchange currency. However, they’re a mere Band-aid compared to the ease of using a single global currency that’s not subject to wild inflation.

 

It was only a matter of time before governments started to embrace the disruptive potential of digital currencies. However, now that they have, it may already be too late. If a truly global coin can obviate the need to trade in fiat currencies, who on Earth is going to need a state-backed cryptocurrency?