EXCLUSIVE- To make a government-backed cryptocurrency is to defeat the point of cryptocurrency, Jacob Eliosoff, a programmer, crypto trader, businessman, and teacher, explains in an interview with Bank Innovation.
There is no shortage of interest in government-backed cryptocurrency in today’s world. From China, to Uruguay, to Estonia, many state governments have been spending a wealth of time and resources in researching the elusive new technology of cryptocurrency.
However, there are many who oppose these efforts, including Eliosoff himself, who runs Calibrated Markets, the general partner of an investment fund dealing specifically with bitcoin and other digital currencies.
In Eliosoff’s view, the problem with governments creating cryptocurrencies is not a matter of any moral or political philosophy, but rather a matter of functionality.
This relates to the fact that such tokens would not necessarily improve upon the idea of standard digital currency, which is a related yet distinct concept.
“The blockchain is a tool, and it solves one very specific problem,” Eliosoff said; namely that “blockchain is used for making a decentralized network, but [governments] do not really want to have a decentralized system.”
Probably not.
He points to the case of China attempting to develop its cryptocurrency as an example. Precisely because the cryptography and the decentralized system used to create cryptocurrencies render a government, or any institution, unable to control who gets cash or how much of it they get, or to alter transactions in any way, it likely is not what such institutions are really looking for.
After all, without a centralized control mechanism, control is extremely difficult to achieve.
Furthermore, cryptocurrency technology is not as efficient as many people would like to imagine. In fact, in comparison to non-blockchain-based digital currency, it is “extremely inefficient,” said Eliosoff, and probably would not warrant usage except in very particular circumstances.
Using blockchain technology to make certain that the value of a token is ensured by a governmental institution or a legal system, or to exert control over transactions, therefore, he says, is “like using a flashlight while blind.” It is not useful for them.
Simply put, a loss of control is probably not something that any regulatory body, like the Chinese government, would actually want.
In Eliosoff’s words, “If the [Chinese] government creates it, and doesn’t control it, then it would never, ever happen,” and if it can be controlled with a centralized system, or if a government backs-up its value, “then it isn’t a cryptocurrency.”
This is why his wariness of government-backed cryptocurrency results from a practical perspective, not a political or philosophical one.
To be sure, there are those who take a philosophical stance in their use of cryptocurrency. “A lot of crypto people are libertarian,” he explains, “and they are wary of government.”
With so many governments and well-established financial institutions supposedly investing in and investigating blockchain technology and cryptocurrencies, it may be difficult for some to imagine cryptocurrencies as a potentially subversive technology.
But, according to Eliosoff, they can be just that.
In some situations, like in an unstable political environment, cryptocurrencies can be extremely useful.
“Thankfully, for most Americans, you can just use the green-back, and that’s that,” he explains, “but in places like Venezuela, for example,” where corruption is rampant and political turmoil is the norm, “there is a use for such technologies [as cryptocurrencies], because taking control of your money is extremely important.” Without it, you may not have control of your cash.
This is where the distinction between cryptocurrencies and digital currencies comes into play. Too often, Eliosoff says, “people miss the distinction between cryptocurrency and digital cash.” Specifically, “the idea of cryptocurrency is rooted in cryptography,” which essentially means that “the most fundamental trait of cryptocurrency is to make sure that you cannot tamper with who gets what.”
You can, however, tamper with transactions made with cheaper, more efficient digital cash, which is probably more along the lines of what regulatory bodies are interested in.
For this reason, state-endorsed cryptocurrencies may be, to put it harshly, a waste of time.
Eliosoff does not mince words when he says that “I think the idea of government-backed cryptocurrencies is a joke,” though “I also think the idea of government-backed digital currencies is very reasonable,” in part because they are cheaper.
That is not to say, however, that government bodies should abandon their research into blockchain technologies. Beyond cryptocurrencies, Eliosoff believes that investing in blockchain technology more generally can be very useful. “I see no problem [with governments] using blockchain technology,” he clarifies, “unless it is for the purpose of creating a decentralized currency.”
Blockchain technology may be a useful tool in other circumstances, in part because it makes smart contracts possible.
For example, because smart contracts are self-enforcing, some have imagined that smart contracts may someday be able to replace lawyers.
This is due to the fact that using technology to perform binding contracts decreases the possibility for error, and also tends to be cheaper–in theory. As Eliosoff puts it, “when they work, they are cheap, and they are less prone to error” than humans. In other words, they do have intrinsic value.
But using smart contracts in legal dealings probably will not entirely eliminate the need for lawyers, he explains. Rather, it will likely make their work easier. “Tractors replace farmers, but farmers don’t go away,” he says, “we just have fewer farmers.”
Beyond governments and the law, there is still the possibility of using cryptocurrencies in exchange for goods and services, but replacing standard paper currency, or digital currency, with cryptocurrency may be a more complex, nuanced endeavor than it sounds.
For example, there has historically been a great interest in cryptocurrency in the Asian Pacific region, but not in terms of using it as an actual means of exchange. “What we have seen from Asia most until now is very little use of these coins in terms of people using them [to purchase items]” Eliosoff explains. Instead, “they have been using them as a trading asset.”
Therefore, even though the Asian continent in general has, so far, been a hot bed of development in the cryptocurrency sector, it may not be the region with the most potential in terms of market penetration. It might be more useful to monitor other parts of the world, in that matter. “I would say that the places where people are more likely to use it are in places like California and Japan” in particular, he clarifies, as cryptocurrencies are still not widely used in developing countries.
The governing bodies for countries like China nevertheless still have the power to influence how cryptocurrency technology will develop in the future. The real question that everyone has on their mind is how far China will go with their cryptocurrency ban, and specifically, if they will ban bitcoin mining altogether.
“Up to the present, 60 to 90% of bitcoin’s power has been based in China, and that has played a big role in the policy of bitcoin,” he says. “If those miners are forced to go abroad, then that would change how bitcoin’s technology evolves.”
In short, cryptocurrency technology is still young and rapidly evolving. Regardless of whether the technology can actually benefit established financial institutions and state governments, these players still have the power to alter the course of its development.