Private vs. National Digital Currency: This is the Next Currency War!

According to the Bitcoin trading platform Bitstamp, the trading price of Bitcoin has now broken through the psychological barrier of $6,000, reaching a high of $6,032.33 per coin, setting a new historical record.

A month ago, the Chinese government’s strong regulatory storm on the digital cryptocurrency (crytocurrency, hereinafter referred to as “digital currency”) business caused the price of Bitcoin to fall to a temporary low of 3227.79; however, Bitcoin’s market performance today shows that the fear experienced at that time and the due awe of capital have long been forgotten by those involved.

After all, as a privately issued digital currency ("God bless Satoshi Nakamoto, whoever he is"), Bitcoin cannot change its status as a currency without official authority. As governments and central banks around the world accelerate the pace of verifying blockchain technology, state-issued digital currencies are about to emerge, and the "liquidation" of private digital currencies such as Bitcoin will eventually come.

Only then will the "currency war" of the new era truly begin, and China's closure of Bitcoin exchanges is just a prelude to a brewing storm.

From China to Russia: Sovereign states are awakening to digital currencies

On October 10, Russian President Vladimir Putin strongly criticized Bitcoin and other privately issued digital currencies, saying that the use of currency brings the risk of tax evasion and funding of terrorism, and that Russia needs to introduce regulatory rules for digital currencies to protect its citizens and businesses.

Less than a week later, on October 16, the Russian government announced that it would issue its official digital currency, the CryptoRuble. Nikolay Nikiforov, the Minister of Information Technology and Communications who announced the decision, admitted that the reason was to get ahead of other governments:

I confidently declare that the CryptoRuble was issued for one simple reason: if we don’t do it now, in two months, other neighbors in Eurasia will do it.

Russia is actually following in China's footsteps by doing this. On January 20, 2016, the People's Bank of China held a digital currency seminar in Beijing, clarifying the strategic goal of the central bank to issue digital currency; on January 25, 2017, the central bank announced that the prototype system of the digital bill trading platform had been successfully tested, which means that the People's Bank of China will become the first central bank to study and issue digital currency and carry out real applications, which has attracted great attention from countries around the world.

It’s not surprising that the first countries to try to launch state-issued digital currencies were China and Russia. Although Bitcoin and the blockchain technology behind it originated from the desire to “decentralize” (i.e. “payments can be made directly without going through a central node”) and thus gain the initiative to withdraw from the government-controlled money supply, more and more governments are beginning to realize that blockchain technology is actually a way to strengthen their control over the economy.

From Centralization to Decentralization to Distributed Ledgers (aka Blockchain)

Xiong Yue, a researcher at the Mises Institute, explains:

For example, if the government plans to issue special subsidies to some farms, they can directly issue a certain amount of official digital currency to the wallets of these farms and program certain conditions for the money to only pay a certain amount to a certain fertilizer supplier at a certain time. This will not only ensure that farmers do not waste funds in operations, but also absolutely prevent the money from flowing to other sectors, such as the stock market or real estate market.

Although some government officials believe that such monetary regulation policies are bound to fail, at least the digital currency (CBDC) issued by the central bank can provide them with better governance tools. With the help of CBDC, they can better plan and manage the economy.

The International Monetary Fund (IMF) is also not far behind in this trend. According to a report by the Wall Street Journal on October 9, the IMF is exploring the possibility of issuing an internationally accepted digital currency.

IMF Managing Director Christine Lagarde's positive comment on October 2 that "it would be unwise to refuse to accept digital currency" made some digital currency advocates naively believe that Lagarde was defending and endorsing the Bitcoin assets they hold. However, Lagarde's "good words" only reflect that in today's world where the forms of financial assets are changing with each passing day, technocrats are increasingly aware that they should be prepared for the emergence of official digital currencies in various countries.

Considering that central banks around the world have been pushing to abolish large-denomination banknotes to combat financial crime in recent years, it is not surprising that Lagarde responded so quickly to the concept of "digital currency".

“There is no room for two tigers in one mountain.” Is Bitcoin’s repeated record highs just the calm before the storm?

It is precisely the many benefits provided by official digital currencies as mentioned above that further highlight the "one mountain cannot accommodate two tigers" nature of private vs. official digital currencies.

No matter how Bitcoin supporters now emphasize the epoch-making significance of Bitcoin and the blockchain technology behind it, one of the core reasons why Bitcoin was initially able to attract its audience and its price skyrocketed astronomically is that private digital currencies, as a payment tool that protects personal privacy, can evade government supervision and facilitate illegal and criminal activities such as dark web transactions, black market smuggling, and capital flight.

After the Chinese government launched a regulatory storm and shut down Bitcoin exchanges in September, the Bitcoin market only experienced a short-term "scare drop". Subsequently, a large number of digital currency transactions were transferred to more private P2P platforms, and the price of Bitcoin quickly recovered its lost ground and is now setting new highs. This reflects from one side that Bitcoin and other private digital currencies that are essentially completely "decentralized" can indeed continue to retain their functionality as "currency" for transactions in the gray area that government regulation cannot reach. To put it bluntly, it is "at large."

Once the official digital currency backed by state authority is launched, private digital currencies carrying the spirit of Austrian neoliberalism will become "outliers" that "try to stop a chariot" and resist state legal supervision. At that time, the "currency war" of the new era will truly begin!