Can a country really have its own digital currency?

ESET, a developer of cybersecurity software, questions whether it is possible for any government to create a cryptocurrency that would share the same values of the already established currencies out in the market.

The group explained that any cash you may have is likely held in an account at a bank that provides you the ability to transact, get a balance statement, and have access to a payment network.

The financial institution works on a centralised methodology, and is typically accountable to a government regulator. The centralisation stops the account holder from double spending, as every transaction is authenticated in one place, the security firm said.

Cryptocurrencies, however, work on a decentralized methodology: there is no server or centralized place that holds account details and transactions.

“Imagine 10 friends creating their own digital currency, to make this work every friend will need to know the balance and transactions of all the other friends in real-time. This stops friend #1 transacting with friend #2 and #3 to withdraw the same funds, making #1 overdrawn.

“When #1 transacts with #2 then all the friends need to be sent the details of the transaction and to confirm they received it, the effect is a distribution of the balance and history,” it said.

To make this scale – like Bitcoin – waiting for everyone to confirm would be too difficult, so you need to create trusted, but still distributed, confirmers of a transaction, ESET said.

These are called miners, and they have a special encrypted relationship with each other. “Imagine 10,000 friends using the currency and 100 of them being miners that have a trusted place in the network to confirm transactions and spread the word to the remaining participants.”

Read: ‘I would fire any employee trading Bitcoin for being stupid’: JPMorgan Chase CEO

With Bitcoin, anyone can be a miner if they are willing and able to create a cryptography hub that can talk to the rest of the network. Their reward for doing this is the payment of a transaction fee paid in the digital currency.

“Now you have a secure network incentivized to confirm transactions and to stop people spending their cash more than once.

“If we simplify this, it’s just a big database that multiple entities have copies of and before a transaction can take place they all need to agree it’s able to take place,” ESET said.

It noted that Bitcoin works on the following principles:

  • It’s fast and secure, regardless of where you transact, it works on a global network of computers that use strong cryptography.
  • The actual identity of the account holder is a digital address, there is no link between this and an account holder’s real identity.
  • There are no permissions, anyone can create an account using software without the need to be identified.
  • Bitcoin transactions cannot be reversed, once a transaction has been made the distributed it’s final.

Cryptocurrency and state sponsorship

Is it possible for any government to create a cryptocurrency that would share the same values of the already established, and somewhat, successful cryptocurrencies available today?

ESET highlighted the recent reports linking Northern European country, Estonia, to its own state-backed cryptocurrency, called “estcoin”.

It pointed out that the Republic of Estonia is a member of the European Union and part of the Eurozone currency, bringing with it regulation and procedures that may limit the success of any cryptocurrency that is state sponsored.

“Mario Draghi, the president of the European Central Bank, quickly dismissed the idea and stated the only currency for eurozone countries is the euro,” ESET said.

The success of Bitcoin is generally based on the lack of regulation – primarily it’s the currency of choice for people that wish to remain anonymous.

“However, bad-intentioned people, like creators of ransomware, could use it also as the payment method to unlock infected machines, making them extremely difficult to identify – creating challenges for law enforcement trying to bring them to justice,” ESET said.

“Allowing people to anonymously create accounts and transact with each other makes the cryptocurrency invisible to tax authorities, financial regulators and law enforcement.

“Making it unthinkable that any government which is part of a regulated financial community could disregard the processes that have been established to create a safe and trusted financial system.

“This is probably just as unthinkable to the cryptocurrency users that they should be regulated and identified in the same way they are with traditional bank accounts,” ESET said.

Read: How Bitcoin could be regulated in South Africa

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Can a country really have its own digital currency?