Digital Currency

Cryptocurrencies have a lot of momentum lately, thanks to the success of BitCoin and Ethereum, and the use of blockchains to secure privacy and security across many business types.

There are three things required before a serious uptake of a virtual currency will occur:

  • Provided by a trustworthy entity
  • Be tied to something tangible
  • Understandable by regular folk

Bitcoin et al have neither, and they will remain in the fringes of society.

Trustworthy

While banks are quite high in the scale of trust (we already trust them), they aren’t the most trustworthy of potential entities. Governments are (arguably) more trustworthy, and a consortium of governments from different countries would  be more so. Most people have faith in the United Nations, for example.

Tangible / Understandable 

The method of mining Bitcoins is too difficult for the layman to understand. It uses something virtual (software) to create something virtual. People need a virtual currency they can understand, that is tied to something tangible. The “gold standard” filled this need, while it lasted.

What every government has in common is that they employ people, and pay them wages. Those wages can be the seed of a new virtual currency – partially or fully. Because governments also receive money from citizens there is already a way to redeem the currency. These spending uses include taxes, public transport, rates, and utilities (governments generally have some control over utilities, and can make accepting the virtual currency mandatory).

Using a card or app to receive and spend the currency is easy. The problem to be solved is who will implement it, and how will it be valued.

Countries

Any country bold enough to go with this idea will have an initial boost in economy and status. They will be essentially ending the domination of the US dollar. Eventually, when all countries adopt it, being an early adopter will be irrelevant. But benefits outweighing the cost of implementation can be expected.

A good solution to who? would be major economies in each continent that have a stable economy. It could be Germany/France, Canada, Japan/Singapore, Australia/NZ, Chile and South Africa. 

China would be a good candidate, because they are already considering this very idea.

Value

The easy, and ironic answer, is to peg the currency to the US dollar. But that is not sustainable as a virtual solution.

Regular, national currencies will continue to exist and run parallel to the virtual currency.

Government virtual wages will be paid with the equivalent of the local currency, there is no other way. And the same government must accept redemptions of the virtual currency at the same rate. This means that making your country rich by just giving out more currency won’t work. If you give a government employee a million dollars each week, they can convert that to a million dollars in hard currency, and the government pays for it. 

Virtual currency conversion would work the same as hard currencies today – the market decides. The relative value of the virtual currencies would be the same as the hard currencies. This is an opportunity to end marginal speculation and day-trading. The system of the currency will allow inter-country trading, but only for long periods of time. For example, if you buy 1000 of the US version of the currency, you must hold it for more than 7 days before trading it again.

Instead of being based on countries, there is the potential for regions or cities to issue there own currency. California would love to have their own currency. And doing so would open the doors for decentralisation of governments around the world. 

Implementation

Initially, each founding country would create a virtual currency that only works internally. After a year or two, it will be available for international transactions. The software side of things is easy, there’s no mining involved. 

Security

Currently a major issue with Bitcoin is that if someone can gain access to your computer, they can steal your money. A global virtual currency must be tied to traditional systems, like banks and a debit card and PIN numbers. Banks can be encouraged to join in, as they can charge a fee for changing virtual currency to hard currency. 

Ideally some form of hard data storage can be intertwined, so that a rare case of global disaster or cyber-malfunction won’t destroy anyone’s wealth.

Privacy

One of the key reasons for the success of BitCoin is privacy. A government-run cryptocurrency can still maintain privacy, but have back-door access if a court decides there is sufficient reason.

But Why?

  1. Virtual currency is inevitable, so someone will win – it might as well be a good model, publicly owned
  2. The costs of transferring money and exchanging currencies are greatly reduced
  3. A new system can end some bad practices of the existing system, such as speculation and faster-than-light trading
  4. Decentralising records creates redundancy in case of catastrophic failure

UPDATE SEP 2017: Japan has announced a digital currency, backed by the major banks, tied to the yen, called J-Coin.
UPDATE OCT 2017: Three Australian businesses are proposing DAD, an Australian digital currency tied to the $AUD