Cryptocurrencies like bitcoin and ethereum have gained massive popularity and have caused central banks around the world to make conscious efforts thereby making various experiments on their versions of digital currency or cryptocurrency.

Sometime in January, the central bank of China made an announcement that it has succeeded in a trial run of digital currency amongst banks. Estonia, Japan, and Sweden (J-coin for Japan, Estcoin for Estonia and E- Krona for Sweden) also made an announcement in this regard; this announcement was made in September.  The United Kingdom, Kazakhstan, and Uruguay weren’t left out as they all aspire towards the same goal – having their digital currency.

The Fed Reserve has taken action by exploring the idea of putting out its digital currency on offer; this was made known from reports published on comments made by William Dudley, the CEO, and president of the Federal Reserve Bank, New York at a conference on Wednesday. However, he has ruled out the possibility of estimating when the Fed would come up with their bitcoin would be premature.

In 24 months, a significant government would be issuing a sovereign digital currency; this prediction was made by Peter Smith, the CEO of Blockchain which is the leading digital wallet.

This global phenomenon termed by some as the central bank–issued cryptocurrency or government-backed cryptocurrency and termed by others as the digital fiat or sovereign digital currency but no one has solidified a term to name it. Jacob Eliosoff is of the opinion that as long as it is a government-backed project, it shouldn’t be a cryptocurrency as a cryptocurrency is under no control of any person or institution says the Investment Manager of Trevi Digital Asset Fund. In his words “You have one institution that controls it, and they can change the rules when they want; they can prevent certain transactions from happening if they don’t trust the party involved. It’s not that that’s bad, but that’s not a cryptocurrency. That’s just a currency that happens to run on a computer.”

The recent rise of cryptocurrencies has attracted the attention and responses of several governments. The cryptocurrency market has enjoyed a global reception, and according to Coin Market Cap, the size of the market amounts to about $335 billion with various virtual currencies like zcash, ethereum, bitcoin and dash T with an expectation of $2 trillion by 2018. This prediction was made by Mike Novogratz who’s a long time cryptocurrency trader. He also predicted the price to rise to as much as $40,000 by the end of next year.

Investors in bitcoin and ethereum are beaming with smiles as there is a 900% and 5900% increase in the value of Bitcoin and ethereum. S&P also experienced a 20% annual return, but this is a little figure as compared to bitcoin. Countries threatened or concerned about the future of the financial system are developing strategic plans to adopt the digital currency movement. China felt the most threatened in the rise of bitcoin and other cryptocurrencies says Paul Triolo, practice head of geotechnology at Eurasia Group.

Blockchain – the base technology of cryptocurrencies. Governments see Blockchain as the way by which they can get ahead of the trend in the cryptocurrency market. You will find some countries like Sweden and China making use of convenient mobile payments systems rather than cash. For instance, last year, it was recorded that about 15% retail payments were made with cash as compared to 40% in 2010.

Head of strategy and lead economist at Blockchain Xen Baynham-Herd said,

“There’s this fascinating prospect of creating a platform for innovation”.

Assuming a second currency were to be issued in a digital form by a government, it would serve as the building blocks for internet money. Cross-border payments and micro transactions would become seamless.


The value proposition

The question that remains on the lips of many is how these government-backed digital currencies would affect the value of cryptocurrencies? Considering no government-backed digital currencies implemented at scale currently exists.

“Bitcoin would probably be the one that’s most affected because it was originally intended to be used as a digital currency,” says Triolo.

Baynham-Herd has this notion that bitcoin could turn into digital gold. “I think Bitcoin and other cryptos will coexist with government-issued cryptocurrencies because they offer different things. Bitcoin, from the very beginning, was all about decentralized, peer-to-peer digital cash, without the need for central intermediary, without the control of a government, and these features remain whether or not a government issues its own digital currency”

Trevi’s  Eliosoff is certain opportunities exist in cross-border transactions for cryptocurrency while Baynham-Herd is certain the innovative features of bitcoin can be combined with other currencies to create security and trust of a currency which will not only be issued but will also be regulated under a central bank and a government.

Rod Garratt who is an economics professor at UCSB (University of California, Santa Barbara) is off the notion that a cryptocurrency from a central bank that provides anonymity would serve as a close substitute for bitcoin, so basically, it still boils down to what features people look out for.

“Central banks don’t get to decide whether or not bitcoin is there or not; bitcoin is there,” said Garratt.

More so, cryptocurrencies are global technologies, resilient to government policies and regulations. We are yet to ascertain if governments could develop digital currencies that contests with bitcoin and others.