Why are nations choosing to digitize their fiat currencies?

Australia, which is home to one of the most popular currencies traded, is already knee deep in their assessment towards digitizing their own cryptocurrency. Whilst smaller countries like Estonia and Lebanon have already decided to create their own cryptocurrency, a digital Australian currency would have a significant impact on the current cryptocurrency landscape. Unimaginatively titled the “DAD”, the Digital Australian Dollar would represent a new stage in the evolution of cryptocurrencies.

The existing structure of cryptocurrencies to date has shunned a link to central banking authorities. In fact, cryptocurrencies are basically predicated on the idea of decentralizing and in effect democratizing the value of the currencies so as to prevent manipulation of currency values by a central authority. The idea of a state backed cryptocurrency that is linked to a fiat currency runs contrary to this model, potentially removing both the democratization of the system as well as the purely digital nature that predominates.

Irrespective of the structural change this would prompt, to date, traditional currencies have been at odds with their cryptocurrency cousins. This begs the question, why would a government begin to issue a cryptocurrency?

It is worth noting that in many countries in the world, money is effectively handled in an electronic or digital form. For example, payment with a smartphone, electronic bank transfers, and even credit card use have much in common with cryptocurrencies. The point is that the existing use of currency has moved more towards a transfer using digital means rather than the traditional handing over of physical coins and notes.

On this basis, the move towards full digitization is somewhat a nod to the current direction of money use.

However, the technology associated with cryptocurrencies is significantly stronger than the existing system. As a low cost, simple method of currency transfer, it is possible to cut out the expensive middleman when undertaking transfers. For a body like the RBA, which derives no benefit from the current system of money transfer, the chance to exert some control over the financial transfers has a strong benefit.

This hints at probably the real reason that the RBA would be interested in converting to cryptocurrencies. Controlling the system allows for more effective regulation of the system. Since the transfer of funds via cryptocurrencies began, the appeal for many users has been the anonymity. Most will remember the links to drug trade using Bitcoin on the website Silk Road, and the subsequent criminal convictions that surrounded that scandal. Cryptocurrencies are tailor made for secret, potentially illegal, transfer of cash. As a result, they have been at significant odds with taxation authorities and legal authorities. Exerting some control over these methods of monetary flow gives authorities the chance to ensure that funds are being transferred legally.

Though much work has since been undertaken by the blockchain community to install preventions against criminal activity, it is probably a matter of time before government authorities try to take control over this element.

Although the current interest in having a digital currency linked to a fiat currency has commercial and regulatory advantages, it remains to be seen whether this is a new trend. For the cryptocurrency community, a digital currency linked to a fiat currency changes the playing field to one that now includes the very entity that cryptocurrencies were trying to drive away from. This new step is either a case of imitation being the sincerest form of flattery or a significant step toward the admission that existing fiat currencies no longer have a place to play in our brave new digital world.

On a personal note, as an aussie expat, I look forward to the day that Australia will give the world their own version of a DAD. Fair Dinkum!


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