Russia and Iran are looking to launch their own cryptocurrency.

Venezuela already has!

Soon, developing nations could be jumping into the act as well.

These country-sponsored efforts are being welcomed by some in the cryptocurrency space as proof positive that the technology works, that it could be a stimulus for increased adoption and even as the harbinger of crypto as the new standard form of money for the masses.

But the devil is in the details, and those are scarcer than hen’s teeth. So until they’re released, count us among the ardent disbelievers and naysayers.

We wonder precisely why these nations in particular are suddenly so interested in borderless, decentralized, permissionless forms of money.

According to the Democracy Index developed by The Economist, Venezuela ranks a lowly 117th in the community of nations. That’s lower than permanently impoverished Haiti and war-ravaged Iraq.

Russia’s ranking is 135th, lower than Cuba’s and Egypt’s, both ruled by dictators.

And Iran is the worst among the three, with a ranking of 150th, way below China’s and Vietnam’s.

The Economist deems all three “authoritarian,” which typically includes:

• Major flaws in electoral processes.
• Extremely low political participation.
• A very weak political culture.
• Little to no civil liberties.
• Deeply flawed or largely absent government functions.

In sum, these are some of the most repressive regimes in the world.

So why would they be the first countries interested in giving their people access to a financial system that’s designed to be democratic at its core?

We can think of only one reason: Their mission is to create cryptocurrencies that are crypto in name only.

They view cryptocurrencies as a new and improved tool to avoid sanctions by Western nations, better manipulate their economy and control their population more efficiently.

In fact, their first goal — to avoid sanctions — is no secret. These governments have actually been quite open in revealing that’s the immediate reason they’re getting into the act. So…

What Would State-Backed Cryptos Look Like?

It’s hard to imagine any resemblance to the cryptocurrencies we know today — currencies that owe their success to four fundamentally democratic principles. They are…

1. Censorship-resistant — a direct threat to a government that censors most or all media.

2. Permissionless — virtually impossible in a government-controlled economy.

3. Borderless — unthinkable under a regime that wants to restrict the flow of people and money in and out of the country.

4. Decentralized — the polar opposite of authoritarian.

Here’s the key: By its very nature, a government — let alone an authoritarian one — cannot issue a cryptocurrency in the pure sense of the word.

That’s not only true for Venezuela, Russia and Iran. It’s also true (to a lesser degree) for countries that have top rankings for democracy, such as Norway (No. 1), Iceland (No. 2), Sweden (No. 3) and New Zealand (No. 4).

Here’s why:

The issuance of any country-sponsored currency would be “backed” by a centralized authority, such as a central bank.

Its major users would be regulated by the government.

Even the choice of international trading partners would probably be scrutinized by regulators.

Sound familiar?

It should. Because, in substance, it would be no different from the financial system we have today.

The only thing that might be different about the cryptos created by Venezuela, Iran and Russia is this:

• The current global financial system comes under the auspices of Western-based institutions. These include the Society for Worldwide Interbank Financial Transactions (SWIFT) for money transfers … the International Monetary Fund (IMF) to secure financial stability and promote trade … and the Bank for International Settlements (BIS), which acts as the “central bank of central banks.”

• In contrast, the ultimate goal of countries like Venezuela, Iran and Russia seems to be to create a parallel financial system under a new alliance of nations: a new system to replace SWIFT … another international organization to replace the IMF … another kind of BIS. All presumably under the leadership of the world’s largest nation, Russia.

In fact, Russia is rumored to be involved in the creation of the Petro, Venezuela’s “oil-backed” cryptocurrency. (We debunked that project here.)

But to better understand the irony — and futility — of state-backed cryptocurrencies, let’s remember…

Why Distributed Ledger Technology (DLT) Was Invented in the First Place

The time is 2008; the place, the White House.

U.S. Treasury Secretary Henry Paulson bends down on one knee to beg before the most powerful person in the U.S. Congress, Speaker Nancy Pelosi.

His pitch: Unless she supports a $700 billion bank bailout, the biggest banks in the world will fail, and the entire global financial system will melt down.

That real-life scene — and the doomsday scenario that it implied — is what motivated a group of “cypherpunks” to create a revolutionary new form of money.

Money that would be fully decentralized, free from government control and never subject to repression by any central authority.

This is why blockchain — more broadly termed Distributed Ledger Technology (DLT) — was invented.

It was deliberately and explicitly engineered so that no authority could have a monopoly on its creation, storage and transfer.

It was invented precisely to avoid the authoritarianism that Venezuela, Iran and Russia represent.

It was created to fully replace functions that, until 2008, were possible only with centralized control.

DLT isn’t just a system that tracks all account balances. It also can foster a fair, democratic, predictable and stable monetary policy that no single party can control or bend to their will.

The concept of distributed ledgers existed before 2008. But the early versions were slow, inefficient, difficult to maintain and even harder to upgrade. Despite efforts to create such a system since the 1990s, no one was able to do so in a fully decentralized network that actually worked.

Until, that is, the invention of bitcoin, which achieved the one thing that was previously so elusive…

The Separation of Money and State

The entire idea is to get the control of your personal money out of the hands of government. To deny government the ability to manipulate —or the temptation to trash — its value.

Like the separation of church and state.

“In most democratic societies,” argue crypto advocates, “we don’t let government tell us how to pray. So why do we allow governments to control how we pay … or get paid? And why do we allow them to inflate our money, deflating the value of our property and the product of our labor?”

That’s the entire point of cryptocurrencies. And it’s why state-controlled cryptocurrencies are entirely pointless.

In fact, their so-called cryptocurrencies wouldn’t even be a distributed ledger. They’d be little more than a plain-vanilla database.

Consider the Cryptoruble, for example. What would it be in practice? Answer: A database centrally managed by the Russian government. Ditto for Venezuela’s Petro and Iran’s new crypto.

We repeat: What motivates these nations is very clear:

First, they want to avoid sanctions by Western powers, especially by the United States.

Second, they want to transition to a fully cashless society. They want no transaction to escape their spying eyes, and full control over their national financial system.

Third, they want a new vehicle to help create an airtight system for media censorship, social monitoring and political control.

The Ultimate Irony (and Beauty) of This Story

To the degree that these governments create a cryptocurrency that can actually compete with other advanced cryptocurrencies, their plan will backfire.

Inadvertently and inevitably, they will come to a fork in the road. And if they truly crave success, it may take them in an entirely different direction — away from authoritarianism.

In this scenario, albeit unlikely, the governments would create a true distributed ledger. They would let people own their money directly. But then, there would be no stopping millions of citizens from:

1. Exiting the system.
2. Moving transactions to decentralized forms of money that are powered by open distributed ledgers, like bitcoin or Ethereum.
3. Undermining the government’s control over its domestic financial system.
4. Laying the foundation for a more democratic society.

That would be a good thing. But the more likely result is that state-backed crypto will be nothing more than fiat money 2.0.

Not something for you to invest in. Not even something to worry about. Because it will almost certainly fail.

Juan M. Villaverde and Martin D. Weiss, Ph.D.