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Investors Beware: State-Sponsored Cryptocurrencies Are Worthless

Investors Beware: State-Sponsored Cryptocurrencies Are Worthless

But policymakers should also watch out because rogue states could use some aspects of crypto technology to avoid sanctions.

Some investors are excited by the thought of nations launching their own cryptocurrencies, even rogue nations like Venezuela, Iran or North Korea.

But with the June 12 summit between U.S. President Donald Trump and North Korean dictator Kim Jong Un just a few days away, a critical question is: Will rogue states be able to launch cryptos and other forms of digital money to sidestep sanctions?

Kim is reportedly looking toward cryptocurrencies as a new tool to increase independence and ease some of the economic burden of sanctions.

Cybersecurity firm Recorded Future has linked North Korea to cyberattacks on investors and exchanges, while South Korea has accused the North of stealing millions of dollars in cryptocurrencies.

And Priscilla Moriuchi, formerly a National Security Agency cybersecurity official, estimates North Korea also earns between $15 million and $200 million by mining and selling cryptocurrencies.

But what’s most concerning to many observers is the possibility that North Korean cyberspecialists will someday create their own cryptocurrency to dodge U.S. and U.N. sanctions.

They wouldn’t be the first. With Western sanctions crippling their economies, Iran, Russia and Venezuela are already exploring state-sponsored cryptocurrencies as an escape hatch:

• In Iran, state-controlled Press TV reports that the country’s Information and Communications Technology Minister favors cryptocurrencies as a vehicle for “circumventing sanctions because they are not under the supervision of the U.S. financial regulatory body.”

• In Russia, the Financial Times reports that Putin’s economic adviser Sergei Glazyev supports the creation of a CryptoRuble as a useful tool to “settle accounts with our counterparties all over the world with no regard for sanctions.”

• And in Venezuela, President Nicolas Maduro has declared that its newly launched Petro will serve as a kind of “kryptonite” against the power of the U.S. government, according to Time.

Moreover, both Iran and Venezuela are reportedly coordinating their cryptocurrency planning with Russia. They aim to create a block of countries that could challenge Western-dominated financial markets, or at least create an independent system for international transactions.

This news raises two urgent questions for investors and policymakers:

Question No. 1: Will it be possible for adversarial or rogue nations to create cryptocurrencies that compete with the likes of bitcoin or Ethereum?

Our answer: No.

As we explained here last week, the entire concept of state-sponsored cryptocurrencies is an oxymoron, especially under an authoritarian regime.

For a cryptocurrency to achieve any measure of adoption, it must adhere to four fundamentally democratic principles that are the essence of cryptocurrencies. They must be:

1. Resistant to censorship, which would be a direct threat to any government that censors its media.

2. Open to all participants without government permission, 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 highly centralized government operations.

Thus, by its very nature, a government — let alone an authoritarian one — cannot issue a cryptocurrency that would have any chance of competing with existing cryptocurrencies. No one would want to use them — even in their own countries.

These would not be cryptocurrencies. They would be strictly traditional government-issued money in digital form, using some of the same advanced technology that cryptocurrencies use.

Question No. 2: Will it be possible for adversarial or rogue nations to use state-backed digital money to help establish an alternate system of international transactions, potentially weakening the West’s ability to use sanctions as leverage against them?

Our answer: Yes, provided they can handle large volumes.

Currently, virtually all international transactions are cleared under the auspices of the Society for Worldwide Interbank Financial Transactions (SWIFT). With digital money, a consortium of countries like North Korea, Venezuela, Iran, Russia and others could establish a system of payments that is faster and more efficient.

Moreover, thanks to the higher level of security that this new form of digital money could provide, their payment system could be an attractive alternative to countries seeking to avoid sanctions.

This prospect is of only tangential interest to investors.

But it is worthy of urgent review by global monetary authorities, particularly if Trump intends to continue using sanctions for leverage in his negotiations with North Korea and others.

Best,

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