Cryptocurrencies are growing in popularity by the day and governments around the world are not oblivious to the trend. Many are considering ways to regulate, adopt or, in some cases, ban the digital currencies, while there is also growing interest among central banks to create a digital version of fiat, or traditional, money.
What is a Government Cryptocurrency?
Although it is not a formal term, government cryptocurrency is normally used to refer to a cryptocurrency that has been officially issued or endorsed by a country as legal tender. In 2018, Venezuela because the first, and so far, only nation to issue its own cryptocurrency: the Petro.
Nicolás Maduro’s government claims that the crypto is backed by Venezuela’s oil, gold and diamond reserves, and that each Petro is pegged to the price of one barrel of Venezuelan oil. Petro’s official website asserts that the currency can be used to pay for goods and services in Venezuelan businesses and institutions that accept it, and that Petros can be exchanged for other cryptocurrencies or fiat money.
However, the Petro has been dismissed by foreign observers as a “scam” to circumvent the international sanctions imposed on the country and has reportedly been rejected by retailers as a means of payment.
Another form of government cryptocurrency is when a country recognises an existing cryptocurrency, such as bitcoin or Ethereum, as legal tender. That is the case in El Salvador, which in June became the first country in the world to pass a ‘Bitcoin Law’ that allowed the use of bitcoin alongside the US dollar, the only official currency in the Central American nation since 2001.
What is a Central Bank Digital Currency?
A CBDC is a digital form of central bank money that is widely available to the general public.
"Central bank money" refers to money that is a liability of the central bank. In the United States, there are currently two types of central bank money: physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve.
While Americans have long held money predominantly in digital form—for example in bank accounts, payment apps or through online transactions—a CBDC would differ from existing digital money available to the general public because a CBDC would be a liability of the Federal Reserve, not of a commercial bank.