Sovereign issuance of ‘cryptocurrencies’

‘Cryptocurrencies’ and central bank digital currencies

Although the main use of DLT in the context of sovereign financing is the issuance of sovereign bonds, as described above in Section 3, a state can also raise capital by issuing a cryptocurrency on a distributed ledger. Before discussing this possibility, it is useful to examine the concept of cryptocurrency more generally.

In simple terms, a cryptocurrency can be described as an asset held electronically on a distributed ledger.35 There is no universal definition of a cryptocurrency, and there is often some overlap between commonly used terms such as ‘cryptoasset’, ‘crypto token’, ‘digital currency’ and ‘cryptocurrency’.36 Nevertheless, some distinctions should be made between the various types of encrypted assets.

Cryptocurrencies that are issued by private entities, of which Bitcoin is the most well known, are created and held electronically on DLT and normally operate independently from any central bank or public authority. In contrast, ‘fiat’ money, the ordinary government-issued currency, is highly centralised and issued and supervised by the central bank of a state.37 Fiat money is a medium of exchange,38 an asset that can be used for payment purposes (a counter performance) and legal tender39 in the jurisdiction of the central bank. Currently, fiat money is not backed by a commodity such as gold but rather by the faith in the liquidity of a sovereign government.40

  • 35 Bank of England, ‘What Are Cryptoassets (Cryptocurrencies)’ (bankofengland. co. »i, undated) chttps://> accessed 5 June 2020.
  • 36 Depending on the design and content of a cryptoasset, it may fall under the scope of an existing regulation and, for example, qualify as a financial instrument under Council Directive 2004/39/EC of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC [2004] OJ L 145/1. It can also be discussed whether a certain cryptoasset falls under the scope of Council Directive 2009/110/EC of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC [2009] OJ L 267/94, and Council Directive 2015/2366/EU of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC [2015] OJ L 337/35.
  • 37 Charles Proctor, Mann on the Legal Aspects of Money (7th edn, OUP 2012) 71. Money is traditionally defined as a financial instrument that fulfils three main functions: (1) facilitate the indirect trade of goods and services as a generally accepted medium of exchange, (2) serve as a store of value and (3) provide a common unit of account to accurately compare the value of goods and services. Salmon Fiedler, Klaus-Jurgen Germ and Ullrich Stolzenburg, ‘The Impact of Digitalisation on the Monetary System’, European Parliament, Monetary Dialogue Papers, December 2019, 8. See also Proctor (n 37) 10.
  • 38 A medium of exchange is something that is used to pay for goods or services. For a system to function as a medium of exchange, it must represent a standard of value, and all parties must accept that standard. ‘Medium of exchange’, see ‘medium of exchange’ (, undated).
  • 39 Here, legal tender refers to the money that can be officially used in a country, see ‘legal tender’ (, undated). Be aware that the legal definition of ‘legal tender’ is debated and may vary across jurisdictions. See ‘What is legal tender?’ (, undated). See also Bank for International Settlements, Committee on Payments and Market Infrastructures, Markets Committee, ‘Central Bank Digital Currencies’ (2018) 9.
  • 40 The gold standard was abandoned 15 August 1971 when President Nixon abolished the convertibility of dollars into gold. See Proctor (n 37) 69.

Whether a cryptocurrency is a medium for exchange or only an investment asset depends on whether potential contracting parties are willing to accept it for payment purposes and whether a particular jurisdiction accepts it as legal tender. Currently, cryptocurrencies issued by private entities are normally not accepted as legal tender under domestic law.[1] Because ‘cryptocurrencies’ cannot necessarily be used to pay for ordinary commodities and services as ordinary fiat currencies, the terms cryptoasset or crypto token are more precise and may be preferable.

Although cryptocurrencies typically are issued by private entities, states - particularly central banks - may also issue assets using DLT. This is often referred to as central bank digital currency (CBDC). There are different potential CBDC models described in the literature. Some detail the establishment of CBDC as electronic cash, others as reserves and some as a combination of both. The difference between the two is that cash is accessible to anyone and meant for payment purposes, while reserves are only accessible to banks. Which model a specific state may choose to implement will likely vary according to its needs. Some states fear the competition from private cryptocurrencies because they may disrupt financial stability, they can be more challenging to monitor and regulate and they may weaken the central bank’s monetary policy tools. Consequently, such states (or central banks) may seek to establish CBDC to compete with private cryptocurrencies and ensure that a monetary monopoly is maintained. Other states want to establish a CBDC to increase financial inclusion. This is particularly relevant for states where banks and financial institutions currently arc not accessible for major parts of the population and its businesses. The argument is that DLT and digital currencies are easier to establish and will contribute to reduce costs compared with ordinary payments and banking systems. Moreover, a shift from cash towards CBDC could increase the ability of central banks to influence inflation, while competition from digital currencies offered by private third parties, such as Bitcoin, constrains it.

  • [1] For an overview of jurisdictions where various types of cryptocurrencies are accepted as legal tender, see The Law Library of Congress, 'Regulation of Cryptocurrency Around the World’ (2018). 2 The European Central Bank (ECB) is critical of referring to cryptocurrencies as currencies and prefers the term 'cryptoassets’. The ECB argues that cryptocurrencies do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value. European Central Bank (ECB) Crypto-Assets Task Force, ‘Crypto-Assets: Implications for Financial Stability, Monetary Policy, and Payments and Market Infrastructures’ (2019) ECB Occasional Papers Series, 3. See also Bank for International Settlements (n 39) 4. 3 Currently, if non-banks intend to hold non-tangible money, they have to rely on deposits at commercial banks. These deposits represent claims against commercial banks instead of claims against the central bank. Fiedler et al. (n 37) 6. In other words, the models vary first in the sectors that have access to CBDC and second in whether there arc entities that provide deposit facilities fully backed by CBDC (as distinct from deposit facilities fully backed by reserves). See in general Michael Kumhof and Clare-Noone, 'Central Bank Digital Currencies - Design Principles and Balance Sheet Implications’ (2018) Bank of England Staff Working Paper No. 725, in particular 5. 4 Introducing CBDC may also improve the countercyclical monetary policy tools of a central bank in times where the interest rate for a long time has been close to zero. Barrdear and Kumhod (n 3) 12. 5 Bank for International Settlements (n 39) 9. 6 Fiedler et al (n 37) 23.
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