[Podcast] Legalized Cryptocurrencies and Some Proposals for Vietnam – Part 1: Differences and Realities in terms of Application in some Countries around the World

01 Nov, 2022

The emergence of fiat cryptocurrencies will lead to a complete innovation in payment methods, bringing many advantages to the State's monetary management. These advantages are reflected in the advancement of the issuance and payment functions, contributing to the development of the economy. In part 1 of this article, the author will point out the differences between fiat cryptocurrencies and cryptocurrencies for the purpose of providing an analysis of the policy and issuance effectiveness of this currency in addition to the analysis regarding the application status of some countries in the world.

Fiat cryptocurrencies and differences in comparison with Cryptocurrencies

Fiat cryptocurrencies is an electronic form of fiat money, used to refer to currencies that are normally issued by countries and issuers but only exist in electronic/digital form (stored in ATM cards, e-wallets, bank accounts…) but not in physical form. Typically, fiat cryptocurrencies have a one-to-one exchange value with regular fiat currency.

Compared to the cryptocurrencies that are emerging in recent times listed as Bitcoin (BTC), Ethereum (ETH), DigiByte (DGB) and so on, fiat cryptocurrencies have the following similarities and differences:

In terms of guarantee: This is the main difference between a fiat currency and a cryptocurrency. Legal electronic money is issued by the Government and guarantees ownership, value and circulation and so on by specific legal regulations. This is a feature that cryptocurrencies have not had until now.

In terms of security: Fiat cryptocurrencies are similar to cryptocurrencies, i.e. using decentralized data storage on the basis of blockchain, on-chain encryption and when encryption has inheritance. Therefore, the transaction recording process is continuous and irreparable.

In terms of environmental protection and energy consumption: in this feature, fiat cryptocurrencies are completely superior to cryptocurrencies. Due to the government's sponsorship, the computer system will operate just enough with the required capacity. As for cryptocurrencies, due to having to pay income/reward to computers participating in the system (mining process) with fixed rewards over time. Therefore, the more computers (miners) join the system and increase the processing speed, the probability of receiving income/reward is decreasing. This means that the powerless capacity of the whole system is getting bigger and bigger, wasting energy.

In terms of anonymity: Cryptocurrency inherits a part of cryptocurrencies, which is the anonymity of the two parties to the transaction. However, the Government of a country will take control through the central bank which means that the Government has the right to access, understand the legitimate information of these transactions and regulate illegal activities listed as buying and selling banned goods, laundering money, using fake money and so on.

In terms of payment: Fiat cryptocurrencies or cryptocurrencies can be paid without limitation of time and space as well as money transfers can be conducted at home and abroad quickly and conveniently at low cost. Currently, the traditional money transfer abroad needs to go through many procedures and time (usually from 1 to 8 working days) with relatively high processing fees. The Government also has specific regulations on the limit of remittance abroad for each specific object.

Policy and issuance effects of fiat cryptocurrencies

In terms of payment: Fiat cryptocurrencies have created a completely new interbank payment and payment model, which can optimize the payment function; If effectively integrated with other financial instruments listed as stock market, commodity market, capital market and so on, the issued central bank’s electronic money will save costs and increase efficiency for not only the state but also for intermediaries listed as banks, credit institutions and more.

In terms of monetary policy: Crypto interest rates from Central bank could become a new monetary policy tool. The Central bank, thanks to the adjustment of cryptocurrency interest rates, can adjust the commercial bank deposit rate.

In terms of issuance: the cost of issuing electronic money will be many times less than the cost of printing, storing, transporting and issuing cash. At the same time, it reduces a lot of staff counting, wrapping as well as post-processing of cash such as checking, making recovery records of unqualified bills for circulation and destruction process. Issuing or withdrawing also becomes easier and faster than ever, when there is an issue order, almost immediately commercial banks have money to spend. The Central bank plays the role of issuing and circulating, maintaining the existence and neutrality of the entire system.

The Status of Legal Cryptocurrencies in some Countries

*Euro currency coming soon

The e-Euro currency will be issued by the European Central Bank (ECB) and national banks. The e-Euro will not replace cash, but coexist with the cash system.

The ECB’s report regarding e-Euro (October 2020) shows that people’ cash usage habits are changing rapidly due to the Covid-19 crisis. Accordingly, young people in Europe are using electronic payments more and more; however, they are still concerned about security issues, including ensuring user privacy and connection stability. The ECB also stated that the e-Euro was issued to promote the digitization of the economy; therefore, the currency must keep pace with modern technology at all times, to best address the needs related to market. Besides, it is convenient to use, speed, and cost-effective. The purpose of issuing the e-Euro is to contribute to the reduction of cash transactions; consequently, it must be able to perform payment transactions without a network connection. In addition, it must be easy to use for minority communities listed as the elderly, people with disabilities; completely free for basic transactions in people’ life and guarantee privacy. In the future, the e-Euro must gradually become a replacement for the current physical Euro currency in many areas: as a medium of exchange and as a means of storing (saving, saving, etc.). To do so, it is necessary to ensure the provision of electronic payments to foreign central banks or individuals and organizations located outside the European region. European citizens must be able to use the e-Euro currency anywhere on the global electronic payment network.

The plan to issue the e-Euro is an important step for the European Union in creating a cashless and internet-free payment environment. Europe also has great ambitions to spread e-Euro globally.

*Testing Chinese Cryptocurrency

In accordance with the information from the Tencent QQ portal of the People’s Republic of China, the second round of testing of the electronic yuan (e-CNY) is being rolled out in six Chinese cities. During testing, e-CNY had no restrictions on its use. However, in the future, the People’s Bank of China has proposed usage limits listed as a limit on the total amount spent per year, per month, per day, or free for small transactions and unrepeated fees, charge for large or repeat transactions. It is expected that there will be 4 different wallet levels/types, each with its own daily, yearly transaction amount and corresponding limits.

In terms of specification and issuance, the e-CNY coin is issued on blockchain technology. However, what makes it differs from the traditional blockchain is that all the peer-to-peer member machines containing the ledger - the data that stores the transaction process - are under the control of the government. Each e-CNY coin is assigned a serial number similar to that of a banknote/polymer and has a corresponding denomination. Therefore, on each wallet, there will be a specific number of banknotes, serial number of banknotes from which to deduce the total amount. Coins are issued and stored as coins, with only the number of coins at face value and without a serial number.

In terms of e-wallets, e-CNY e-wallet, like other e-wallets, is an app installed on the user's mobile phone, secured with a password, used only when there is an internet connection. Scanning the QR Code of the recipient and entering the amount to pay like other e-wallets. E-wallet is attached with user identification.

In terms of the hardware wallet, tested in Shanghai, NFC technology (Near-Field Communications, roughly translated as near-field connection technology), is a connection protocol between two electronic devices at close range. Pay by swiping card on the credit card device of the receiver/seller/service provider, the payment does not require complicated operations without any need to carry a smartphone with no Internet connection nor a password for payment. The transfer of money from an E-wallet to a hardware wallet or from a hardware wallet to an E-wallet will be conducted on a smartphone via bluetooth or NFC connection. Upon losing a hardware wallet means losing money, anyone can use it as the hardware wallet has no identity with the user.

Payment process via hard wallet and integrated payment tools thanks to NFC technology without Internet connection (source: www.new.qq.com)

China has tested e-CNY in various localities to determine the stability and reliability of transmission lines and systems. At the same time, China also tested many different wallets in different small regions. In the near future, with great ambition, China will continue to test e-CNY in association with other countries; currently, Thailand and the United Arab Emirates (UEA) have agreed to join the Chinese Global Cryptocurrency Plan.

Author: MSc. Nguyễn Đức Việt – University of Economics Ho Chi Minh City (UEH).

This writing is in series of Spreading research and applied knowledge from UEH with “Research Contribution For All – Nghiên Cứu Vì Cộng Đồng” message, UEH would like to invite dear readers to look forwards to Newsletter ECONOMY NO. #65.

News, photos: Author, UEH Department of Marketing – Communication

Vocie of: Ngọc Quí