Role of Government in a Digital Economy

As the global economy progress towards a digital nature, governments around the world
are presented with a challenge to seamlessly adapt to this change. A major overhauling
needs to be done in the existing frameworks in order to accommodate more and more
people participating in the digital economy. The regulatory frameworks put in place
need to ensure not only the financial integrity and security but also facilitate further
innovations while minimizing the inevitable short-term disruptions.
Developing countries like Kenya and China have already seen a widespread adaption
of digital payment methods. Elsewhere in India, the government has taken initiatives to
digitize traditionally paper-intensive tasks like land distribution. Distributed ledger
technology, the crux of the modern-day cryptocurrencies has facilitated peer to peer
lending opening up a new source of credit for small businesses that have trouble
borrowing from a bank in Brazil.
Technologies like artificial intelligence, cloud computing, and blockchain hold a lot of
promise but also brings a new set of risks. Bitcoin, for instance, can be used to fund
illicit activities like drug trafficking owing to its anonymous and untraceable nature.
Recently, Financial Stability Board (FSB) a coordinating body for financial regulations
for the G20 announced that it has begun to research ways to track the growth of crypto
assets with an emphasis on mitigating potential risks and ensuring stability.
Payment systems are central to an economy, more so in a digital economy. As of present
day, cash takes the natural place as the only legal tender. But with the rise of more and
more online services, that landscape is bound to change. The society is heading towards
cashless payments.
However, in the case of an electronic payment what should a legal tender mean? Should
the central bank start issuing their own digital currency to the public?
Digital currency of such kind would need to fulfill certain requirements to effectively
deliver any value to the economy. First of all, it should ensure maximum possible
inclusion. The service should be easily accessible to the public without posing any
hurdles. Second, the infrastructure should be safe and secure. Third, the system should
be easy to use and efficient. Payments should be settled quickly and with the least
possible intermediary costs.
Sweden is one such country where the decline of cash is rapid. It has seen a 50 percent
decline in the demand for cash over the last decade as more and more people shift to
cards and digital payment apps like Swish. Cash now accounts for only 13 percent of
the total payments in stores and is expected to go completely obsolete by 2023.
Responding to the declining demands of cash, Swedish central bank Riksbank has
started issuing a digital currency- e-krona.
An e-krona is a digital central bank currency issued by the Riksbank, which means that
it is a claim on the Riksbank in the same way as cash. Its value is stated as SEK. The e-
krona is broadly available to the general public 24/7/365 and can be used to make instant
payments at the desired point in time. E-Krona can be issued as a value-based (prepaid)
or an account-based currency.
A similar initiative has been taken by the Central Bank of Uruguay (BCU). In 2018,
they launched their digital currency called E-Peso for testing. This currency will be a
legal tender issued by BCU and will be considered a digital equivalent to Uruguayan
Peso. It aims to tackle the challenge of financial inclusion, improve efficiency, and
increase transparency in payments. An initial pilot run began on 17th November 2018
with UY$ $20,000,000 being issued to 10,000 ANTEL (A Uruguayan Telecom
provider) customers digitally. On March 2019, IMF declared this pilot run to be
“successful”.
In 2018, the government of Venezuela announced its own cryptocurrency- Petro (PTR).
However, unlike a traditional cryptocurrency, Petro would be backed by the country’s
oil reserves and would be issued by the government.
According to the whitepaper, Petro would have three facets. First, a means of exchange.
It shall be considered as a legal tender and can be exchanged for goods and services in
Venezuela. Second, serving as a digital platform to represent all the goods and services
exchanged. Third, as an investment and savings facility.
Cryptocurrencies like Bitcoin promise a completely decentralized and anonymous
means to exchange value. A value neither backed by an asset or by a financial
institution. They have shown the world that a robust financial infrastructure can be
created in a completely untraditional manner with the help of technology. The
anonymity and divisibility of value it provides along with almost negligible transaction
cost makes it an ideal choice for micropayments.
What shall be the consequences of such currencies being adopted by the masses?
The answer lies in the way the government ensures stability and economic
development- Monetary policy which would have effectiveness diminished. These
policies are put into action by controlling the supply of currency and consequently, the
short-term interest rates. Unlike fiat currencies, the supply of cryptocurrencies is often
a pre-decided number encoded in its algorithm- somewhat similar to the gold standard.
An economy running on cryptocurrency poses the risk of deflation.
The government should regulate cryptocurrency rather than denying it. This includes
taking steps to prevent its users against frauds, financing of illegal activities and even
imposing taxes on cryptocurrency transactions.
Even the industrial revolution which changed the course of mankind called for a
regulatory framework in terms of working conditions, labor rights, and more recently,
environment protection. A technology irrespective of its disruptive potential doesn’t
repudiate the demand for government intervention in at least in some form in order to
reap maximum benefits from it.