The Possibilities of National Blockchains

Note: this post assumes some knowledge of blockchains, tokens, and smart contracts. For background reading, try this primer on blockchains and then this primer on tokens.

With the news that Russia, Singapore, and potentially China are working on tokenizing their fiat currencies (though I’m not sure that report on the “Chinese Royal Mint” has been cleared up quite yet), we’ve caught a glimpse of what the world might look like if states actively pursue blockchain ecosystems: each country possessing its own digital token and private chain.

What begins with tokenization could, eventually, end in a series of self-contained, on-chain national economies — what I am calling “hosted economies” until a better term comes along.

Russia, for example, might migrate its economy to its own private blockchain, with its own token (the digital version of the ruble), transaction history visible to the chain owner (the Kremlin), and smart contracts and transaction policies that are immune to outside interference. Permissioned government institutions would be able to set the terms of trade, taxation, and many other economic options for the entire chain. A second country, like Singapore, might likewise transition to its own private blockchain. The two chains may then integrate via sanitized input/outputs like any pair of applications on your computer. The killer apps for blockchains are countries.

The pressure on states to adopt private chains will be strong. Experiments like Bitcoin and Ethereum, and especially more price-stable cryptocurrencies like USDT and Corion, have proven that users are prepared to give digital tokens a value and exchange these tokens as though they were money in return for goods and services. This presents what might ultimately be an existential threat for governments — untaxable transactions. If public participation in blockchain token trades (effectively an underground market) grows rapidly, this will pose an economic crisis as everyone defects to the new, taxless system. If states find themselves unable to tax most monetary transactions, they will collapse under revenue drought.

The only way to address this threat is to either:

cut off public access to public blockchains (and, if traffic is encrypted, this can only be done by eliminating encryption or the internet itself), or to create a private blockchain and capture most of the commercial sector early, before industry has time to develop a robust competitive system.

Because the internet is a critical economic resource, and encryption is a essential component of the internet, most countries will decline the first option. Some countries have gone so far as to ban fiat-cryptocurrency exchanges, but this is ultimately ineffective as long as citizens can send funds out of the country to foreign exchanges (which is also very, very difficult to restrict).

The second option, the creation of a national private blockchain, is more palatable and might even be desirable to governments (as will be shown later). Deployment of a private blockchain can prevent mass migration to a public chain by virtue of relatively simple transaction analytics. Any users accumulating tokens via the private chain but trading them in bulk for outside tokens may be easily identified and punished by the chain owner, incentivizing participation in the private chain or approved public chain vendors.

For example, the United States might see that an employee, John Doe, receives USD tokens from his work. John is then on record trading these tokens for public tokens (say, Bitcoin) through an unapproved vendor. This demonstrates John Doe is making further transactions outside of the state chain, and if he does not file taxes for external transactions roughly equal to the USD tokens he traded initially, he can be flagged as a possible tax evader and investigated (and perhaps fined). Another option available to states is to simply white list approved currency vendors whom the government trusts to collect taxes on behalf of the state. Either way, by mandating that the bulk of personal income is provided in private chain tokens, a state can incentivize general use of the private chain rather than public chains.