Estonia announced at the end of 2017 that it will go ahead with its plans to launch its own cryptocurrency, tentatively titled Estcoin.
The structure, and indeed the purpose, of Estcoin are yet to be worked out. It could be a freely tradeable digital token — like bitcoin but avowedly not a currency — or a token to cryptographically verify your identity (very much not tradeable), or it could be pegged to the value of the euro — not unlike the Utility Settlement Coin concept.
The funds raised by Estcoin’s initial coin offering will go towards “the development of [Estonia’s] digital nation”. Estonia aims to make its e-residency programme “the best option globally for launching a trusted ICO”.
Estonia seems to be the sovereign with the firmest intentions to launch a cryptocurrency, but Sweden has an E-krona project, Japanese banks have backing from their central bank to launch J-Coin, the Bank of Canada produced a discussion paper exploring the possibility in December 2017, even Mark Carney discussed the possibility in a recent speech.
For some countries, it’s a strategy to circumvent international trade restrictions.
Russia is reported to be considering a state cryptocurrency, which it considers could be “a useful tool to get around international sanctions” and Venezuela is intending to launch Petro: a cryptocurrency backed by its oil reserves.
Most options being considered by central banks would, like the Utility Settlement Coin, be collateralised by fiat currency held by accounts at central banks. As such, they would not raise financing for governments (because for every token, a unit of currency is locked away, keeping the money supply the same).
Estonia’s plan to make the process a finance-raising exercise is different.
And, after all, why not? Debt management offices are supposed to raise funds for a country at the lowest possible cost to taxpayers. An initial coin offering is the cheapest means of raising funds on offer, since tokens pay no interest.
Issuers of ICOs create a run of tokens on a distributed ledger, then sell them to people for money. Cryptocurrencies are supposed to have some purpose beyond raising funds for the issuer. The idea is that the token sold has some utility — that it be used to pay for a service on a decentralised platform.
But considerations like that have not stopped many of the thousand or so initial coin offerings from raising more money for start-ups in 2017 than venture capital.
A sovereign might actually have ways of creating a useful cryptocurrency that start-ups could not.
If a country were simply to say that taxes could be paid via a digital currency, that creates an instant demand for said currency, as well as delivering “efficiency savings”. Governments could facilitate all manner of financial transactions by providing an instant settlement facility in a new digital currency.
But these are advantages available to a government because governments are centralised entities with sovereign powers. The value of decentralisation in government work is questionable.
The truth of the ICO market is that, for now at least, utility does not matter. The vast majority of those who purchase cryptocurrencies do so as speculative investors.
Whatever the form the token takes or putative purpose it promises, almost everyone who purchases cryptocurrencies does so with the expectation of selling their tokens on at a profit.
Rather than speculate on the expected utility of the service or network tied to the token, speculation is purely on the expected demand (a function of the quality of the marketing team behind the ICO).
Regulators have repeatedly issued warnings about this type of investment behaviour and are beginning to crack down on ICOs with securities law. Speculation of this sort is unsustainable and DMOs ought not to encourage it — however attractive the funding terms on offer might be.
Should the price of such a token crash as the ‘fear of missing out’ inflows come to an end, citizens might, rightly or wrongly, feel aggrieved. “Buyer beware” is not a good look for a government raising finance from its citizens — even if they're just "e-residents".
Still, this is a problem of timing and execution, not an issue with the core concept. If a sovereign is able to devise a genuinely useful cryptocurrency that derives unique value from a decentralised application, then why not fund with an initial coin offering?
Estonia, however, freely admits that Estcoin is “a solution looking for a problem”. Perhaps the government will be able to retrofit it with a truly useful function but, if not, Estonia will have raised some free cash and promoted the e-residency programme, luring more tax-paying start-ups to domicile there.
The tone of Estonia’s blog posts on e-residency are always charmingly idealistic, but it’s hard not to view the move as just as cynical a move as it is when start-ups use initial coin offerings as a means of giving their staff a free bonus. ICOs aren't yet the future of sovereign funding.