The phrase “if you can’t beat them, join them” seems so applicable in light of the Commonwealth of Dominica announcing plans to distribute bitcoins to all of its citizens. This is a wonderful attempt to integrate people into a burgeoning market. The timing could not have been better, as Ecuador also announced it will introduce its own cryptocurrency. The key difference between Ecuador and Dominica’s plan is that Ecuador plans to implement its currency through its central bank, whereas Dominica plans to disperse bitcoins directly to its citizens. Perhaps fearing competition, Ecuador is also banning Bitcoin, so the central bank’s cryptocurrency will be the only game in town. It’s a fascinating natural experiment in the making.
Forbidding competition is a mistake on Ecuador’s part because competition is what truly allows the best goods and services to develop, so it looks like Dominica’s experiment will be more successful for it citizens.
Moreover, Bitcoin was created to resist centralized institutions, according to the original white paper by Satoshi Nakamoto, the currency’s creator. These cryptocurrencies represent the potential for non-fiat currency to be used on a global scale. This potential should be nurtured, not squandered by governments.
Bitcoin’s own protocol takes aim at government management of currency by both setting a maximum amount of the total possible bitcoins, which limits inflation, and by decentralizing its infrastructure, minimizing the possibility of political interference. A centralized institution would be much more vulnerable to these outcomes. Despite this, other writers have proposed the idea of creating a central bank for Bitcoin. These ideas should be discouraged as they undermine the design of Bitcoin.
By welcoming Bitcoin to its economy Dominica will be a trend setter, attracting more Bitcoin businesses to set up shop in their nation. Dominica is looking towards progress and the future, whereas Ecuador is looking backward and seeking to maintain the status quo in money.
The marketplace will ultimately determine which option is superior, but Dominica appears to be ahead of the curve.
Cryptocurrency adoption is taking place in other countries, too. Spain and Iceland have introduced Spaincoin within Spain and Auroracoin. Unlike Ecuador, Spaincoin and Auroracoin were mainly developed by private institutions seeking to encourage adoption of cryptocurrencies. So long as Spain and Iceland allow competing currencies to coexist with Spaincoin and Auroracoin, consumers will have viable digital currency options that will make shopping easier, and allow entrepeneurs to flourish.
It is essential for governments to allow digital currencies to develop from the bottom up, and not to impose them from a top-down central bank. That way the necessary trials and errors needed develop a successful model can happen through an open and accountable competitive process. As Ecuador is about to find out, if the central bank does a poor job designing its cryptocurrency, that currency will almost surely fail, leaving people with no alternative to traditional currency.