Time for governments, central banks to stop being defensive
The first and widely used response from central banks over the issue of cryptocurrency has been that of warning members of the public that trading and investing in such instruments is illegal and that those engaged in such trades risk losing out on the money invested.
Leading players in the financial services sector have also weighed in, highlighting the negative aspects of trading in bitcoin. Goldman is one of the firms to send a warning flag about cryptocurrencies. JPMorgan Chase CEO Jamie Dimon has also labelled bitcoin a “ fraud”.
Outgoing Fed Chair Janet Yellen has said it is a “ highly speculative asset”, while Bank of Japan Governor Haruhiko Kuroda said it’s being used for speculation. According to reports China also cracked down on digital currencies in September and the share of yuan-bitcoin trading has fallen drastically to less than 5 percent.
The Reserve Bank of Zimbabwe has also spoken about cryptocurrencies, Bitcoin in particular, saying the trading of such is not regulated by the country’s laws and presents risks such as money laundering, terrorism financing, tax evasion and fraud.
“Under the existing legal and regulatory dispensation, any person who invests in virtual currencies or participates in any transaction involving virtual currencies, does so at own risk and will not have legal protection from, or recourse against, any regulatory authority.”
The warnings are off course in order as the cryptocurrencies are not regulated and are not binding as contractual agreements. But in a world where we have seen new products being invented and some of them becoming global successes, governments and central banks should offer more than just warnings.
Think of Alibaba and other online trading platforms that have taken global trading by storm. There are so many risks involved, but because safeguards have been put in place, they have since become global trading powerhouses were trillions are changing hands every day. Alibaba has a market value of nearly $440 billion, according to FactSet.
Given that background, and considering the fact that the world is now tech driven, central banks should stop being dismissive of cryptocurrencies but instead invest in studies aimed at adopting the phenomenon.
Instead of saying cryptocurrencies are not regulated, the discourse should be on what safeguards can be put in place to make sure that those engaged in Bitcoin trades, do not end up losing on their investments.
Central banks have also been quick to say investors should not dabble in something that they do not understand. How about central banks investing in understanding and disseminating educational information to the transacting public? There is a first for everything and central banks should take a leading role in understanding products that are seen as a threat to the monetary system.
There has also been talk that those engaging in trading in cryptocurrencies are speculators driven by greed. Is there no chance that these investors are actually running away from the currency risks that central banks have failed to deal with and in some cases have even created? The 2007-2008 financial crisis is a case in point.
Take the case of those dealing in cryptocurrencies here in Zimbabwe, some have been driven by the need to pay school fees outside the country amid the current cash shortages, while some are involved as they try to hedge against currency risks.
Some have said cryptocurrencies are akin to music that will eventually stop. But have we not said the same to other innovative developments. We are told that when Strive Masiyiwa first talked about introducing mobile phones in Zimbabwe, the idea was dismissed as a fad that would soon fade, but here we are, we have witnessed even greater things that have come through mobile phones. Innovative ideas such as Ecocash were not widely accepted by most local banks, but they have since become a phenomenon embraced by many, with very little regulation being put in place.
Another reason that has been used in defence against cryptocurrencies is that they are susceptible to hackers. Warnings have been made that digital currencies are always prone to hacking and we have seen reports saying a South Korean cryptocurrency exchange lost $70 million through hacking.
Nearly $64 million in bitcoin has also been reportedly stolen by hackers who broke into Slovenian-based bitcoin mining marketplace NiceHash. History tells us that banking accounts have also been hacked in the past. So instead of hiding behind the finger of cryptocurrency’s susceptibility to hacking, central banks should invest in putting in place safeguards that will protect transactions from such vagaries.
While bitcoin remains the largest digital currency by far and the most known and talked about in the world, there are many other cryptocurrencies that have since been developed and are being used and traded in across the globe.
Despite Bitcoin’s reported rally that saw it record a 1,318 percent gain in 2017, Ripple was, however, the top performer after it jumped 36,018 percent. Ripple, is touted as a new kind of payment system for banks.
Bitcoin fares slightly better when compared against rival cryptocurrencies as it makes it to eighth place in the ranking obtained from Coinmarketcap.com.
Here are the top 5 cryptocurrencies on coinmarketcap.com
Name Market Cap
2/10/2018 Price as at 2/10/2018 Circulating Supply
Bitcoin $229,7 million $13,692 16,777,312
Ripple $89,8 million $2,32 38,739,144,847
Ethereum $84,7 million $876.01 96,720,388
Bitcoin Cash $42,0 million $2,489 16,889,038
Cardano $20,5 million $0.79 25,927,070,538
Litecoin $13,6 million $249.62 54,579,083
A country such as Zimbabwe, which currently has no currency of its own, should be at the forefront of seeking ways of how best to use cryptocurrencies as a mode of payment even if it means putting in place regulatory measures. Some countries are already looking at ways on how their countries can benefit from cryptocurrencies.
In Japan for example Nomura Instinet analysts Yoshiyuki Suimon and Kazuki Miyamoto estimate the wealth effect of bitcoin could boost consumer spending in Japan to as much as 96 billion yen or $855,4 million.