Crypto, Blockchain and the Future of Finance

Bitcoin, blockchain, and cryptocurrencies are words that are so often used nowadays that we feel we know and understand them because they are so familiar. However, people have very different ideas about how they actually operate and the implications in our lives. Let’s have a look at the ideas and try to make some sense of it all.

Cryptocurrencies, despite the name, are not actual currencies. For thousands of years countries have issued currencies as a medium of exchange, and today we have the US Dollar and the SA Rand as examples. These are regulated and backed by the government, which means that they are legal tender and serve a vital function in the legitimate economy. In contrast, cryptos as they are commonly known, are not backed by anything and are not legal tender.

Cryptos are not currencies – try to buy a pint of milk or pay your tax with them. Cryptos are not investments – at best they are speculative, like betting on the races. Cryptos are not a store of value – how can they exist 100 years from now?

Similarly, cryptos are not investments. While some people have made fortunes by trading in various crypto instruments, most of the money has been made by the people who develop the products and run the trading platforms. We regard an investment as something which creates income streams, like property, bonds, and equities. Crypto does not do this.

Are cryptos a store of value? Over the centuries many things have been regarded as stores of value especially so-called hard assets like land, commodities, and gold. All of these are tangible assets and are rare and enduring. Cryptos are not tangible, and they are not rare because they can be created in a few hours. Nor are they enduring – think of how many digital files, photos, and music playlists you have lost in the last 10 years – now think about whether any cryptocurrency will be around in 100 years.

So, what are cryptocurrencies?  There are now more than 16,000 different cryptos, each invented by its own backers and all trying to exploit the speculative mania. More and more countries are either banning or restricting the ownership and trade in cryptos. Some analysts believe that they are a giant Ponzi scheme ( Possibly the best view is from the Governor of the Bank of England who said “They have no intrinsic value. Buy them only if you’re prepared to lose all your money.”

We argue that cryptocurrencies are best left to the speculators. So, how will this new technology affect our everyday lives? This is where it becomes more interesting.

The technology behind cryptos is blockchain, which is a distributed and secured database or ledger which creates a transparent and secure record of transactions. Blockchain has potentially disruptive applications in many areas including insurance and banking.

Governments are coming to recognise the potential benefits of developing their own digital currencies. Fifty-six central banks including the US Fed and the SA Reserve bank, are now researching or developing some form of digital currency. These are called Central Bank Digital Currencies (CBDCs). In essence, a digital US$ will work in tandem with the traditional US$ and, at least initially will not replace it.

CBDC’s could drastically reduce transaction costs and enable central banks to fine-tune monetary policies

The cost of financial transactions, especially for low-income earners is extremely high. A worker in South Africa who wishes to send R100 to his family in Malawi will see at least R25 disappear in costs. Government grants and pensions also cost enormous sums to distribute to their ultimate beneficiaries. Digital currencies offer the potential to drastically reduce these costs by creating a direct link between the central bank and the citizens without having to go through layers of intermediaries. In addition, economists and central bankers can coordinate monetary policy and welfare benefits in real-time, instantly funneling money into the pockets of those who need it.

CBDCs offer the potential to eventually abolish cash and reduce money laundering and large-scale criminal activities. In the developing world, many people do not have bank accounts. Now digital currencies will allow everyone with a cell phone to have easy access to banking.

But digital currencies also have a serious downside because they provide a feast of data for technocrats and surveillance-happy police. The risks that come with putting this kind of power in the hands of an authoritarian state bent on social control—or perhaps any state—seem to outweigh the benefits. But it’s happening all the same.

China’s digital currency, the digital yuan (eCNY) is still in its testing phase and already has more than 250 million users who transact on the central bank’s official app. At the Winter Olympics, it was opened to international users for the first time. Nigeria was one of the first countries in the world to launch its digital currency, the eNaira which went live in October 2021.

CBDCs will have international implications on the financial system and could upend the US Dollar’s dominant status as a reserve currency

For the last 80 years, the US$ has been the world’s reserve currency. This may change in the next few years as CBDCs will allow settlement of transactions in their own currencies, which opens the prospect of there being several reserve currencies that are acceptable for international transactions. It is likely that the first two rivals to the US$ in this arena will be the Euro and the Yuan.

Change is coming, and developing countries like South Africa will not want to be left behind, because the advantages of CBDCs are so compelling. The difficulty will be managing the loss of personal privacy in such an environment.