CEO IDU
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Why the panic about cryptocurrencies?

22nd Jan 2019
CEO IDU
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Crypto
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Have you spent any money this week? You probably have, and it might have been by swiping or tapping a card, by shopping online, or via an internet transfer or a direct debit. You maybe even spent cash, handing over notes and coins and getting change in return.

For us in South Africa we could have also pointed our smartphone at a QR code and paid that way, using a service like SnapScan or Zapper. Or many of us might have transferred money via a mobile wallet too. Or perhaps you were travelling and didn’t think twice about paying for goods and services by credit card, or drawing foreign exchange from a local ATM.

The point is, that we don’t think twice about what happens behind the scenes for these transactions to take place. We don’t blink an eye when we’re halfway around the world from home, put our card into an ATM, have the correct amount of foreign exchange emerge into our hands, and have our bank accounts debited with the right amount, plus a few charges, obviously. All instantly.

It’s like writer Arthur C. Clarke said: “Any sufficiently advanced technology is indistinguishable from magic.” Except we don’t think of money as magic, it’s just there. Even for those of us working in the financial services space.

But maybe we should be thinking about money, or the processes managing its use, in a little bit more detail, given the dramatic and rapid changes that are coming. Consider that historian Yuval Noah Harari describes money as “the most successful story ever invented and told by humans”.

And it really is. Some of us may remember the days when currency was linked to the gold standard, or vaguely think that it is still the case that that little piece of paper with the pound, euro or dollar sign represents something tangible and of value stored in a vault somewhere. Or a pound coin is actually made from one pound’s worth of metal – although ironically for many countries the cost of minting smaller denominations is starting to cost more than the face value of the coin.

In fact, the fiat money system, used around the world today, is a legal fiction that has no actual value apart from that given to it by governments. The word “fiat” is Latin for “let it be done” and that is exactly what happens: governments and central banking authorities assign value to an essentially valueless item.

And it’s not a bad system, as discussed above. It all works because a network of ledgers controlled by banks around the world keeps track of transactions. And it works because we trust that it works.

We happily exchange money for goods and services from people we don’t know, over a counter or through an internet connection. Not so long ago, we would even read out our credit card details over the phone to another person! Many of us don’t even need that little piece of paper or pocketful of coins any more, we trust the number presented on our online banking app. And even for people who prefer cash – a report last year said that the cash in circulation around the world continues to increase, despite electronic options, and that, in Europe, a staggering eight out of ten transactions at tills are still cash – the fundamental fiat system still applies.

But now let’s think about emergence of cryptocurrencies and the underlying blockchain, and the ensuing moral panic. In a nutshell, cryptography, which is used to create the advanced algorithms that keep your passwords and chip and pin bank cards secure, steps in as the guarantor for the currency, replacing the role of governments and central banking authorities. And, instead of bank-controlled ledgers, a decentralised, anonymous digital blockchain keeps track of transactions.

So, instead of having to trust a central authority to validate and record transactions, and to negotiate transactions that take place across borders, any group of people can do this anywhere in the world. And the benefit of this is that, unlike a monopolistic central authority, transactions can take place faster, and more cost-effectively. For instance, one fintech startup has seen its transaction costs for international salary payments drop from $80 to less than a dollar, and the transfer takes place instantly.

The ability to streamline payments around the world seems like a good idea. Being able to reduce the cost for people to send remittances home to support their families is certainly a good thing. The ability for my global business to transfer money around the world instantly, without it being held onto by banks unnecessarily – allowing them to triple dip: they get paid once by me, and then win again on the exchange rate, and a third time by holding onto my business’s money for days or weeks – also seems like a good idea.

Of course, it’s early days and appropriate regulation needs to balance innovation with protecting people and preventing crime. But it strikes me that fraud and tax evasion revealed by the Panama Papers and Paradise Papers were carried out through the traditional banking system. And credit card fraud is still a reality. So, it seems then that the moral panic, the comparisons with Ponzi schemes, tulip mania, the South Sea Bubble and the dotcom bubble don’t ring true. Instead, perhaps it’s a case of the Shirky Principle, named for writer Clay Shirky, who said: “Institutions will try to preserve the problem to which they are the solution.”

Replies (6)

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By Justin Bryant
22nd Jan 2019 15:16

Crypto currencies only have value in the 1st place coz people (criminals mainly) were attracted to its professed secrecy and that led to a virtuous circle of speculation and that bubble has recently and inevitably burst and there is a high chance these crypto currencies will all go to near zero long term (as has been stated here many times before - you cannot get long term put options for that reason as no-one would be dumb enough to sell them to you) as there is no intrinsic value unlike a fiat currency where the value is imposed by Governments demanding that their taxes be paid in their central bank's fiat currency.

How fiat money (being mostly bank deposits) is created & destroyed is an interesting topic and is basically all due to credit expansion & contraction respectively (which is why we inevitably have economic booms & busts and is why governments have little control over that - although they can of course borrow and spend in a bust to create more money). Only about 10% at most is ever physical bank notes & coins and that can essentially be ignored in this analysis (indeed most economists ignore that measurement of the money supply).

So, unless they are happy to risk losing a significant amount of their wealth, investors who are long in these crypto currencies should sell sooner rather than later.

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By ireallyshouldknowthisbut
22nd Jan 2019 18:47

Balls.

Crypto currency is rarely used as a currency unless you are a drug runner, its only used for speculation.

And due to there being hundreds and hundreds of "me too's" [there is no barrier to entry] its a crap currency when anyone can invent one.

I happily however take money from our miners and speculators who have set up speculation style business on the back of this boom (and current bust). Its a short run, I priced it assumed they would do 3 years at most 18 months ago, and this is being borne out now. Couple have packed up, most are now losing money.

Remember kids, always sell the tools to the goldrush, don't try and dig any gold!

I assume Kevin has lost some money on Bitcoin and is trying to talk it up!

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By rjames
24th Jan 2019 10:12

Cryptocurrencies - the theory is great but what about the practice?

I would distinguish between deposits and investments

We expect deposits to be safe and stable. And barring some fraudulent online activity (which is a micro percentage of all banking activity), this has been the case for most people reading this article, and even with fraud there is still some protection and forms of appeal. And bitcoin as a store of value? A joke. It is like an investment not a deposit. Let's say I get paid in bitcoin, a daily fluctuation could make any banking charges saved look very small indeed

And there is the additional question - would most people put their rainy day deposits in bitcoin? Not at the moment they won't. If it all disappears, who would you appeal to?

I believe that cryptocurrencies could be huge in future and may even take over from the current banking system, but they are currently of interest mainly to criminals, crypto-evangelists and speculators.

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By Justin Bryant
24th Jan 2019 10:37

Not to mention the highly adverse environmental factors driving Bitcoin relentlessly towards zero per today's story in the link below:

https://www.fxstreet.com/cryptocurrencies/news/bitcoins-price-may-collap...

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Hallerud at Easter
By DJKL
24th Jan 2019 21:16

It is the same question re which currency you are prepared to keep your savings in.

For most on here Sterling is the obvious choice, our purchases tend to be denominated in same and it is relatively (!!!!!!) stable, but Crypto currencies are like holding all your savings in say the Thai Baht when you have no connection with that country re your purchases and no idea what exchange rate will prevail when you buy or sell relative to your home currency.

I hold some money in Swedish Crowns, but I have good practical reasons, my son has deposits in Euros, Dollars and Sterling but he has business reasons plus they likely, are relatively less volatile, certainly as a blended mix.

Investing in a volatile currency that is not your home currency when your liabilities and outgoings are in another currency is really mere gambling.

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Kevin Philips IDU
By Kevin Phillips
25th Jan 2019 09:54

The article is not about really about bitcoin, apologies if that was not clear. The article is really about systems and processes. if Blockchain is accepted as reliable and trustworthy and can effect transactions, of a financial nature, in a short time frame at a low cost is it not highly likely that this will become the system of choice when transferring money? The current process of seeing your money vanish from your account only to re-appear a few days later in another account with no compensation for the use of that money but, by contrast, an exorbitant bank charge seems to take advantage of the consumer. If nothing else Blockchain and the acceptance of more efficient transfer methodologies will drive the financial sector to re-evaluate their process to the benefit of all, mark you it may dent their profits! The banking sector as a whole is slow to innovate, and the UK is particularly poor I would have to say, and Blockchain and the threat of crypto-currency may well be the catalyst to spur that innovation..

Bitcoin is the best known of the crypto-currencies and their price is widely circulated. However there are actually currently more than 2 000 different crypto coins and tokens in circulation, and this is increasing as new schemes, through initial coin offerings, are continually launched. The available measures to determine the exact size of the crypto assets market are limited. A tool often used by industry players is the price checking website, Coinmarketcap, which indicates a perceived market capitalisation of about US$200 billion for all crypto assets. Governments are still trying to understand and adapt to a highly innovative and rapidly changing market space and to work out how to regulate it.

Your comments regarding the misuse of crypto-currencies for illegitimate purposes are fair however there are more and more regular people using these tokens and coins in everyday life and it is therefore not a phenomena to be ignored or dismissed, one would do so at their peril. Indeed this is precisely why governments are investing time and energy into understanding them.

As an aside I personally think Bitcoin is a bit like a stalking horse, it is the first and will not be the last but will help pave the way for a more robust and accepted, probably regulated, crypto-currency to come. Like most innovations the first attempt is almost certainly destined to failure.

PS I have never bought bitcoin 

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