Bitcoin
By Geoff Iyatse
‘Keeping up with the Joneses’ is a fairly popular phrase in the consumption hypothesis, where it assumes an increasing obsession with social status among neighbours. In a modern economy, the phrase also sits well with peer-to-peer catch-up tendencies among national macroeconomic managers.
But the current race to create Central Bank Digital Currencies (CBDCs), a digital representation of fiat currencies expected to be part of the money supplies of the respective countries, goes beyond the mere postulation of the underlying theory of ‘keeping up with the Joneses’ or the feeling of being left behind. It is an obsession the need to survive the current war between fiat and decentralised currencies has exposed central banks to.
The Central Bank of Nigeria (CBN), last week, disclosed that a committee was working on the possibility of a national digital currency. This has enlisted Nigeria as one of the many forward-looking countries as the global community battles the disruption of crypto investment. Interestingly, this is not the first time the Central Bank would reveal its intention to create electronic money (e-money)
In September 2017, the then Deputy Director/Head, Payments System Policy and Oversight, CBN, Musa Jimoh, said the apex bank had commenced an arrangement to introduce a digital currency to key into the global adoption of cryptocurrency. Jimoh, who is now, the director of the department, said the Bank “cannot stop the tide of waves generated by the blockchain technology and its derivatives” and that it had “taken measures to create four departments in the institution that are looking forward to harmonise the white paper on cryptocurrency.”
Over four years after the CBN had recognised the disruptive power of the digital currency, it backtracked in February, rolling out a new directive to insulate the financial system from the ruin of digital currency investment, a bull run that has since popped. But the CBN’s recent move is a flash in the pan in a seemingly coordinated race to curtail the speed of crypto investment or, perhaps, its volatility.
Indeed, there is a global clampdown on the rave that has ruined and rebuilt millions of lives around the world at the same time. Last week, the Governor of the Bank of Japan, Haruhiko Kuroda, attacked cryptocurrency investment describing it as “speculative” and its volatility as “extraordinarily high”. Also, the United States, as usual, is looking at crippling the technology, which seeks to ‘oust’ the dollar and assume its supremo status, with taxes. Central banks across the globe have voiced their concerns or taken measures to regulate, control or outlaw crypto assets, which rose from the ashes of the 2008 financial crisis as young people sought alternative investment platforms.
In the United Kingdom, TheCityUK, a financial services sector lobbying group, has published a white paper calling on Britain to put in place tailored regulation for the cryptocurrency sector. The paper said Britain could influence global policy by setting the standard for regulating crypto and take advantage of the booming sector to lure businesses with the certainty of rules.
“There is a fierce global race underway to see which applications of distributed ledger technology (DLT) and crypto-assets will win out, and who will grab the biggest slice of the value they promise. The ultimate winner is for markets to decide, but the government and regulators have an important part to play. They must set safe and robust rules for this burgeoning sector – while ensuring they don’t inadvertently squash good ideas before they can mature and flourish,” the group argued.
So far, the UK body’s position appears to be the closest touch with reality. The United Kingdom financial market, interestingly, has seen crypto-asset investment from all shades. In 2011, Britcoin, a replica of Bitcoin that sought to rival the pound launched with fanfare, with millions of investors betting on it. But, like many of its kind, it withered along the way leaving a huge cost on the individuals who threw their incomes and fortunes into it. Yet, there are testimonies from thousands of young people whose blink future fate turned around when they encountered virtual currency trading.
It is not surprising that while some countries are merely engaged in panic actions, understandably, the UK group has done a rather objective assessment of the situation and suggested a more feasible solution. In the crypto circle, nobody denies the fact that not all the coins, which were estimated at 9,000 as of March, are genuine. Even among the non-scam variant, there are meme (or joke) coins, which have no intrinsic value.
Bitcoin has been elevated to the gold standard as it is believed to be relatively stable, serving as a store of value (this doesn’t imply no but moderate volatility compared with others with much wider swings). There are also utility coins, like XRP (Ripple), which has built a global business around cross-border money transfer around the world. Exchanges recognise these thin lines and the possibility of outright scam in the ecosystem, a reason every listing comes with a caveat urging investors to carry out due diligence before transacting. Unfortunately, only The CityUK admits this reality as the world wields the big stick against crypto assets.
The most devastating anti-cryptocurrency measure in the past few weeks came from China, which, once in a crypto bull run, intervenes in the market with its draconian rules. China has banned the financial system, like Nigeria has done, from transacting in digital coins. That has rocked the market, and justifiably so taking into consideration the weighted average of China in the global crypto market. But while China’s restriction could affect trading, the extension of the hostility to mining is the scariest challenge in the renewed Beijing onslaught.
The East Asian country controls an estimated 75 per cent of global Bitcoin mining, an activity that could be likened to the virtual business soul. Bitcoin mining is performed by high-powered computers that solve complex computational problems. It is something similar to the conventional mining operation that results in the extraction of gold but much more complex. Cryptocurrency mining achieves two results. First, when computers solve mathematical problems on the Bitcoin network, they add new blocks to the chain (or produce new coins to use plain language).
Secondly, by solving computational problems, Bitcoin miners help to
strengthen the integrity of the network by verifying each transaction
that takes place on the blockchain. Cryptocurrencies are decentralised
currencies hence there is no central authority to give a stamp of
authenticity on a unit or fraction of coin exchange. How then, do
traders verify the authenticity of a transaction of stop double-spending
or counterfeiting (to use a term commonly associated with fiat
currency)? This is where miners come in – to provide the proof of work
(POW).
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This second responsibility of miners for which they are rewarded with
the new coins created that are halved every four years to reduce the
supply volume is the most important aspect of digital asset investment.
This makes the Chinese clampdown on miners a mar or mark event in the
evolution of the new investment window. There could have been a war
against cryptocurrency traders in the United States, the United States
(the biggest market), Nigeria, or any other country, but restricting or
banning mining activities in China is like holding the market by the
jugular and strangulating it.
As mainstream miners close shop, leaving the stage for the marginal players, and investors digest the implications of a crypto market without sufficient mining, panic ripples the market from Asia to America and from Africa to Europe, leading to widespread dumping. As of the time of writing, the value of Bitcoin, the flagship asset, had melted by over 49 per cent, down from its $64,829.14 all-time high about a month ago even as analysts suggest the popping might be far from over. Some more volatile coins have lost over 70 per cent to the crash. In a single trading day, Shiba Inu, a meme coin that christened itself of Doge (its parent variant) killer, lost about 60 per cent of its value.
Indeed, there has been plenty of speculation on whether cryptocurrencies are a bubble waiting to pop or a substance that would pass the test of time. The bubble itself found an expression in the evolution of e-commerce and intensified with the proliferation of coins. But the real ‘democratisation’ of the asset took a new twist in February when the controversial billionaire, Elon Musk, announced that his company, Tesla, had stalked $1.5 billion on Bitcoin and that one could pay for a Tesla car with highly volatile quasi currency.
Soon, there was a flurry of endorsements and announcements of intentions to process trading in cryptocurrencies or accept them as means of payment came from institutional investors and payment processing firms from all over the world leading to the christening of 2021 as the year of cryptocurrencies. Prices ballooned as newcomers poured in amidst warning from the conservative investment experts. By April, the market capitalisation of cryptocurrency had surpassed $2 trillion, just as enthusiasts angled at the $1 million unit price mark as the look of success for Bitcoin.
The success and its pomp became the alarm bell central bankers needed to move in to mute the year of cryptocurrency that was moving even faster than the market players initially expected and ultimately save their jobs. Years ago, in 2017, when the world was only musing over the confusion about the fast-rising popularity of Bitcoin, Ecuador moved ahead to launch a semblance of CBDC, emerging the first country to do so. Its decision, though laughable then, has become a global template as governments panic over the fate of the currencies they issue.
On May 20, the Federal Reserve Board Chair, Jerome Powell, announced that the U.S. Fed would publish a paper in the summer that would explore the implications of issuing a U.S. CBDC to complement the research already underway. The Bank of England was a pioneer initiator of the CBDC proposal. China’s People’s Bank of China (PBoC), Bank of Canada (BoC) and central banks of Uruguay, Thailand, Venezuela, Sweden, Singapore among others, like the CBN, are looking into the possibility of introducing central bank-issued digital currencies.
The environmental safety concern is now being seen as a smokescreen for asking Bitcoin miners to leave China as the Asian giant’s aggressive pursuance of digital yuan takes the centre stage. Russia has been moving very fast with the conceptualisation of the CryptoRuble, announced by Vladimir Putin in 2017 while Venezuela is reportedly working on a CBDC called petro.
Sadly, national governments are not free from the altruistic motives adopters of the technology are being accused of in their involvement in the crypto market. For instance, it is being speculated that a major reason Putin is interested in blockchain is the fact that the transactions are encrypted, making it easier to discreetly send money without worrying about sanctions by the international community. The speculation gained traction after the Financial Times reported in 2018 that one of Putin’s economic advisors, Sergei Glazyev, said during a government meeting: “This instrument (the CryptoRuble) suits us very well for sensitive activity on behalf of the state.
We can settle accounts with our counterparties all over the world with no regard for sanctions”.
China, on its part, is being accused of seeking more control of individual wealth through the digital yuan.
But beyond these conspiracy theories weighed against the pains inherent in wide swings of cryptocurrencies, the world has tasted the anonymity, quick fortune and convenience of crypto coins. These set tall targets for CBDCs, which seek to marry the convenience of cryptocurrencies and surety of a fiat currency as a store of value to reset the digital currency evolution.
If they (CBDCs) do not meet these attractions – quick returns, convenience and anonymity – the ongoing onslaught may only mute the year of cryptocurrency but may never go close to killing the obsession as a technologically-savvy world will fight back with everything than to ditch the lure of crypto trading for a promise of good faith.
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