The year 2019 will be remembered as the one when bitcoin and cryptocurrency in general went main-stream, at least in the lesser sense of the word. It was during that year when high profile politicians signaled that the growth of this innovation is proving to be a challenge to the long established way of managing monetary policies.
The United States President, Donald Trump, is the most high profile figure to attack both bitcoin and the Libra stablecoin—Facebook’s proposed cryptocurrency—for threatening the established financial order.
In general, the charge sheet against privately issued cryptocurrencies ranges from terrorism funding, tax avoidance to aiding organized crime. Only recently, the Financial Action Taskforce (FATF) said it now believes that stablecoins pose a bigger threat to global financial stability than pure cryptocurrencies.
For regulatory bodies stability equates to monopoly, so when they say stablecoins are a threat to global financial stability they are referring to a threat to monopolies that control currency or money supply.
First it was bitcoin and now it is the stablecoin which is a threat to the status quo. This latest communication coming from FATF only reaffirms the notion that financial authorities around the world cannot and should not be challenged.
For several decades central banks have never had to content with currency issuing rivals and this perhaps helps to explain why seemingly all governments and central banks are singing from the hymn book on this issue. Dissenting voices are routinely muzzled.
Fortunately that may not continue to be case anymore, that is if the recent statements by the Swedish central bank head are anything to go by. Riksbank governor Stefan Ingves, was recently quoted just stopping short of endorsing privately issued cryptocurrencies, in particular Libra.
According to the media report, Ingves believes privately issued currencies have been integral in cajoling reluctant central monetary institutions into reforming.
In other words, without the threat from cryptocurrencies like bitcoin, central banks like Risibank will not even consider issuing tokens like the proposed e-kroner.
In fact, today many central banks are contemplating issuing similar tokens because they fear privately issued currencies might drive them out of business if they don’t.
Meanwhile, another high profile central bank figure to come close to the same conclusion (as Ingves) is Mark Carney, the governor of the Bank of England (BOE). Unlike some of his peers, Carney has not taken a hard-line stance against privately issued cryptocurrencies. In fact, reports even suggest he may be open to a token like Libra.
According to Carney’s BOE, privately issued cryptocurrencies like bitcoin (and probably Libra) will not threaten the UK’s financial system anytime soon. Bitcoin has unresolved issues that prevent it from scaling hence it cannot overhaul the present system so it seems.
In a paper titled ‘Written Evidence’ published in 2018, the BOE remarked that the widespread use of a non-sterling cryptocurrency within the UK could indeed impair the Bank’s influence over monetary stability.
However, the same document shows that the BOE is confident this (diminishing of influence over monetary) will not happen anytime soon because pioneering cryptocurrencies like bitcoin face significant capacity constraints and so they cannot handle the payment volumes required for them to usurp the pound sterling.
To illustrate, every day in the UK, more than 30 million electronic payments are made through Bacs and Faster Payments. In contrast, bitcoin’s global peak capacity is around 0.6 million transactions per day which as it stands now is insignificant.
It is this scaling challenge that convinces the BOE that no decentralized crypto-currency platform is currently capable of handling more than a fraction of the UK’s payment needs. Granted, a lot has happened since the release of this document and perhaps this may not be the case anymore.
In the meantime, Carney and his colleagues believe only a central bank digital currency (CBDC) issued by the Bank of England will be more efficient than any privately issued currency. A CBDC combines the advantages of blockchain that are seen in privately issued currencies with those that come from a centralized authority.
Yet, it is also fair to say that the BOE is only now mulling such a (CBDC) launch because the possible benefits of such a token have been made apparent by privately issued cryptocurrencies. BOE proposals are very much in line with what Ingves observed, privately issued currencies have been pivotal in forcing central banks to innovate though few monetary policy officials will ever publicly admit to this.
For crypto advocates it clear that there is a caveat to both Carney and Ingves’ overtures to the cryptoworld. The stance taken by both men and the organizations they represent is founded on the belief that central banks should now take mantle away from private players and thus remain as the sole issuers of currency under a reformed format.
Ultimately all central banks want a return to the status quo prior to 2008 a period just before the launch of the first cryptocurrency, the bitcoin. It is only the way they approach the challenge posed by privately issued cryptocurrencies that sets central banks apart. While BOE and Risibank are more conciliatory in their approach, others like the South African Reserve Bank are more brazen in their opposition.
For example, a consultation paper released by the South African Reserve Bank earlier in the year shows the true extent of this misguided belief. The paper actually accuses privately issued cryptocurrencies and their issuers of ‘infringing’ on its sole right as South Africa currency issuing body.
Seemingly monetary authorities generally suffer from amnesia of sorts when it comes to this topic. They conveniently forget that it is the presence of the same cryptocurrencies that made them realize and acknowledge that their fiat system is no longer sustainable yet they want cripple these currencies even before they have garnered widespread usage.
In fact, it seems more logical to conclude that central banks will continuously reform if this threat from cryptocurrencies persists.
History of opposition to privately created currencies
Unfortunately, such logic has not prevailed when it comes to issuing currencies and this phenomenon is quite widespread. Governments and monetary authorities are headstrong when it comes to anything that compete or mimics a national currency. For example, when a non government organization (NGO) in Kenya, Grassroots Economics created what it termed a community currency, the government responded by arresting and jailing leaders of this organization.
After some skirmishes, the government later relented and the project was allowed to proceed. Now preliminary results suggest this now blockchain supported stable currency initiative is improving the quality of life for that country’s rural population. Aptly called community currencies, such tokens are designed to circulate alongside and not against national currencies.
The Sarafu Network—as this Kenyan community currency initiative is known—began testing in August 2018 with the first-ever tomato traded on the blockchain. In addition to the thousands of wallets created, there are currently one million unique trackable blockchain tokens have been issued while 2500 businesses, schools and clinics are in the Sarafu Network. According Grassroots Economics, 61% of on-boarded businesses experienced an increase in sales revenue while 36% of users of these currencies reported an increase in savings.
The wallets are owned by locals who work as farmers, school teachers, retailers, healthcare providers and more. A farmer can now receive payment in village’s local currency, which she can then use to pay for her child’s school fees, and so on.
The financial inclusion cause
This Kenyan scenario shows that private initiatives are also better placed to address the longstanding problem of financial exclusion, in addition to forcing central banks to reform. According to the 2017 World Bank Global Financial Index, 1.7 billion people are unbanked globally and a majority of these are found developing countries like Kenya.
Indeed financial institutions in countries like Kenya have seemingly failed in reducing the number of adults that are unbanked yet a small NGO like Grassroots Economics has made more headway in just a few years. The reality is that the presence of privately issued cryptos has been beneficial to the financial inclusion cause in Kenya.
Of course it would be amiss to talk of financial inclusion in Kenya without mentioning M-Pesa, the country’s famous mobile money service. This mobile money service has been instrumental in reducing Kenya’s unbanked population.
According to the same World Bank report, nearly 73% of Kenya’s adult population is listed as having a mobile money account. Interestingly, the reports states that percentage of adults listed as having a mobile money account only has always been higher (2014) than those with a regularly bank account and by 2017 it had grown even further.
While this Kenyan experienced is mirrored by many African countries, the experience elsewhere on the continent has shown that this success can easily be reversed by central banks, which are obsessed with controlling the financial system than promoting the interests of those presently marginalized. The Zimbabwean case makes this point more clear.
As it stands now, the Reserve Bank of Zimbabwe’s (RBZ) money laundering concerns are more important than the financial inclusion of Zimbabwe’s marginalized. It was supposedly this concern that drove Zimbabwe’s central bank to censor country’s popular mobile money service Ecocash in late September 2019.
Weaknesses of centralized systems
It should interest the reader to know that the World Bank financial index report of 2018 ranks Zimbabwe as one of the countries with highest numbers of adults with a mobile money account, at 50%. In spite of this, the RBZ chooses to blame this innovative service for enabling money launderers and illegal currency dealers whose activity has hurt the country’s national currency.
So in order to curtail these elements, the central bank went on impose cash in and cash out limits, which are unrealistic given the country’s hyperinflation environment. While these limits were aimed at currency dealers and money launderers— who are the minority—the effects are far reaching.
As data from the same RBZ shows, mobile money now dominates the country’ micropayments in terms of volume of transactions, with one service provider, Ecocash accounting for close to 95 percent of the total. Given this background, one realizes that imposing draconian limits on mobile money transactions only hurts those without regular bank accounts. The intended targets of such regulations will always find ways to circumvent the new regulations.
Again this Zimbabwean experience underlines why private players still have a place in the quest to bring financial services to the poor and the marginalized despite the opposition. Indeed privately issued cryptocurrencies are resistant to the kind censorship that authorities have exercised over the mobile money service. Adopting privately issued cryptocurrencies is best play for those who want to shield their earnings or wealth.
Meanwhile ordinary people need to realize they cannot continue to be victims of a system that only benefits a few. Privately issued currencies are the only way the marginalized can insulate themselves from the excesses of an out of control central bank.
In countries where there is heavy censorship of the monetary system, privately issued currencies are the only way people they can voice displeasure at such a system. This in turn forces officials to rethink some of their ill advised decisions.
Whichever way you look at it, privately issued cryptocurrencies are proving to be useful and all right thinking people must support them.