IN my last piece, we discussed the future of fiat currency in Zimbabwe and we briefly touched on some emerging alternatives, namely cryptocurrencies and good old barter trading. Today, we zero in on cryptocurrencies: Bitcoin, Ethereum, Litecoin, AWG, etc.
This article is particularly pertinent now since the Minister of Finance has announced the country will have a real currency within the next 12 months.
There is no doubt that Bitcoin epitomises cryptocurrencies and the surge in its value towards the end of 2017 as well as the sharp drop seen in the second half of 2018, attracted interest from many stakeholders.
The unusual growth in value and volatility seen in 2018 presented exciting opportunities for investors on one hand while alarming global monetary authorities on the other.
Whereas cryptocurrencies offer an opportunity to ordinary people to preserve value, established global financial players feel threatened because these currencies look destined to disrupt the structure of global finance as we know it. Namely, cryptocurrencies are an attempt to break the central bank monopoly on money creation.
Consequently, prominent names in global financial markets have taken turns to give negative reviews of the Bitcoin and cryptocurrencies in general, often citing the currency’s limited track record, lack of regulation and volatility.
Bill Gates told CNBC that “as an asset class, you are not producing anything and so you shouldn’t expect it to go up. It’s kind of a pure ‘greater fool theory’ type of investment.”
Warren Buffet said Bitcoin is an asset that creates nothing while George Soros said it is a bubble although reports would emerge later that his fund planned venturing into cryptocurrencies. Getting attacked like that by these billionaires is equivalent to getting the death penalty. It is hard to survive after that.
Yet the attacks have so far failed to completely destroy cryptocurrencies precisely because there is one element of this currency that seems to offer a genuine alternative to the moribund fiat currency. Blockchain, the technology underlying cryptocurrencies, is the first viable attempt outside the traditional central banking system to offer an alternative to fiat money.
In very simple terms, Blockchain technology pre-empts the problem of over-printing of money. Ironically, the prominent figures attacking cryptocurrencies hardly contest the potential of Blockchain technology; they just don’t like the digital currency.
For instance, there is a finite amount of that currency which can be mined or produced, about 21 million to be exact. So any attempt to produce beyond the limit will be rejected by a network of computers that perform verification before any addition to the Blockchain is validated.
In other words, cryptocurrencies are an attempt to cure the twin problem of inflation and currency depreciation caused by producing money disproportionate to a country’s output levels. As we explained before, central banks are institutions used by states to support their quest to live outside their economic means. This is achieved through either, the issuing of financial instruments like Treasury Bills (TB) and Negotiable Certificates of Deposit (NCD) or currency printing.
To illustrate, during the global financial crisis of 2008, a bailout fund known as Troubled Asset Relief Programme (TARP) was created on behalf of the US government. The TARP was a response to the sub-prime loan crisis that had engulfed the US financial system.
The US government wagered that by pumping about US$700 billion into troubled businesses, it could stop the total collapse of the US economy.
Since the US government did not have the US$700 billion, it relied on the US Federal Reserve’s quantitative easing — euphemism for currency creation — to finance the bailout.
To illustrate this, three years prior to the global recession, the Euro-dollar exchange rate was € 1:US$1,25 and it went up to € 1:$1,4 at the height of the sub-prime loan crisis in 2008. However, by December 2018, the US dollar had recovered to €1:$1,13. The same is also true with respect to dollar/yen exchange rate or dollar/rand exchange rate.
So in a way, the United States was able to minimise the effect of quantitative easing (currency debasement) on its economy by virtue of the perceived strength of its currency. Since countries continue to hold the US dollar as a reserve currency, they thus unwittingly helped the US by absorbing some of the inflation burden that resulted from the US Federal Reserve actions.
Smaller countries often attempt to copy the US government’s strategies but the dynamics are different hence the outcome is often devastating.
For instance, Zimbabwe’s government intervened in the economy through state-funded programmes like command griculture as well as the bailing out of loss-making state owned companies. Such expenditures are financed through Zimbabwe’s own form of quantitative easing — TBs and central bank overdraft.
Unfortunately for the RBZ and government, Zimbabwean money only circulates inside Zimbabwe, it has no appeal outside the country. So when government initiated these unplanned expenditures, the negative effects of this form of currency debasement will be felt quickly because, unlike the United States, Zimbabwe cannot spread the inflation burden.
So after its introduction two years ago, the bond note now looks destined for a collapse similar to that of bearer cheque or the Zimdollar. The issuing of TBs or the printing of money are having a dilutive effect on the value of money.
Cryptocurrencies like Bitcoin or gold backed tokens like AWG can potentially offer countries a break from the situations explained above.
If what occurred in the United States in 2008 had happened in a cryptocurrency dominated environment, then the US government would have been forced to find other ways to solve the crisis since it could not ease its way out. Deep spending cuts would have been initiated and inefficient companies would have been allowed to collapse. In fact, the US would have been forced to carry out economic reforms similar to those it is now prescribing to Zimbabwe.
Cryptocurrencies have a potential to force governments to live within their means while bringing back confidence into the global financial systems. For smaller central banks like the RBZ, holding cryptocurrencies as reserves will provide cover in case bigger institutions like the European Central Bank or the US Federal Reserve pump billions into financial markets again.
However, opponents of cryptocurrencies often cite the ability to transact anonymously as their main line of attack against Bitcoin. Criminal gangs, money launderers, tax evaders and terrorists could be using cryptocurrencies to finance their operations.
Also, the possibility of losing digital currencies because of cyber-theft, bankruptcy of a digital currency exchange, or volatility in the price of digital currencies are some of the concerns most potential investors of cryptocurrencies.
However, some of these concerns have been addressed by new emerging cryptocurrencies. The intense competition in this market will assure potential users of safe and legitimate innovative products. It is instructive to note that advanced economies like Japan have rejected fear and cynicism espoused by opponent s of cryptocurrencies.
Instead, these have chosen to incorporate cryptocurrencies in the payments system because of the promise they hold.
Zimbabwe should take a cue from Japan and other progressive countries by adopting cryptocurrencies and allow the deepening of financial services that are presently not widely available.
Zimwara is a writer and analyst based in Harare. You can contact him on 0771799901 New Perspective articles are coordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES) Email; firstname.lastname@example.org and Cell +263 772 382 852.