HomeColumnistsCryptocurrencies: A fad or the future?

Cryptocurrencies: A fad or the future?

Courage Masona
Economist & lecturer

LATELY, the media has been awash with news that the government of Zimbabwe is considering adopting a new currency (Cryptocurrencies).

The rumour was sparked by numerous reports, quoting head of the e-government unit Charles Wekwete, saying the government was in talks with the private sector business to help introduce cryptocurrency in the country.

However, the Minister of Information, Monica Mutsvangwa publicly dismissed the rumours. In contrast, the honourable minister clarified to the world that the government was keen on experimenting with central banking digital currency (CBDC).

It is not only Zimbabwe that is considering (CBDC) but countries in the G7 as well, such as, Canada, France, Germany and the United States, which are already making strides towards this goal.

To date there is no national central bank that has yet launched its own digital currency. However, at least 80% of central banks are researching this technology, including in the US, China and UAE.

I agree with the notion that defining a new era is a daunting task. For instance it took years before regulators and industry captains could agree on defining different types of crowd-funding, either for the sake of simply communicating or for regulatory purposes. The crypto market could not be an exception.

Cryptocurrencies are touted as technology that will revolutionise the finance sector. However, outsiders do not understand the cryptocurrency space.

The block chain environment and its implications gave rise to different concepts, which are difficult to define and categorise. For instance terms like cryptocurrency, virtual currency or digital currency are used interchangeably as if they are identical terms, though this is not the case.

It is, therefore, imperative to demystify this contemporary issue so as to help ordinary citizens to understand cryptocurrencies and inform the government on future policy options.

Cryptocurrency, digital currencies

Cryptocurrencies are a subset of virtual currencies that use cryptography to operate in a distributed, decentralised, and secure environment. They rely on a technology called block chain. Bitcoin was introduced in 2009 as the first cryptocurrency.

It was conceived by a computer expert called Satoshi Nakamoto.

Cryptocurrencies are actually a subcategory of virtual currencies, which in turn are a subcategory of digital currencies.

According to the Bank for International Settlements (BIS), digital currencies are “assets represented in digital form.

Characteristics of cryptocurrencies

Cryptocurrencies make use of block chain technology, therefore, they exhibit properties, such as, safety, transparency and irreversibility. These are the main three properties. However, some additional properties include: decentralisation, anonymity, convertibility and finite supply. These properties are discussed in detail below.

Safety

Safety is an inherent feature of block chain technology that uses encryption. All transactions are encrypted, and it is practically impossible to hack them and change the chain of transactions.

Transparency

There are three features of transparency in cryptocurrencies.

First, transactions are verified by multiple nodes of the network via a group consensus mechanism. Second, all transactions are recorded in public databases (public ledgers).

Third, all users have access to this public record/public ledger at any time.

Irreversibility

The moment a transaction is validated and a block is created and recorded in the block chain, it cannot be cancelled. The only way to reverse a transaction is to create a new one with the opposite direction.

Anonymity

Cryptocurrencies transactions are carried out by certifying the digital signatures of the participants and no other personal information is needed. This anonymity feature has raised concerns regarding using the technology for malicious practices (that is, money laundering and terrorism financing).

Convertibility

All cryptocurrencies are either directly or indirectly convertible with fiat currencies. Some cryptocurrencies (that is, bitcoin, Ethereum, Litecoin) can be converted directly to fiat currencies. All the others should be first exchanged with the former ones before being cashed out to fiat currencies.

Finite supply

Most cryptocurrencies have a finite supply. Depending on the project, this finite supply can be either exercised from the start, namely produce or offer all tokens, right from the start, or can be gradually reached over time, namely tokens will continue being created via the mining process until a specific supply cap is reached sometime in the future.

Why adopt digital currencies

Cryptocurrencies have lower transaction fees than credit card charges, particularly, for international payments. On average credit card charges range from 2% to 5% or more on every transaction. However, using the block chain, bitcoin and other digital currencies one pays a much lower fee, sometimes none.

Diaspora remittances account for about 6% of the GDP in Zimbabwe as of 2020. However, Zimbabweans many a time complain about the fees charged to send money to Zimbabwe through services like Western Union. Thus, the challenge can be solved through adoption of cryptocurrencies.

Despite the pain of paying higher fees on international transactions, the pain is exacerbated when it takes ages to see the funds appear in one’s bank account.

It is faster to receive funds through digital currency than through the traditional financial institutions. Further, digital currencies support the unbanked and underbanked.

Currently, Zimbabwe is grappling with price increases induced by exchange rate volatilities. This is a common problem in many developing countries, where central banks inflate the domestic currency to try to keep their head above water. However, with bitcoin, there is no inflation due to controlled quantity limits and the algorithms in the system.

Risks of adopting digital currencies

At the moment, there are so many digital currencies being created across different block chains, so it will take time to establish which one is the best.

Further, transactions associated with block chains can be expensive since this can take considerable electricity and gets more expensive with more transactions.

However, this might not be the case for CBDC since they are likely to be controlled by the central bank and the complex consensus processes are not needed.

Businesses are reluctant to use digital currencies as a mediums of exchange because of too much volatility in their values. For example, during bitcoin’s brief history, its dollar value has fluctuated wildly.

In 2010, the price of bitcoin ranged between 5 US cents to 39 US cents. The price rose above US$1 in 2011 and above US$1 000 in 2013 before falling below US$500 in 2014.

Over the following few years, the dollar value of bitcoin skyrocketed, reaching more than US$19 000 in 2017. But by early 2019, it had fallen back to US$3 500.

In contrast, with CBDC the value is much stabler, like paper currency, and cannot fluctuate like this. However, developing CBDC will take time and resources.

It is still a hypothetical concept across the globe and if the government decides to create one, there will be costs associated with its development.

Way forward

The long-term success of cryptocurrencies depends on whether they succeed in performing the functions of money: a store of value, a unit of account, and a medium of exchange.

Many economists are sceptical cryptocurrencies can perform the functions of money. The great volatility of the dollar prices of cryptocurrencies makes them a risky way to hold wealth and an inconvenient measure in which to post prices.

Few retailers accept them in exchange, at least so far. As a result, cryptocurrencies are excluded from standard measures of the quantity of money.

I truly believe that CBDC could be a better option as it can perform all the functions of money. Therefore, CBDC should be fully investigated and as it holds greater potential.

However, it must be noted that regulatory intervention is a critical survival factor at the early stages of any innovation. The crypto market could not be an exception. Cryptocurrencies may be the money of the future, or they may be a passing fad.

  • Masona is an economist and lecturer at Zimbabwe Ezekiel Guti University. This weekly column, New Perspectives, is published in the Zimbabwe Independent and co-ordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society and past president of the Institute of Chartered Secretaries & Administrators in Zimbabwe. — kadenge.zes@gmail.com or mobile: +263 772 382 852.

Recent Posts

Stories you will enjoy

Recommended reading