Sunday, February 07, 2021 / 11:37AM / By Tope Fasua / Header Image
"The traditional financial system is deeply rooted, organized, and backed by government. Cryptos are not... At least not for now!"
First, a bit of history. A supposed Japanese named Satoshi Nakamoto started the first bitcoin sometime in 2007. Indeed, nothing is known about whoever started the concept apart from what they claim to be. No pictures. The name has been indicated as a pseudonym (fake), and so also may be the nationality and the current age of forty-five (45). What is not in question though, is the bitcoin net worth of Satoshi, who could be a man or a woman. $8.8 billion is the figure, at 2020 prices. The fuzziness around founder-ship presents the first contradiction in the crypto saga, for a system which seeks to achieve total transparency in transactions was birthed on anonymity.
NB: Satoshi Nakamoto is the name used by the presumed pseudonymous person or persons who developed bitcoin, authored the bitcoin white paper, and created and deployed bitcoin's original reference implementation. As part of the implementation, Nakamoto also devised the first blockchain database.
The idea was to create a different currency system - and if you like, entire financial system - that short-circuits the current traditional one. This was borne out of a need to rebel against current fiat currencies.
Now, in Economics, we call today's currencies 'fiat currencies' because they are created by fiat and command the value on their faces, because governments say they should. Fiat is force or command. Before the global adoption of fiat currencies, money was backed by other assets such as gold.
The proponents of cryptocurrency believed that there is a need to push back and do something different, that will mimic the attributes of a gold-backed currency in view of durability and scarcity but do better than the current system by being smart, secure and not possible for central banks to issue at will. There are also other known failures of the current financial and currency systems, notably bank failures and bailouts, lack of transparency, inefficiencies, and excess charges which make a number of the bank executives and even regulators exceedingly rich. Nakamoto and co believe that there is a need to stop the exploitation of the masses (that is an irony today though, given Nakamoto's net worth).
So, from get-go we have to understand that cryptocurrencies declared a war on the traditional banking and financial system. And the uptake has been frightening even if the road is laden with booby traps which we may be able to discuss shortly.
A friend, Nnamdi Nwizu, informed me that one of the first known bitcoin transactions was for the purchase of a pizza. 10,000 bitcoins was exchanged for a pizza. Today, 10,000 bitcoins are worth $300 million or anything like N14 billion. See the meteoric jump. This kind of phenomenon has attracted a lot of people to acquire and keep cryptocurrencies. But we have also seen much volatility in the prices of these cryptocurrencies, a number of which are said to be scams. Imagine an asset whose price could fall overnight by 60%? Nigerians who are investing in it should be clear about something; they are merely riding the waves. Nothing underpins these cryptocurrencies.
As a fact, far more cryptocurrencies have failed than have succeeded. There are about 4,000 cryptocurrencies around today with just a handful of them being real or successful. This article states that 1,000 cryptocurrencies have failed, making away with billions of dollars from people who wanted to play the market. The purpose is almost defeated because the focus in now simply on probable gains that people can make from getting in on the action. In 2019, a Canadian cryptocurrency Quadriga went down with $250 million of investor money when the founder, Gerald Cotten was said to have died while honeymooning in India. Those whom he duped are calling for his body to be exhumed.
So, just as the traditional banking and finance system is flawed, so also is the proposed replacement - cryptocurrencies. I will shed a bit of light below. Given that no system is perfect, my concerns are:
1. The anonymity it provides is a haven for criminality.
2. What drives prices and is there any opportunity for abuse?
3. If there is no regulator are a few people likely to take advantage?
4. What causes volatility in prices?
5. What happens when a coiner dies? This is very important in this age of a thousand deaths.
6. How exactly are coins mined and who has ability to mine?
7. Do we in these parts have the electric power and computing capability and speed to mine? Does that not skew the market already?
Starting with my last concern, I realized that the mining of these cryptos is the real work. I then realized that it takes about 10 minutes to mine one coin, but you require 72,000 Gigabytes of electricity to do this. I converted 72,000 gigawatts to megawatts and found it was a mere 72 million megawatts. The whole of Nigeria still tries to generate about 5,000 megawatts. So, obviously there is a disadvantage here. Apart from those who somehow have the capacity to mine these coins, aren't other coiners just gambling or at best just disguising some of their wealth in the name of investing? On my concern with mining, Nnamdi opines that "You need super computers, set up all in a warehouse space or so to achieve the mining power, and it consumes a lot of electricity, which funny enough counts towards the cost of transactions. This is what makes it too hard to copy and no, we are not even close locally to the kind of mining tech required in Nigeria.
I also found out that when most coiners die, no one is able to access their investments which ab initio are encrypted with passwords, passphrases and whatnot. People don't usually plan to die.
Source: Tope Fasua and BankingHub
Now, this is where regulation helps in the financial markets. Apart from deposit insurance which kicks in in the event of collapse of an insured and regulated financial institution, the relations of a dead account holder in a traditional bank could still have access to their balances. This is also where we have to let the usually young revolutionaries behind and in support of cryptocurrencies that history matters, and the traditional banking system had benefited from centuries of experience, battles and dialogue.
The single story that all the bankers are ripping the rest off may not be 100% correct. The traditional system and indeed the fiat currency system, does have their own merits. In the case of Gerald Cotten the founder of Quadriga crypto in Canada, his newly wedded wife Jennifer Robertson (a Canadian real estate developer) said everything about him was encrypted and so she had no knowledge of what he did with people's monies. He was said to have died en route doing some charity in India. An Indian doctor signed his death certificate but most of his 76,000 victims don't believe he is dead.
On the question of volatility, my friend Nnamdi asks "with Bitcoin going from $3k to $30k in a year, how does one trade with something so volatile?" I checked the price graph for Bitcoin since 2009. The prices were stable at about $2,000 till around 2017. Since then, it has been quite a ride, hitting $14,000 sometime in 2018 before receding to $4,000. Today, a bitcoin trades at over $40,000 which is an all-time-high. It seems unlikely that the current meteoric rise will be sustained.
On the question of what exactly drives prices, one of the listed advantages of cryptocurrencies is 'scarcity'. This is also one of the attributes of good money i.e., money should not be just anything you could pick off the ground. Even cowries aren't that common except by the sea. The proponents of cryptocurrency suggest that only a minimum or finite amount of the currency will be available and also that there is nothing like a Central Bank sitting somewhere printing money on behalf of a government and determining who gets what. Now that is great. However, the advantage also presents a downside. Nnamdi calls it a 'melt up' (as against a meltdown). This is because the price of cryptocurrencies seems to trend up because of the scarcity. The awareness is growing, pushing more people into trading or just buying the currency.
Having been around for over a decade now, there is more confidence that perhaps these currencies are here to stay. Also, in a place like Nigeria a lot of illegal money may moonlight as cryptocurrencies and that drives the demand. But the volatility remains. With no underlying fundamentals, traders trade the wind. What is more? This limitation shows that cryptocurrencies are limited in use for monetary policy purposes and even fiscal systems could seize up if indeed there comes a day when cryptos run the entire system.
Look at the world today, being run by a new Keynesianism by which every country is borrowing and printing just to get out of this well, self-inflicted global economic meltdown? Cryptocurrencies begin to resemble a contraption designed by idealists, some of whom say they want to create an ideal and digitized world where everyone is tracked down to the nanosecond. Are they realistic? Or is the idea even healthy for humanity? We aren't robots, are we?
A Fight to the Finish (?)
Crypto in my view is not ready for the all-out war globally. Global acceptance by the traditional economy is going to take a lot of time e.g., for farmers or market women to accept crypto. If it started as a rebellion (which is the case), then you must think of the incentive for the global economy to sign on to that rebellion with you against the devil they know. This then means that until there is global acceptance it will continue to be easy to create panic in the crypto world and big players can dump the currency when they have achieved gains. It then becomes worse than the stock market because for cryptocurrencies the fundamentals are non-existent apart from an analysis of how many are adopting the currency and who is winning between an established traditional banking system and the new kids on the block. At least for stock markets people can see some companies actually producing a tangible good or service.
The last issue I can address today has to do with the propensity for fraud. In all the analysis I have seen from crypto traders, trainers and enthusiasts in the last two days, they have always mentioned that many fraudsters are in the system. One of them mentioned that Telegram is crawling with fraudsters who have made away with people's money even before the CBN circular. With the banks being re-instructed to hands off being platforms for cryptocurrency exchanges, coiners and potential coiners will have to look for ways to trade among themselves. Some have suggested that they bring in a bit of trust (but remember that the fundamental reason for cryptocurrency is to eliminate the element of trust entirely).
Some have suggested that cryptos may still be traded but narrations should not carry any word that suggest it is for cryptocurrencies. This makes the payer very vulnerable to fraud. One chap suggested that this is an opportunity to go mainstream and consummate every transaction in crypto. He mentioned school fees but I imagine that many schools may not want to accept crypto coins. Other savvy businesses may, but I am unsure, if we have enough of those here, to be able to expand the crypto ecosystem. All I can see are speculators and a few shady monies in the horizon.
The bankers know that they are done if cryptocurrencies really take off and replaces traditional currencies. Quite a number of them have invested in cryptos just to hedge their bet. But the traditional financial system is deeply rooted, organized, and backed by government. Cryptos are not.
Till date, only 5 countries have issued their own cryptocurrencies namely China, Ecuador, Senegal, Tunisia and Singapore. The traditional system has a vice grip yet on the rest. The question of exchangability begins to pop up e.g., how many Bitcoins for one China bitcoin? And what are the histories of each bitcoin to be able to adjudge the future. There will be many errors and surprises for good or ill. Or will it be that all cryptos shall merge into a single global currency someday? Maybe, like some have suggested and as is already happening, the big players like big banks will hijack the whole concept, and ram it all back into traditional banking or offer it as option. I have also seen that some guaranteed cryptos exist, tied to assets or existing currencies. Does that not defeat the purpose? The answer my friend, is blowing in the wind. Oops! Wind again!
About the Author
Tope Kolade Fasua is a Nigerian businessman, economist and writer. He is the founder and CEO of Global Analytics Consulting Limited, an international consulting firm with its headquarters in Abuja, Nigeria. He was the 2019 presidential candidate of the Abundant Nigeria Renewal Party (ANRP), which he founded. He can be contacted via e-mail at email@example.com
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Related Links and Post on the CBN Action
2. Central Banking and the Cryptocurrency Challenge - Call it like it is - by Tope Fasua, Feb 07, 2021
3. CBN Tightens Noose on Cryptocurrency Market - Proshare, Feb 05, 2021
4. How FBI Warned FG, CBN on Scammers Using Cryptocurrencies to Defraud the West - Thisday, Feb 07, 2021
5. Regulation of Cryptocurrency Around the World - Library of Congress
6. A Thread Explaining What the CBN Circular Means and Why the CBN issued It - Stears Business, Feb 05, 2021
7. CBN Circular on CRYPTOCURRENCY: CBN and SEC Singing Discordant Tunes - By Stephen Azubuike, Stephen Legal, Feb 05, 2021
8. The Unsettling Dust over Cryptocurrency Transactions - by James Emejo, ThisDay, Feb 07, 2021
10. Feb 05, 2021
11. More than 1,000 cryptocurrencies have already failed - here's what will affect successes in future - by and , The Conversation, Nov 21, 2019
12. Banning Cryptocurrency will Give Power to Outlaws - Emeka Okoye, Leadership, 3 years ago
13. VIDEO: 2017 CIBN forum discussing blockchain technology in Nigeria - WebTV, 2017
14. Banking and Bitcoin - Can Crypto Kill the Banks? - by Ivan on Tech, Sep 19, 2020
15. Can Bitcoin Kill Central Banks? - by James MCWHINNEY, Investopedia, Jun 25, 2019
16. Central Bank Digital Currency and its impact on the banking system: A need for a new payment system - by Zeb, Innovation & Digital, BankingHub, Aug 22, 2018
17. Why Central Bank Digital Currencies will Destroy Bitcoin - by Nouriel Roubini, The Guardian, Nov 19, 2018
The first video is an excerpt from the 2017 CIBN forum discussing blockchain technology in Nigeria. Mr. Musa Jimoh (the then Deputy Director, Payments CBN) was giving the position of the banking regulator on digital currency. CBN's position has since evolved as changes occurred in adoption, infrastructure, risks & global regulation.
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