The topic of cryptocurrencies, and bitcoin more specifically, tends to stir up diverse opinions. Some feel that the emergence of these currencies with no central control and no respect for national boundaries poses a real threat to the security of nations, while others feel that bitcoin represents the future of global banking.
Recently, Brainstorm hosted a roundtable to discuss the impact of this phenomenon and while participants were generally bullish about the future of bitcoin as a currency, opinion was divided over whether the currency itself or its underlying blockchain technology would have a greater impact in the long term.
Saurabh Kumar, CEO of In2IT Technologies South Africa, says that when it comes to both bitcoin and blockchain, the market is taking a wait-and-see approach towards bitcoin, but investing heavily in technologies powered by blockchain.
“This is especially true in the area of smart contracts, where companies are looking to take advantage of the distributed ledger nature of blockchain. With a distributed ledger, you don’t need a central authority to hold contracts. When people ask if blockchain is a fad or not, I say watch the cash. And reports say that $2.4 billion was put into creating apps around blockchain last year.”
Leslie Horne, partner at IBM Global Business Services South Africa, comments that the enthusiasm around blockchain could bode well for cryptocurrencies in the long run as it will create more comfort around the distributed nature of the cryptocurrency.
“Blockchain is a platform for innovation, to do things differently and solve a lot of the issues that we had before, such as cost and speed of delivery. A lot of the vendors have seen the opportunity and they are pushing blockchain quite hard. I’m not sure that there is the same level of others pushing cryptocurrencies and as a result, blockchain is top of mind, while cryptocurrencies not so much.”
Stephen Cakebread, Microsoft’s Azure principal solutions specialist, agrees that the current investment in blockchain could be the trigger for increased use of cryptocurrencies in the future.
“In terms of currency adoption, should we not be looking at blockchain version 2.0 driving the use of smart contracts? This could be tied in to the use of cryptocurrencies. When you buy a car, the contract could indicate the chain of custody of that vehicle so you could see exactly how many times it had been bought and sold and who had owned it. But in addition to the contract, the actual transaction could be embedded into the contract and that would be the trigger for the adoption of the currency.”
Play the long game
Darrel Orsmond, industry head for Financial Services at SAP Africa, adds that the focus needs to be on the long game, and in order to drive acceptance of cryptocurrencies, pushing blockchain may be a useful strategy. It’s not, however, that blockchain and cryptocurrencies are bonded together and that they will succeed or fail together.
“Cryptocurrencies have their own journey to navigate because there are so many other stakeholders in the game. The difficulty is that many of those stakeholders hold an effective veto, meaning they can block them should it not be structured in a way they can use it.
“For example, in the banking sector, national regulators have requirements that have to be satisfied and the moment something goes wrong in the cryptocurrency - someone loses his shirt, or someone uses it to buy illegal drugs - then the regulators may take that opportunity to clamp down on these new currencies. The fact that similar things happen inside the traditional banking sector will not be a factor.”
The issue of regulation and governance loom large in the discussion.
Fred Baumhardt, CEO of Curve Group, comments that bitcoin can’t thrive or even survive if people are only using it because, ‘it’s cool!’.
“It’s relatively simple for government in large countries to shut down trading in the currencies, especially in some countries with more autocratic leaders.
“History teaches us that when something becomes big enough to fly above the radar, it is going to get regulated. Let’s take aviation for example: planes were cool and they were unregulated, but the moment planes started falling out of the sky and people started dying, regulation followed pretty quickly.”
Don’t fight regulation
He adds that the future of global cryptocurrencies is going to be determined by the global temperature at the time. Right now, the global financial market hasn’t reached that point. Some countries like Columbia have banned bitcoin completely, while others have permitted it. But once it gets large enough, there will be a reckoning and regulation will happen.
Lorien Gamaroff, CEO of Bankymoon, is one of the true believers in the future of bitcoin as a global currency. While other panellists see blockchain adoption as a precursor that will prepare the world for the distributed nature of cryptocurrencies and bitcoin, he feels that the bitcoin moment is now.
“If you think about it from a global macroeconomic point of view, there are many things happening in the world today that are going to drive bitcoin as a currency and a store of value,” he says.
“There is a global movement where people are being pressured out of the existing financial system and looking for a hedge against trends like hyperinflation. This means that people are going to be looking for alternatives and, traditionally, this was precious metals such as gold and silver.
“Today, we live in a digital world and we want to remit money around the world. I think bitcoin, and to a lesser extent other, alternative currencies, is going to turn out to be the actual revolution that creates a space where people can move their wealth into a currency that is not governed and not subject to issues such as inflation and works great when it comes to moving value around the world.”
Baumhardt, while striking a more cautious note, agrees with Gamaroff on the value that bitcoin holds as a store of value.
“I love the comparison to gold and silver and you can add in treasury bills and bonds as financial instruments that serve as a store of value. However, if you want the currency to take off, you need to focus on the issue of acceptance.
“Simply put, the transactional dynamic, especially in Africa, will keep widespread payments level adoption relatively low because there are faster, cheaper and more efficient ways for people to transact. If you look at the average Tanzanian or unbanked South African, their requirements are relatively simple. Store some value and ensure that all the merchants accept it.”
He gives the example of what happens when people receive payments from Sassa. Typically, they draw all their money from the ATM as they know that cash is the only medium that is universally accepted. One of the reasons that a system like mPesa was so widely adopted in Kenya was that acceptance was almost universal.
“So for the next three to four years, bitcoin will be a fantastic store of value and the higher up the capital chain or more advanced the enterprise, the stronger that will hold. But if you talk about digital currencies, it suffers from the same dynamic that if you can’t accept it, it will not become pervasive.”
Orsmond adds that the industry should not underestimate the power of ordinary citizens in determining the fate of bitcoin.
“I’m talking about the average consumer who is frustrated by the amount of fees they are paying to their bank and who are not feeling like they are getting value for money. It’s the same potential groundswell that got Donald Trump elected, that results in the refusal of Gauteng motorists to pay their e-tolls, that has people looking for ways to rebel against an unfair system.”
A key question that keeps coming to the surface is what would banks and financial regulators do if bitcoin were to establish itself as a major player in the payments space. The issue is that if banks start to see an impact on their bottom line from rising use of cryptocurrencies, they are more likely to push for strong regulation to protect their existing business.
IBM’s Horne comments that when it comes to the regulation of bitcoin, the currency is more likely to get a sympathetic hearing in the rest of Africa than it is here.
“On the rest of the continent, the banks have more challenges with unbanked citizens, the cost of transfers and shortages of cash, and they may be more accommodating. They are competing with the unregulated part of the economy as well and so they may be happier to deal with new technology because it helps them.”
South African banks may not be quite as enthusiastic as they have much greater penetration and, therefore, more to lose.
Setting the tone
Baumhardt points out that when it comes to financial regulation, there is an established hierarchy in the speed with which banks adopt new regulations.
“When it comes to the implementation of new regulations for emerging financial technologies, countries such as Sweden, Norway and the Netherlands are typically the leaders and set the tone for how the rest of the world will go. The UK and the US follow soon after the leading countries and African central banks are typically four to five years behind that.
“What we have seen is that the leaders have decided to accept and establish programmes to help foster adoption of cryptocurrencies,” Baumhardt says.
He adds that it is important to not look at regulation as a bad thing. What would be a negative situation is that if the South African Reserve Bank held off on regulations until something negative happened and then there would be pressure to act in a way that may not be entirely rational.
“We need the Reserve Bank to take the lead and put provisions into the FICA Act to protect bitcoin and other cryptocurrencies from being shut down by a knee-jerk reaction. We should be saying yes to the cryptocurrencies and bitcoin rather than trying to shut them down. This is where the industry needs to work with the regulators to ensure that both sides are catered for.
“You don’t put brakes on a car to slow it down, you put brakes on a car to go faster more safely,” he says.
The good news is that the SA Reserve Bank is already looking at cryptocurrencies and taking a wait-and-see approach.
“The SA Reserve Bank is looking to what countries like Singapore do,” says Microsoft’s Cakebread.
Gamaroff adds that he has already had discussions with the Reserve Bank and that they definitely don’t have an anti-technology stance. This is good news for an emerging technology/currency like bitcoin.
It is clear that even for old things like money, the future is digital and it probably won’t be long before you start hearing about the digital rand in dinner-time conversation.