Can crypto currencies kill central banking? – 2

Continued from last week

We continue today by looking deeply at what Crypto currencies portend for the currency monetary system and why the Central Bank of Nigeria – and now the Security and Exchange Commission- has discouraged transacting in them through our banks.

It must be recalled that the idea of crypto currencies started out as a reaction to and rebellion against the current system of central banking and the regulation, which its enthusiasts believe to be quite corrupt and, therefore, unfit for the purpose. The question is whether central banks around the world (none of which can possibly or openly support the current crypto currencies) will sit by idly and allow itself and its history to be summarily liquidated. The central banks do have some very solid points against the survival and growth of cryptos. Some of them are:

• Sanwo-Olu seeks private sector aid for greater Lagos
• Edo enforces riders’ permit for tricycles, motorcycles

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 crypto currencies 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 crypto currencies and that drives the demand.  But the volatility remains. With no underlying fundamentals, traders trade the wind. What is more? This limitation shows that crypto currencies 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. Crypto currencies begin to resemble a contraption designed by idealists, some of whom say they want to create an ideal and digitised 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?

Fight to 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 crypto currencies 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 crypto currency 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 crypto currency 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 suggests it is for crypto currencies. 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 crypto currencies 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, organised, and backed by government. Cryptos are not. Till date, only five countries have issued their own crypto currencies 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!