Cryptocurrency – If you are a child of the 80s, you will no doubt remember the great philosopher Ferris Bueller’s infamous musing, “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it”. Today, life moves very fast and change is constant. COVID appears to be a catalyst for accelerated change, particularly when it comes to how we spend and the move towards the much debated ‘cashless society’. Whether this is a good or bad thing and how this affects individuals who may become financially excluded, is a discussion for another day.
Cryptocurrency, Digital Currency and Blockchain technology were understood by a few and misunderstood by many; perceived associations with the darker side of the economy and the 2013 Silk Road closure did nothing to improve their reputations. As the value of crypto assets is once again on an upward trajectory, we have had a successful public listing of an exchange and more main stream media coverage than ever before; public awareness and perception is starting to change. Many, now regulated industries, were once likened to the ‘Wild West’. From the Wild West, they evolved into self-regulation and then eventually, into the auspices of the global regulatory framework. Visa and MasterCard moving to accept cryptocurrency on their network is case in point.
Central banks investigating CBDC’s (Central Bank Digital Currencies) are very much on the agenda, with the Bank of England setting up a task force to investigate the viability of a Sterling digital currency and China leading the way in the removal of cash. CBDCs are certainly inspired by cryptocurrencies, their reasons for existence are philosophically contrasting. The backing of a sovereign bank removes the volatility of a cryptocurrency; for example, my bank note promises to pay the bearer on demand the sum of £20 – a CBDC from the Bank of England would be issued in Sterling, and £20 would be always worth £20. Although for many, is not part of the motivation for cryptocurrency the possibility that £20 today could be worth £1000 in the future? Of course, my £20 today could also be worth £0 tomorrow, which is often the accusation directed its way.
What is the real motivation for central banks to issue their own digital currency and remove cash? Financial crime and terrorist financing are huge global issues. Accepting payments, sending payments and receiving payments online requires the rails for the movement of funds and the authentication of the sender and receiver. Innovation in RegTech and FinTech is constantly reducing the friction and expense in this. This eco-system allows the identification of suspicious activity and fraud, which in turn is helping to keep us safe. It is also eating the lunch of legacy financial institutions – and they need to evolve if they want to compete. In the regulated world, all of the above are not the issue. It’s the unregulated underground world where the issue lies.
In December 2020, it was reported that £50bn of bank notes issued by the BoE into circulation could not be account for. Where is that cash and what is it being used for? In a cashless society, with a digital currency, this would cease to be an issue. In theory, every note issued would be accounted for, the holder known and identified. Some might see this as a ‘Big Brother’, overreach and control by the state; on the other hand, if you have nothing to hide, then you have nothing to worry about – the reward in the fight against money laundering and all that goes with it, is surely a change for the better and a contributing factor to a safer future for all.
So, what of the future, the two sides of the virtual coin we may say. From one side, the digital asset perspective, the highs of mid-April saw a correction in the values of the most traded assets possibly down to one of the wealthiest individuals on the planet, playing a small part in both (their motivation behind that, is open for debate). We also have China’s prohibition of banks from accepting cryptocurrencies, playing its part also (again, just an opinion, but always on the cards given the ambitions of China to be a global Blockchain superpower, with its national digital currency part of that plan). Prohibition, often a precursor to regulation.
China cannot achieve this alone, it requires other countries to adopt and create their own CBDC’s – this step change, which I believe, is a foregone conclusion.
The other side of the virtual coin is the adoption of blockchain technology and digital currency being an agent for change in the financial system. Such change as this has not seen since the Chinese moved from physical objects as a medium of exchange, to their miniatures cast in bronze that eventually became coins and then one hundred years later, paper money. Is history repeating itself with China being the first adopt its own digital currency? By the time Marco Polo travelled along the Silk Road in the 13th Century, China already had an insight into money supply well ahead of its time. Perhaps there is a symmetry here, in this being the beginning of the next evolution in how money is issued and how value is transferred. When Satoshi introduced the world to Bitcoin, as a decentralised digital currency, it laid the foundations for what we are seeing today and educated the centralized financial system to a smarter approach. From Silk Road to Central Bank, it has been an interesting journey, a journey that is only just starting; a journey that will certainly divide opinion and create debate for many years to come.
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