Digital money is convenient, but govts have a duty to build trust
There is no standardised regulatory framework in place to govern the use of cryptocurrencies.
The things we take for granted in our lives are reaching obsolescence. Notably, cash is poised to be disrupted by digital cash. The coming generations will wonder what cash looked like, just as our children wonder about vinyl records and phones with rotary dials.
It's been a decade since the first cryptocurrency Bitcoin was launched once Blockchain technology evolved. Now enthusiasts are considering adding cryptocurrency to their will, after the sudden demise of Gerald Cotton, CEO of Canada's largest cryptocurrency exchange QuadrigaCX, took the passwords to his grave.
While Bitcoin still accounts for more than half of the cryptocurrency market, thousands of Bitcoin variants have mushroomed based on a consensus algorithm. The agreement of a reasonable number of members for a successful payment transaction is at the heart of public decentralised blockchains. Decentralised finance almost looked plausible enough to push the banking industry and in particular central banks into an existential crisis.
Yet, cryptocurrencies have earned a bad name because of their volatility and strong association with money laundering and terrorism financing. There is strong evidence that terrorist organisations have been most bullish about Blockchain technology. Daesh famously accepted donations in Zcash and Bitcoin, which they used to buy website domains. The cryptocurrency market began to resemble the lawless cowboy countryside when the sheriff is on vacation.
The industry has been brimming with confusion about cryptocurrencies. The banking industry is afraid that cryptocurrencies would create shadow banking. While the central banks are afraid that they could undermine the government backed or fiat currencies.
Private entities have so far been dominating digital payments and cryptocurrencies.
Facebook's announcement of its digital currency Libra got central banks thinking about their own digital currency to avert the risk of losing control of the financial market.
Governments and in particular central banks will become more active in the cryptocurrency market. Although they have been studying this for years, we will see many digital currency pilots by central banks. Fiat-backed cryptocurrency from central banks will help narrow the trust deficit that the cryptocurrency market faced in 2019.
Let's face it. Of all the entities in the financial market, governments are least likely to sink into a financial hole.
A key anxiety about central banks entering the cryptocurrency market is that digital payments will no longer be private or anonymous. Yet it is exactly for this reason that cryptocurrencies transactions are suffering from the same problems as cash transactions.
They are great for Illicit transactions. Also, there is nothing absolute about the anonymity of cryptocurrency users. Law enforcement agencies are able to nab criminals by correlating publicly available blockchain transaction data with other information.
With the central banks entering the cryptocurrency market, we will see more of permissioned networks consisting of validated nodes or members.
One of the reasons why Bitcoins seem like Ponzi schemes is because they are volatile.
You could have gone from billionaire to broke in a matter of weeks in 2019. To overcome this problem, the Facebook backed Libra Association is maintaining a reserve of money that includes US dollars as well as others like British pounds, euros, Japanese yen, and Singapore dollars. A digital basket of reserve currencies is the most plausible and acceptable asset. This asset reserve backing will make cryptocurrency more stable.
Stablecoins require central banks to play a key role so that coin holders do not panic en masse and demand the return of the asset they staked. Cryptocurrencies also need sophisticated issuance rules that central banks can create.
Countries such as Australia and Brazil are building regulatory frameworks that range from KYC (Know Your Customer) and anti-money laundering compliance, to reporting for tax purposes. While the UAE central bank does not approve any private cryptocurrency, it will create a regulatory framework for local and cross-border digital payments. Financial authorities across countries need to put their heads together to arrive at a standardised regulatory framework. This will be the first step to using cryptocurrency for everyday transactions.
Yet the most anticipated development is central bank digital currencies for faster cross border transactions and everyday payments. The Chinese government is quite close to launching digital renminbi to digitise the yuan. Sweden's central bank is exploring e-krona as the digital replacement of cash. There is a consensus among financial experts that Swedish retailers will stop accepting cash by 2023.
So, where does that leave us average folks? Do I see myself buying hummus and pita bread with cryptocurrency? I would wager that we will start to use government-backed cryptocurrency for our daily transactions when it becomes mandated or when it is convenient. Consumers are moving to mobile contactless payment such as Apple Pay because of the sheer convenience of just whipping out the phone and paying for things.
In Argentina, public transport services across multiple cities accept Bitcoin. Other countries like Spain will launch transport services that will have a unified digital payment system. Yet, they will only have wide acceptance if service providers think hard about the convenience factor regardless of how safe cryptocurrency is.
Shalini Verma is CEO of PIVOT technologies
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