Money has always evolved, and this evolution has always been towards reduction of transactional friction and better stores of value. Bitcoin, cryptocurrencies, and the underlying blockchain technology breakthrough fit the mould as possibly, even probably the next evolution of money.
These are the bitcoin fundamentals:
- Only 21 million tokens or coins will ever exist (just over 18,6 million are already in circulation). Mostly these coins are intangible, although some have entered the “physical” world with products such as credit cards. Each Bitcoin is divisible into 100 000 000 units called satoshis, or ‘sats, named after Bitcoin’s pseudonymous inventor.
- They come into circulation when they are successfully “mined” – computationally developed by solving particular problems, including control mechanisms. This “mining” is energy-heavy, which constitutes one of the controversies around cryptocurrencies.
- Flow is created in a predictable way; every four years, the rate of that flow is halved. This can only continue until the cap of 21 million is reached.
- Although they are digital, they cannot be copied and shared – through the blockchain distributed ‘ledger’, we have the ability to create digital scarcity. Farzam shared that this was his “aha” moment around cryptocurrencies: 95% of our money “in the traditional world” is digital. If we have a folder for all our digital things, why don’t we have a folder for our digital means? The answer is our ability to copy and paste digital artefacts – effectively, in currency terms, the ability to “double-spend”. That’s what banks control: “traditional money” is a single token for value which cannot be “double spent”. What blockchain and Bitcoin found was the solution to double-spending that does not require the intervention of a bank or the need to trust any central party.
- By definition, Bitcoin is decentralised: no one controls it, no one can shut it down (except, perhaps, the Chinese government, and that would affect only China), no one is in charge. “The ruleset has been stable and boring,” said Simon. In a world in which trust in governments and financial regulations are low, this is appealing.
Early, wary, and scary
Outside of the independence from third-party control, users of cryptocurrencies see clear advantages. They can send money anywhere in the world, for instance, in less than a second, at less than 1c. That’s not something banks can do, and for Tanya that was her “aha” moment. “I was at a conference in the Far East and one of the speakers said: ‘if money is digital, how come I can fly my 130kg body across the world faster than you can send my money?’”
But it’s not surprising that so many of us are confused and wary, said Simon. We don’t know what to think. “We don’t know what to do with things when we invent them. It was like this with electricity – we had no idea what it was ‘for’ when it was discovered.
“It was the same with the internet”.
“From a philosophical perspective, we can think of this as the third era of the internet (mobile was the second) – now we are adding the layer of trust and commerce.”
Causes for concern relate to the lack of regulation and the fact that ownership is tied up in a code. If an owner has lost their private keys or died without leaving their private key instructions to anyone, it is almost impossible to gain access to the investment.
Moreover, the risk of the lack of regulation is increasingly evident, said Tanya. “We’ve seen a lot of graft in the crypto space. People are getting scammed out of their money every day”. However, trying to regulate cryptocurrencies through existing frameworks is nonsensical – like trying to regulate the internet like they did radio and television. “How do we have regulation which isn’t just about reproducing the regulation of the old system? That’s currently a big conversation.”
Will it take over?
Still, the stratospheric value growth of cryptocurrencies is legendary. From a zero base in 2009, said Farzam, the global market is now over $2 trillion.
Banks and other commercial entities were and are interested. The cost of cash, Tanya pointed out, is billions a year; and cash is risky.
When Facebook, with its 3 billion users, announced its entry into the market, the central banks dramatically sped up their own initiatives. Regulator pressure on Facebook meant its entry was, in the end, a pale shadow of the original plans, said Tanya – but the offshoot was that 85 central banks are now issuing digital currency. China is leading the way; the Caribbean has one up and running; the US and EU respectively have a “digital dollar” and “digital Euro” – and the merchant banks are exploring how to use cryptos to transfer wholesale monies around the world.
In theory, if cash were completely overtaken, commercial banks would be redundant. Their role as providers of products and services currently keeps them relevant, but that may shift. “We always thought the traditional banks would get into crypto,” said Tanya; “but the other thing is happening – the cryptos are offering more traditional services.”
“It’s an ecosystem; the volumes and use cases are growing,” added Farzam. “But we need to have humility – it has some challenges. They are being worked on. But yes, I believe the ecosystem will be subsuming the monetary system.”
The South African picture
There are up to 11 million unbanked people in South Africa. The banking system doesn’t want low-value clients. The Bitcoin network is, however, agnostic about how much value you store; cryptocurrencies are thus potentially quite inclusive.
So how are South Africans taking to it? “We’re signing up thousands of people every week,” says Farzam, who is CEO of VALR.com, a cryptocurrency trading platform. “It’s not a story of a particular demographic – we have clients from the townships and billionaires; we have octogenarians and people buying it for their babies. In the last 24 hours we’ve traded about R400m.”
Where does that leave us?
The believers will continue to adopt this new financial system, the curious will invest “only what they can afford to lose”, and the doubters will continue to watch.
Tanya had one solid piece of advice for those who’d like to dip their toe in the water: cryptocurrencies were developed to eliminate third parties. To avoid falling victim to any of the scams, go directly to a legitimate exchange.