Cryptocurrency Versus Traditional Banking, By ‘Tope Fasua

5 min

Cryptocurrency Versus Traditional Banking, By 'Tope Fasua

The bankers know that they are done if cryptocurrencies 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.
First a bit of history. A Japanese person named Satoshi Nakamoto started the first bitcoin sometime in 2007. Indeed, nothing is known about whoever started the concept, apart from what they claim to be. No pictures. The name is a pseudonym (fake), and so also may be the nationality, and the current age of 45. What is not in question though, is the bitcoin net worth of Satoshi, who could be a man or a woman. $8.8 billion is the figure, at 2020 prices. The fuzziness around founder-ship presents the first contradiction in the crypto saga, for a system which seeks to achieve total transparency in transactions and was also birthed in anonymity.
 The idea was to create a different currency system – and if you like, entire financial system – that short-circuits the current traditional one. This was borne out of a need to rebel against current fiat currencies. Now, in Economics, we call today’s currencies ‘fiat currencies’ because they are created by fiat and command the value on their faces, because governments say they should. Fiat is force or command. Before the global adoption of fiat currencies, money was backed by other assets such as gold.  The proponents of the cryptocurrency believe that there is a need to push back and do something different, that will mimic the attributes of a gold-backed currency in view of durability and scarcity, but better than the current system by being smart, secure and not possible for central banks to issue at will.  There are also other known failures of the current financial and currency systems, notably bank failures and bailouts, lack of transparency, inefficiencies, and excess charges, which make a number of bank executives and even regulators exceedingly rich. Nakamoto and co believe that there is a need to stop the exploitation of the masses (that is an irony today though, given Nakamoto’s net worth).
As such, from the get-go we have to understand that cryptocurrencies declared a war on the traditional banking and financial system. And the uptake has been frightening, even if the road is laden with booby traps that we may be able to discuss shortly. A friend, Nnamdi Nwizu, informed me that one of the first known bitcoin transactions was for the purchase of a pizza. 10,000 bitcoins were exchanged for a pizza. Today, 10,000 bitcoins are worth $300 million or anything like N14 billion. See the meteoric jump! This sort of phenomenon has attracted a lot of people to acquiring and keeping cryptocurrencies. But we have also seen much volatility in the prices of these cryptocurrencies, a number of which are said to be scams. Imagine an asset whose price could fall overnight by 60 per cent? Nigerians who are investing in it should be clear about something; they are merely riding the waves. Nothing underpins these cryptocurrencies. As a fact, far more cryptocurrencies have failed than have succeeded. There are about 4,000 cryptocurrencies around today, with just a handful of them being real or successful.  This article observes that 1,000 cryptocurrencies have failed, making away with billions of dollars from people who wanted to play the market . The purpose is almost defeated because the focus in now simply on probable gains that people can make from getting in on the action. In 2019, a Canadian cryptocurrency, Quadriga, went down with $250 million of investors’ money when the founder, Gerald Cotten, was said to have died while honeymooning in India. Those whom he duped are calling for his body to be exhumed.
Hence, just as the traditional banking and finance system is flawed, so also is the proposed replacement; cryptocurrencies. I will shed a bit of light below. No system is perfect. My concerns are:
1. The anonymity it provides is a haven for criminality.
2. What drives the prices of cryptocurrencies and is there any opportunity for abuse?
3. If there is no regulator, are a few people likely to take advantage of the situation?
4. What causes volatility in the prices of cryptocurrencies?
5. What happens when a coiner dies? This is very important in this age of a thousand deaths.
6. How exactly are coins mined and who has the ability to do this?
7. Do we in these parts have the electric power, computing capability and speed to mine? Does that not skew the market already?
On the question of what exactly drives its 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 just be anything you could pick off the ground. Even cowries aren’t that common, except by the sea.
Starting with my last concern, I realised that the mining of these cryptocurrencies is the real work. I then realised that it takes about 10 minutes to mine one coin, but you require 72,000 gigabytes of electricity to do this. I converted 72,000 gigawatts to megawatts and found it is a mere 72 million megawatts. The whole of Nigeria still tries to generate about 5,000 megawatts. So, obviously there is a disadvantage here. Apart from those who somehow have the capacity to mine these coins, aren’t other coiners just gambling or at best disguising some of their wealth in the name of investing? On my concern with mining, Nnamdi opined that: “You need super computers, set up all in a warehouse space or so to achieve the mining power, and it consumes a lot of electricity, which funny enough counts towards the cost of transactions. This is what makes it too hard to copy and no, we are not even close locally to the kind of mining tech required in Nigeria.
I also found out that when most coiners die, no one is able to access their investments which ab initio are encrypted with passwords, passphrases and whatnot. People don’t usually plan to die. Now, this is where regulation helps in the financial markets. Apart from deposit insurance, which kicks in, in the event of the collapse of an insured and regulated financial institution, the relations of a dead account holder in a traditional bank could still have access to their balances. This is also where we have to let the usually young revolutionaries behind and in support of cryptocurrencies know that history matters, and the traditional banking system has benefited from centuries of experience, battles and dialogue. The single story that all the bankers are ripping the rest off may not be 100 per cent correct. The traditional system and indeed the fiat currency system, have their own merits. In the case of Gerald Cotten, the founder of Quadriga crypto in Canada, his newly wedded wife, Jennifer Robertson (a Canadian real estate developer) said everything about him was encrypted and so she had no knowledge of what he did with people’s monies. He was said to have died en route doing some charity in India. An Indian doctor signed his death certificate but most of his 76,000 victims don’t believe he is dead.
On the question of volatility, my friend Nnamdi asked, “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 close to $30,000, which is an all-time-high. It seems unlikely that the current meteoric rise will be sustained.
On the question of what exactly drives its 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 just be 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 prices of cryptocurrencies seem 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 cryptocurrencies and that drives the demand.  But the volatility remains. With no underlying fundamentals, traders trade the wind. What is more? This limitation shows that cryptocurrencies 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. Cryptocurrencies 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, or are we?
It then becomes worse than the stock market because, for cryptocurrencies, 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.
Fight To Finish

The 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 the 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 of the currencies, 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 cryptocurrencies, 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 analyses 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 Central Bank of Nigeria (CBN) circular. With the banks being re-instructed to hands off being platforms for cryptocurrency 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 the cryptocurrency 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 suggest it is for cryptocurrencies. This makes the player 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.

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