Unpacking the Blockchain
That Blockchain technology underpins Bitcoin and other
crypto-currencies cannot be over emphasized, Blockchain is an integral part of
any decentralized digital coin. However, this technology has possibilities that
extend beyond digital currencies although ignorance seems to be the main factor
behind the apparent slow embrace of the technology.
There is no doubt, this is a fairly complex topic that is
not easy grasp but we try to simplify the main issues so that as many people
can get a good idea about this game changing technology.
Blockchain technology is loosely defined as a growing list
of records, called blocks, which are linked using cryptography. Cryptography itself
is the art of writing or solving programming codes which ultimately confirm data records, and facilitate consensus.
Each block contains a cryptographic hash of the previous
block, a timestamp, and transaction data. By design, a Blockchain is resistant
to modification of the data. As a consequence, Blockchain brings trusts between
parties, a role currently entrusted to intermediaries like lawyers, central
banks, Escrow, regulatory authorities etc hence the growing popularity.
Blockchain gives transacting parties greater control and
this is what makes the technology a hit with individuals who do not want third
parties snooping around their private lives.
Still many might find this explanation rather difficult to
grasp, so let us simplify this technology further by using an example of
Cassava SmarTech’s Ecocash application. A few years ago, the company introduced
a new function to the popular Ecocash mobile money transfer platform, the
Ecocash Savings Club.
This service allows a group of people to create a cash
pool where all members contribute agreed amounts over a particular period (commonly
known as ma rounds).
The unique advantage of the savings club over the
traditional money clubs is the transparency it comes with. With a traditional club,
one member is chosen to collect on behalf of all members and this is where
problems are often experienced. For starters, some members will not contribute
on time or will only contribute a fraction of the agreed amount and this
destabilizes the club.
The essence of such clubs is to enable members to borrow
small loans from collections made. Ordinarily members would not get such loans from
conventional banks. So if one or more members fail to honour their commitment
to contribute fully, this prejudices other fully paid up members, and often
that is how such clubs collapse.
Now the Ecocash Savings Club uses a technology that allows
members to overcome this challenge. To illustrate, each time a member
contributes to the group’s Ecocash account, a message is simultaneously sent to
all group members, informing them that member X has contributed. That way, it
is easy for all members to track the progress of deposits into the pool and more
importantly, if all members are adhering to set deadlines.
With respect to traditional clubs—which are supposedly based
on trust—the second major problem concerns the abuse of members’ funds by the
group’s trusted treasurer or any other member who has access. A person
appointed to keep the funds prior to their distribution, may be tempted to use
the money for personal gain and return this just in time before the next member
is due to collect.
Often, this breach of trust is uncovered when the untrustworthy
treasurer fails to remit the full amount to a member scheduled to receive the
funds. This happens even as all members are up to date with their
contributions.
Ecocash Savings’ Club application solves the problem by
using the same technology to inform members if funds have been withdrawn and
the identity of the member making the withdrawal. As an extra safety measure,
the technology requires two members to authorize a withdrawal, with one making the
request and the other one approving. On top of that, all members will get a
message that a certain amount of the groups’ funds have been withdrawn!
Thus this Ecocash application enhances transparency as well
as protection members’ funds from potential abuse. Any member attempting to
subvert the club rules will be identified quickly and be ejected.
The Blockchain technology that underpins Bitcoin has many
elements similar to this Ecocash Savings’ Club application, although it is much
better in many ways.
Blockchain technology eliminates intermediaries because it
uses applies a peer to peer technology in a new revolutionary way. Having such
a technology means there are no costs of paying the treasurer, his administration
expenses, travel expenses and perhaps more significantly, the risk of abuse or
fraud is avoided.
It is then hard to understand why crypto-currencies have
been subjected to continuing hostility when they offer these clear advantages.
Of course it is not so hard to understand why central banks
lead this hostility towards to crypto-currencies, they stand to lose the most
if digital currencies are widely adopted.
A report by the Brookings Institute of May 21, 2018,
discussed the growing use of digital currencies and the implications for
central banks. The discussants were Agustin
Carstens, General Manager of the Bank of International Settlements; Stefan
Ingves, Governor of Sveriges Riksbank; Urjit Patel, Governor of the Reserve
Bank of India; and Benoit Coeure, member of the Executive Board of the European
Central Bank.
When asked if crypto-currencies are going to replace central
banks issued currency, the response was an emphatic no. Their preamble was
predictable, ‘Bitcoin and other crypto-currencies are popular, but most people
don’t trust them the way they trust the U.S. dollar, the euro, or the Japanese
yen, all of which are backed by a central bank.”
This is rather absurd assessment when one considers the fact
that crypto-currencies emerged due to the dearth of trust in many central
banks. In any case, the four discussants’ opinions are far removed from the
realities on the ground in much of the rest of world, ordinary people in
developing countries do not trust central banks after their polices destroyed
national currencies not once but several times. Ordinary people have lost
lifetime savings while pensions simply disappeared when money lost value.
Zimbabwe is in the midst of another economic crisis which is
threatening to wipe out the value of bond notes, the country’s latest medium of
exchange that was introduced in late 2016. In 2008, the Zimdollar, Zimbabwe’s
currency collapsed after the central bank over printed the currency.
Venezeula
introduced a new currency in August 2018, after lopping off 5 zeros from the
previous currency, the Bolivar, but already reports suggest the new currency is
losing value fast. Iran’s currency has been tumbling since the United States
withdrew from the nuclear pact. There are many more countries with problems
with their currencies and the root causes are nearly similar.
In Zimbabwe’s case, the central bank is actually aware of
the confidence deficit it has with the majority of the population. For
instance, when it contemplated re-introducing the local currency, it had a hard
time trying to assure ordinary people that things would be different as the
currency had the backing of bank guarantee.
It is sad to note that the
assurances were not genuine as the same misdeeds that led to the initial
collapse of the local dollar, appear to be behind the current bond-note slide. In
a less ten years, the country had already returned to another currency crisis.
For Zimbabwe’s central bank, adopting crypto-currencies
might just be what the doctored ordered given its legacy of abuse of trust. For
a government that has displayed a propensity to consume more than it can
produce, digital currencies will potentially keep the both, the central bank and
government in check and stop the unrestrained issuing/printing of currency.
So Zimbabwe’s central bank should embrace Bitcoin and other
crypto-currencies to restore confidence with ordinary people, instead of
banning Bitcoin exchanges as it did earlier this year. Central bankers and
their institutions publicly condemn crypto-currencies yet behind the scenes,
they are exploring ways to starting their own digital currencies.
The RBZ
should follow the footsteps of Tunisia and Ecuador, both have issued their own
digital currencies. However, instead of creating its own digital currency,
Zimbabwe should adopt those already in use and this can partially restore
confidence.
Digital currencies and other innovations in payment systems
could increase the speed of domestic and cross-border transactions, reduce
transaction costs, and eventually broaden access to the financial system by
poor and rural households.
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