FCA draft cryptos findings reason for optimism or cynicism?

The UK based Financial Conduct Authority (FCA) recently released a consultation paper --Guidance on Cryptoassets— which has implications that may go beyond the UK market. Consequently, contents therein should concern all stakeholders.

On one hand, the paper makes an important admission that ‘technological aspect of crypto-currencies/assets could potentially create equality and diversity considerations for (certain) consumers. In other words, crypto-currencies or cryptoasssets as FCA prefers to call them, offer something that mainstream financial institutions do not.

On the other, the consultation document is replete with an unremitting list of harms and threats to consumers, something which compels the FCA to take preventative action. 

With such a lopsided approach, some could conclude that the FCA has already made up its mind even as it seeks for feedback from all concerned parties.

Nevertheless the FCA, which is located in London, deserves credit for taking this different approach, an invitation by a regulatory body for feedback or comments from crypto market stakeholders. This goes against the common practice in Africa where regulators simply issue decrees without entertaining questions or feedback.

London, the globe’s financial hub, is at the heart of the world’s largest foreign exchange market and is a top location for OTC interest rate derivatives. The London Stock Exchange is the world’s leading international exchange with more than 600 international listings, while 70% of global Eurobond turnover is traded in the city.

FCA’s call

It really counts for something that a regulator from this background is inviting stakeholders to help shape the regulatory structure of crypto-currency markets.  The FCA really is setting a good precedent, one that hopefully other regulators will follow.

In fact, there is a good chance that many regulators, particularly those on the African continent without a clear plan of dealing with cryptos other than just banning or issuing decrees, will simply copy and paste FCA’s findings and recommendations.  Therefore, this might just be the opportunity for crypto developers from the continent to voice their opinion about the way this market needs to evolve.

On paper, FCA’s approach acknowledges that this nascent market should be allowed to grow and that no one, not even the innovators, entrepreneurs, consumers or regulators can claim to have a perfect understanding of crypto markets and how they should be handled.

Listening to all key stakeholders will help regulators to get a better direction and understanding of this market, something which the FCA guidance acknowledges.

Part of the guidance reads, “Reliable and comprehensive data on the crypto-currency/asset market are not yet available, given the market is still in its early stages and developing rapidly.”

Size of UK crypto market

In spite of this challenge, the UK Cryptoassets Taskforce, to which FCA is part, concluded in an October 2018 report that the UK is not a major market for crypto-currencies as its findings show a fewer than 15 crypto spot exchanges with headquarters in the UK, out of a global market of 231.

In addition, they appear to have a combined daily trading volume of close to $200 million, which accounts for close to 1% of the daily global trade in crypto-currencies/assets. Only 4 of these 15 spot exchanges regularly post daily individual trading volumes above $30 million, which represents a low volume relative to the wider global market. In a nutshell, UK is a small player in this market or at least as according captured data.

Therefore one may be compelled to ask, ‘Why is the UK interested in regulating a market that is so insignificant?’ As one goes through the rest of the document, a sense of de-javu quickly sets in! The initial enthusiasm is doused by a charge list of potential harm to consumers posed by cryptoassets as the FCA prefers to call them.

Unfair characterization of cryptos

FCA’s claim of neutrality is offset by its identification of 15 ‘harms’ posed by cryptos against just the two potential benefits it observed on a small scale in the Sandbox. This Sandbox allows businesses to test innovative products, services, business models and delivery mechanisms in the real market, with real consumers in a controlled environment.

As expected, the increased speed and a reduction in cost of cross border money remittance with crypto-currencies as a vehicle for the exchange are the identified advantages from the sandbox. Surely there are must more advantages than just the two to justify the rapid growth that all regulators acknowledge!

Unfortunately, such sleazy attempts to characterize cryptos as more harmful than beneficial also reinforces the perception within the crypto community that regulators are out to stop this market from growing further.

To illustrate, a recent Financial Action Task Force (FATF) report to the G20 noted that suspicious transaction reporting linked to cryptos is rising globally. Europol estimates that £3-4 billion is laundered using crypto-currencies each year in Europe. However, this remains a relatively small proportion of total funds estimated to be laundered in Europe, however, which stands at £100 billion.

So this means most money launderers still prefer using fiat currency or the centralized financial system for their activities yet there is no alarm at this revelation by those claiming to be protecting the integrity of markets.

Backdoor control and centralization

 In the meantime, the FCA says it intends to mitigate identified harms by, among other things, encouraging ‘responsible development of legitimate Blockchain or Distributed Ledger Technology (DLT) and crypto-related activity in the UK’. This goes to the core of the matter, control and centralization, the very antithesis of decentralized public ledgers like the Bitcoin Blockchain.

The use of words such a ‘responsible’ and ‘legitimate’ here seem to imply that some within this FCA want to control DLTs, including the pioneering Bitcoin Blockchain. Again, this belies the pledge to neutrality and shows a sinister motive behind the desire to sideline permissionless cryptos.

The FCA’s consultation paper seems to suggest it knows what constitute a legitimate Blockchain and what does not. Again there is the usual attempt to divorce crypto-currencies from Blockchain, a technology which most regulators agree has many potential benefits. 

‘Bitcoin has no track record but Blockchain has potential benefits that go beyond digital currencies’ are some of the common phrases.

This cherry picking of parts of a good solution will only discourage further innovation or worse, create animosity between innovators and regulators.

Why cryptos in the first place

Regulators should always remember why cryptos emerged in the first place, it was and it still is the quest to create an efficient alternative system or generating competition for the flawed fiat currency system. The story is not just about the complexity of the innovation, it is equally about addressing the wrongs of an outdated system.

Understating the many benefits cryptos will neither translate into the popularity of central banks nor improve financial inclusion. According to a World Bank Global Findex survey, about a fifth of the 1.7 billion unbanked people say they do not trust financial institutions and perhaps that is why some crypto creators are attempting to offer transparent solutions that are not found in a central bank controlled system.

As highlighted earlier, FCA’s regulatory reach goes beyond the UK national borders hence this body has to be careful of adopting recommendations that may repress growth of cryptos where they are needed most.

There are many start-ups on the African continent offering truly unique solutions that address unique problems.The invitation by FCA should be seen as an opportunity for crypto stakeholders to directly explain or even educate regulators with facts. An organized response might just prove to be key in influencing drafting of regulation.

Readers who wish to add their voice to the process can forward their questions or comments directly to the FCA at fcacrypto@fca.org.uk or http://www.fca.org.uk/cp19-03-response-form

Crypto solutions meeting competing needs

Elsewhere in this blog I have consistently highlighted problems and challenges that slow crypto-currencies adoption. Regulatory concerns loom large in many cases, the threats against and lack of endorsement of crypto-currencies, mean regular businesses will find it difficult to incorporate these alternative currencies into their payments systems.

The unbanked, particularly those in the developing world, will be unwilling to adopt alternative currencies, if this limits their choices or if they cannot pay for essential services using such currencies. In some African countries, financial institutions have instructions not to extend banking services to crypto-currency exchanges.

This marginalization of crypto-currencies partly obscures their true value and potential impact on communities. Of course the aim is to slow down a mass movement towards cryptos, staying the execution so to speak.

Nevertheless, the same hurdles are playing a part in encouraging entrepreneurs to develop new and innovative solutions. Such solutions attempt to satisfy the sometimes competing needs of ordinary people and those of regulating authorities.

Meeting the needs

Ordinary people on the African continent want a stable currency that is recognized globally, to enable fast and secure cross border payments. Governments are more concerned with conserving scarce foreign currency reserve and money laundering issues.

Consequently innovative solutions meeting some of these conditions are emerging with some seemingly having struck the right chord.

A Singapore head-quartered technology firm, Pundi X Labs has developed a user-friendly Blockchain based solution for digitalization of any over-the-counter retail transactions, courtesy of their XPOS terminal. According to Melcom Copeland, Pundi X Business Development Director, EMEAR, this terminal enables merchants and customers to conduct crypto-currency transactions using fiat currency, and their proprietary mobile X Wallet and XPASS cards.

“What Pundi X has done is to take out the complexity and mystery of conducting crypto-currency transactions by emulating today’s current over-the counter payment processing in order to forge crypto mass adoption”, says Copeland

Potential implications for crypto adoption

Pundi X’s unique solution appears to be one of the early successes in attempts to integrate crypto-currency with the fiat currency dominated financial system.

This solution has important implications for the prospects of crypto currencies in general, because it has the potential to draw people who are attracted to cryptos, but are denied the opportunity to purchase these, often by decrees or subtle disapproval by regulators. 

This ability to top-up or draw down crypto-currencies is one quintessential attribute of the XPOS, which makes it a potential game changer in the fight to achieve mass adoption. With the XPOS, once you acquire crypto-currencies, there is no longer a sense or a feeling of being ‘trapped.’ This is because the solution enables users to either increase or decrease cryptos as well as the ability to perform everyday transactions using crypto-currency.

It is possible that when this is done consistently over a long period, some of the popular misconceptions about crypto-currencies will dissipate and more people will embrace the technology.

Pundi X says these terminal are configured to accept the most popular crypto-currencies including Bitcoin, Ethereum, Binance BNB, and their own NPXS. In addition, the Pundi X ecosystem can also list and integrate other ERC-20 based tokens and wallets on a case by case basis.

Buttressing financial inclusion 

The compatibility of the XPOS with mobile wallets makes this innovative solution potentially appealing to the unbanked population across the African continent. The World Bank conducted the Global Findex Database research in 2017 which measured financial inclusion and the fintech revolution. In its findings, the World Bank discovered that Sub- Saharan Africa is the only region where the share of adults with a mobile money account exceeds 10 percent. 

The number has been increasing exponentially since 2014 as those who could not previously access banking services joined mobile money platforms. According to the Global Findex database, in 2014, Kenya had more than 40% of the adult population with a mobile money account, the highest number on the continent then.

However, by 2017, four more countries namely, Namibia, Gabon, Uganda and Zimbabwe had passed the same 40% threshold and the continent’s trajectory suggests more countries will join this club. A mobile money account is the first important step of financial inclusion but it has limitations. For instance, cross border payments are often not possible without pre-arrangements with financial institutions. One would have to physically visit the bank, to facilitate any such transaction.

Secondly mobile money accounts are often subject to draconian limits imposed by some central banks. In other words, you cannot make purchases that exceed the set daily limit, even when you are running a legitimate business that demands bigger funds. Apparently these limits are set by bureaucrats with limited knowledge business activities in the informal sector, where many mobile money account holders trade.

The Pundi X solution potentially solves this problem as it can also be configured to accept traditional mobile wallets, in addition to crypto-currency wallets. This means the previously unbanked can now transfer funds into such wallets, which are recognized globally and make payments beyond national borders. This is all done without having to visit a physical building of a bank.

With such features, it will be difficult to stop or slowdown the crypto-currency movement as evidenced by the belated but reluctant admission by some regulatory bodies on the African continent.

Governments and regulators should by now realize, that if they had taken a more embracing approach, it is possible they could have been in a position to influence growth of the market in ways that addresses their concerns.

Nevertheless, there is still a small window for such co-operation and as such, governments and regulators should work with entrepreneurs to bolster or create alternatives, which are acceptable to all but without violating some of the core tenets of crypto-currencies.

Zimbabwe’s currency troubles should inspire mass adoption of crypto-currencies

The protests and violence that rocked Zimbabwe recently stem from the abuse of the flawed fiat money system. Pressure had been building up, depreciation of currency had eroded disposable incomes in an economic environment of prevalent price increases.

The massive fuel price increase on the 12^th January was the final nail in the coffin. Diesel jumped from about $1.30 local to $3.11, a 140% increase.

Businesses responded by increasing prices twofold while public transport operators took advantage by hiking fares by rates much higher than the 140% fuel price hike. This left workers in a much worse position than they were before the increases.

So what exactly what led to this desperate situation, when only ten years ago Zimbabwe was emerging out of another economic malaise?

Well, a few years ago, Zimbabwe’s government engaged in a form of money creation—Treasury Bills issuance and overdraft facilities with central bank —and this culminated in the ballooning domestic debt.

After the end of the coalition government, which many credited for dollarizing as well as stabilizing of the economy, the new government resuscitated deficit spending and a general fiscal indiscipline, practices that had been curtailed in the previous government. Treasury Bills issuing was at the core of this deficit spending.

Prior to this, the re-introduction of exchange controls in 2013, had precipitated the gradual withdrawal of the US dollars and other currencies from the financial system. The so-called multi-currency regime, a system where a basket of foreign currencies are accepted as legal tender remains in place regardless.

By in its own reckoning, Zimbabwe does not have a currency or at least did not have a form of local currency when treasury bills issuing began. So in principle, the country could not issue treasury bills because that would be equal to counterfeiting. Zimbabwe did anyway and the treasury bills have now found their way into the banking system.

Suddenly, the country’s financial system now has to contend with billions of dollars whose value is not backed by anything despite the ominous attempts to equate them with actual US dollars. The billions are akin to a giant bubble because the country does not have enough foreign currency reserves or an economic activity to support their purported value.

Economists like to use this adage—bad money drives out good money—when rationalizing the rejection of one currency in favour of another by economic agents. This is exactly what happened when government forced the return of local currency, which is the bad money in this case and this resulted in foreign currency, the good money, leaving the formal economy.

People had no confidence in the new local currency, the Bondnotes, which government pegged at par with the US dollar. So as soon as Bondnotes were introduced, a parallel market for those who wanted to buy the US dollars with the new currency immediately sprang up.

As the shortages of foreign currency in the formal system worsened, the parallel market exchange rate increased against the Bondnotes. The billions that government created could only be liquidated at a massive discount.

In other words, local currency had to be devalued proportionate to the bubble of billions trapped in the banking system. This can only be done at the rates determined by markets and not at the absurd government stipulated rate of one Bondnote being equal to one US dollar.

The market rate, which is commonly referred to as the parallel market rate, has determined that the actual rate as one US dollars to three Bondnotes (1:3).

The government is acutely aware that Bondnotes are not equivalent to the US dollars but for purposes of furthering its expedient agenda, has maintained an opposite stance in public. This stance may be motivated by a more sinister but legal desire to pass on the burden of the country’s version of quantitative easing (state sanctioned counterfeiting) to the masses.

By 2015, these acts of creating money without a commensurate increase in national output, began to trouble government. Ultimately, this resulted in the launch Bondnotes in late 2016. Bondnotes as well as bank RTGS balances were supposed to absorb the giant bubble arising out of the runaway domestic debt.

The only problem so far has been the resistance by the masses. The strikes or intention to strike by government workers highlights this resistance. People are well aware of how Bondnotes can lose value quickly, hence the demand for salaries to be paid in US dollars.

On the other hand, government which had hitherto, maintained a facade that local currency is at par with US dollars, faced challenges of its own. Since government insisted that Bondnotes are at par with the US dollar, this forced it to heavily subsidize the price of fuel.

Landlocked Zimbabwe’s fuel became the cheapest in the region yet the country is a net importer of fuel. Regional traders were now importing fuel from Zimbabwe and selling this in their respective countries at a substantial profit. As figures from Zimbabwe statistical agency, Zimstat showed, the country’s import bill for this commodity grew by some 40% in 2018.

Zimbabwe was now subsidizing fuel for the region thus creating this extra demand. Finally, government could not sustain this consequently it responded with the sharp price increase.

This was the trigger that the restive population had been looking for and they responded with violent protests.

Now the wheels have definitely come off, the effects of quantitative easing are threatening to plunge the country into a civil conflict. Zimbabweans lost the last time out when the central bank printed money with such reckless abandon, culminating in the collapse of the Zimdollar in 2008. This time workers are a little wiser, they want to be paid in foreign currency or at least they want disposable incomes indexed with inflation.

Yet there is a better way of dealing with the excesses of both government and the central bank without resorting to violent protests as we saw in Zimbabwe. Crypto-currencies like Bticoin, Ehteruem, AWG are innovations created exactly for the situations like that in Zimbabwe, where there is no transparency in the creation of money.

Unlike central banks’ fiat currencies, digital currencies are anchored on a publicly distributed ledger or Blockchain, which is temper proof. There is a slim possibility of quantitative easing because each new currency addition will have to be verified before it starts circulating.

Better still, the intense competition between various crypto-currencies creators engenders confidence because rivalry often leads to better and secure currencies. In the case of Zimbabwe, the adoption of crypto-currencies will lead to lower transaction costs and seamless cross border payments. Inflation will be eliminated if the right crypto-currency or token is adopted.

There are far too many advantages for using crypto-currencies and countries should not wait until the last minute before they adopt. Zimbabwe’s troubles should be a wake-up call to those who live in countries undertaking similar practices. In the end, the mass adoption of crypto-currencies will benefit everyone including central banks and government that are presently opposed to privately issued crypto-currency.

 

Disproportionate bank charges boon for crypto-currencies

Bank service charges or fees make a compelling for the mass adoption of crypto-currencies, particularly in developing countries, where these fixed costs remain disproportionately high. In fact, in some lands, it is these high bank charges that actually discourage people from using financial services offered by banks. The overall cost of accessing banking services increases when costs like transport to and from the physical offices of the bank are factored in!

In addition, the very low wages earned, suggest many families that survive at or just above the poverty datum line, will be very sensitive to extra costs like bank fees.

Zimbabwean banks demand their clients to maintain a balance that makes it possible for the bank to deduct $5 in fees every month, irrespective of whether the account is accessed during the month or not. For the majority of workers who earn less than $400 per month, such a fixed monthly cost only drives people away from the traditional banking system and there is documentary evidence to support this.

To illustrate, the Reserve Bank of Zimbabwe’s October 2018 monetary policy statement reveal that depositors are not very keen on keeping their funds inside the banking system. According to the statement, demand deposits—customer bank deposits that can be withdrawn any time without notice—comprise 65% of all bank deposits, a clear indication of an unwillingness to fully use the banking system.

In any case, a number of Zimbabweans lost out at the end of the hyperinflation period in 2009, when bank account holders’ balances simply disappeared without explanation. Subsequently confidence in banks tanked.

The same happened to the insurance industry and to this day, pension rights groups are still fighting for a fair compensation after some pensioners received payouts not exceeding $5 despite making contributions for years.

Why many remain unbanked

Weak consumer protection laws and inept regulatory bodies in some developing countries mean banks can connive to levy high charges, without facing significant risks of being penalized. When the same banks fail, deposit insurance is inconsequential, only a maximum of $100 per depositor is paid regardless of the level of losses.

This reinforces distrust of the financial system, a fact supported by a World Bank Global Findex Database of 2017, which also revealed that 1.7 billion people around the world remain unbanked.  According to the Global Findex Database, a lack of documentation and distrust in the financial system were both cited by roughly a fifth of adults without a financial institution account.

 Interestingly, banks cannot carry on the same way in developed countries like the United States as they normally do in developing nations. The United States has applicable laws and institutions to deal with banks’ malpractices with respect to depositing taking as well as lending. For instance, the Truth In Lending Act (TILA) passed in 1968 compelled banks to be more truthful when advertising or informing potential clients about the cost of borrowing.

While such laws do not offer 100% protection, the legal threat the Act poses ultimately forces banks to toe the line something that cannot be said of developing countries like Zimbabwe, which is yet to pass a consumer protection law, some 39 years after gaining independence.

 Inversely, banks’ refusal to set up in rural areas amplifies the extent of global financial exclusion. Apparently, banks cannot establish a branch in areas not dominated by regular income earners as this denies them the opportunity to earn fixed service income, enough to cover overhead costs. Areas dominated by smallholder farmers are ignored by banks because such farmers do not regularly receive an income, which banks use to fund part of their operations.

The case for crypto-currencies

Given this whole background, it is easy to see why crypto-currencies could see a mass adoption in the coming few years. Whereas potential bank customers have to contend with transport costs when accessing banking services, with crypto-currencies, it is simply getting internet access via a mobile phone or a computer, there is no costly long distance travelling.

In certain instances, people might be compelled to open an account but the centralized nature of the banking system means many will remain under-banked despite possessing a bank account.

To illustrate, Zimbabwe is a major tobacco producing country with the multi-million dollar industry now dominated by tens of thousands of smallholder farmers. A few years ago, the Zimbabwe government made it a mandatory requirement for all tobacco farmers to open a bank account while suspending payments of tobacco proceeds in cash.

Farmers duly obliged by opening bank accounts with different financial institutions, which are mostly based in Harare and many were issued with credit cards to facilitate payments. Herein lies the problem, tobacco farmers reside in farming towns outside Harare and with a few banks having branches in such remote places, this meant that for the majority of new account holders, they would have to travel to Harare or any other town to access banking services.

Even worse, if a tobacco farmer has a major query with their bank account or they lost credit card, then only a visit to the head office in Harare will suffice, a costly exercise!  If the tobacco farmer were to opt for crypto-currencies instead, a similar scenario will be resolved without the need for an account holder to incur transport costs. Blockchain technology, which underpins crypto-currencies, eliminates the very query to begin with.

A complex verification and validation of records means there is a remote chance of a encountering a typo error or any other problem, which might necessitate the need to travel more than 100 kilometres to get the problem fixed.

Crypto-currencies will potentially solve the confidence issues that presently beset the financial system, particularly where the unbanked are concerned. Transparency has been one key to the success of crypto-currencies like Bitcoin thus far because Blockchain technology, which is essentially a publicly distributed ledger, allows to anyone to verify or authenticate transactions.

This level of transparency has not existed within financial systems before, especially with regards to large businesses.

Lower costs

Of course, crypto-currencies have small inbuilt transactions costs but these are significantly lower than what is obtaining within traditional banking system.

The other appealing aspect of crypto-currencies has to be the ability of two or more people to transact without having to go through intermediaries, a process which normally comes with high costs. Going back to the example of tobacco farmers, further problems are experienced when two neighbors who are new account holders, want to perform a transaction with funds in the banking system.

The buyer will have to travel to the nearest town or business centre to withdraw funds or transfer money to an account of his neighbor, the seller. This might seem ridiculous but it has been happening for years and it is the only way the seller can be assured that the buyer has an adequate balance to fund the transaction.

A mobile phone company, Econet Wireless has since stepped in, allowing people to transfer fiat money with more ease via mobile phones. The mobile phone application, Ecocash, which now enjoys a virtual monopoly, can only go as far facilitating the ease of moving funds inside national borders.

Cross border payments are only possible after one pays a visit to a banking institution to make the deposit of the appropriate foreign currency deposit. The intermediaries involved here include the public transport operator, the resident bank plus a clearing bank and all demand a fee for their services.

Crypto-currencies payments or funds transfer are normally seamless inside borders just like they are seamless outside borders and the cost is much smaller than the conventional route. There are no intermediaries and this lowers the cost of the entire transaction.

Crypto-currencies surpass the mobile money transfer app by a wide a margin and once the ignorant population becomes aware of this, more people will abandon the banking system.

Crypto-currencies make real savings possible

In this age of quantitative easing and wanton currency printing, citizens are repeatedly forced to invest in all kinds of things—from gold and paintings to rare coins—just so they insulate themselves against the negative effects of too much money in the economy—inflation.

Gold is one stable commodity that has consistently shown its resistance to inflation yet it is a controlled metal in many countries, you need a permission from government to be able to buy and store it. Even if you were to get the permission to own gold, you still have to find ways of storing it safely and this comes with costs.

Others seek solace in stock markets, which have a reputation for maintaining value, just ask billionaire investor Warren Buffet. However, this applies to efficient stock markets and you can only get these in North America, Europe and in Asia. For the rest of the developing world, that is not the case, liquidity is often a challenge as many stocks remain undervalued.

In any case, stock markets are still seen as a preserve for the elite, there are barriers to individuals who may want to participate. There are intermediaries and thresholds one has to contend with for those who wish to buy stocks. After all, transactions are conducted via the banking system, thus there is no possibility for the unbanked to participate.

Fallacy of central banks monopoly

There are really a few other options that shield value from the ravages of inflation or currency devaluation. Even fewer people have access to these leaving the majority totally exposed to the shenanigans of some central banks.

This situation exposes the fallacy of maintaining central banks’ monopoly over money creation.  It is a gross injustice that people are systematically denied an alternative escape route, when central banks engage in debasement of currency!

When the US Federal Reserve and the European Central Bank engaged in quantitative easing, at the height of the global financial crisis, everyone holding the respective institutions’ currencies lost out.

This affected China, the biggest holder of US financial instruments outside United States itself, this affected Russia, another holder of large quantities of these so-called reserve currencies. In fact, almost every other central bank in the world, which has stocks of the US dollar and Euro as reserves to back their own currencies, lost out as well.

Many emerging and developing economies peg their currencies against the US dollars and the Euro, so when these reserve currencies are debased, it means all pegged currencies get debased too.

China’s Yuan currency, which logically should have appreciated in value against the US dollar, especially after 2009, but that has not happened. Apparently, Chinese authorities still perceive the dollar to be stronger, but privately, there is a growing disquiet about this perception.

Therefore, the currency of the world second largest economy, notwithstanding these concerns, has remained pegged at the same exchange rate of just below US$1:7 Yuan since 2008.

Japan, the third biggest in the world, has also maintained an exchange rate of just under 1:100 for decades. Apparently, maintaining an artificially low exchange rate helps the cause of its exporters. 

Yet, this pegging of national currencies against the ‘stronger’ US dollar also imply, that when the US prints money or engages in quantitative easing, the rest of the world shares the burden of inflation that comes with such an exercise. In the end, the inflation affects everyone including the same exporters.

Gold stocking

Countries like Russia and India seem to have understood this and since 2009, they have been buying large quantities of gold instead of increasing their US dollar stocks. Such is proof that the world yearns for an alternative to the present fiat currency system principally when it comes to preserving value.

This is where crypto-currencies come in since they offer that alternative, a way out, not only for governments but ordinary people as well. So at first, it would seem rather unexpected that the same countries, which are supposedly yearning for alternatives, are leading the charge in resisting or even blocking the mass adoption of crypto-currencies.

Nevertheless, if we understand the extent of power and control that comes with the monopoly to issue currency, then we can appreciate why many countries are waging campaigns against Bitcoin and other privately issued digital currencies.

These nations simply want to replace the US dollar’s position as the world’s reserve currency with their own currencies. The motivation is not to reform or to end central bank monopoly but to perpetuate the same system except under a different name.

The relief brought by crypto-currencies

That would leave ordinary people, the biggest victims of inflation and devaluation, in the same situation that has existed for close to 50 years now. Therefore, it is such a relief when technology gives ordinary people a way out of the predicament through crypto-currencies.

Nonetheless, as one would expect, privately issued crypto-currencies have faced a hostile reception from regulators who are eager to control the decentralized currencies. Some opponents of crypto-currencies have gone as far as predicting their demise. Yet after some ten years and still counting, they are hopeful the price of Bitcoin will drop to zero.

However, such opponents conveniently forget that the circumstances that led to the rise and popularity of privately issued currencies, remain unresolved. Quantitative easing and excessive printing of banknotes are some of the continuing central bank acts that destroy value. Therefore, it is not reasonable to expect the Bitcoin to just die without something else springing up to replace it.

In fact, the kind of competition that exists in the crypto-currency markets today, points not to an end but a continued growth of these innovations. Entrepreneurs driven by the desire to produce flawless and efficient alternatives to Bitcoin and earlier innovations, are busy at work doing just that.

Gold backed currency

For instance, a Dutch based start up, Aurus, plans to launch a fully gold backed crypto-currency, which the company believes will stand out in a highly competitive market.

Gold backed currency the once efficient and widely used currency system, was abandoned in 1971 in favour of fiat currency and the rest is now history.

By creating this innovation, the start up hopes to attract, not only early adopters of crypto-currencies in general, but those who have stayed on the fence this entire time. Those worried by the current volatility of digital currencies will be interested in this token as it apparently tracks the price of gold.

In addition, Aurus says its AurusGOLD (AWG) token will stand out because of the way it is structured. Aurus itself will not own any gold, it will simply work on the system while its partners will provide the precious metal as well as vaults for storing gold. The partners will deal with the supply and distribution of the gold token. The entire system is built on simple economic principles that allow the price of the tokenized gold to stick to the spot price of gold.

Furthermore, Aurus states the token subscribes to the Blockchain technology principles of decentralization and transparency. The start-up says it has created a protocol on top of Ethereum that allows existing gold players to step in and take different roles.

A partner has already come on board after pledging to deposit the first $25 million in gold to issue the first allotment of AWG. Aurus adds there is a commitment of up to $250 million just from this one entity, based on demand.

Aurus also states it wants to make the use of AWG as simple as possible hence the plan to make it a fee-less transaction system. To illustrate, Aurus says any token on Ethereum requires the holder to also own ETH if he/she wants to spend that token and this is something that slows the adoption of these tokens. 

To remedy this, Aurus says it has developed a means of transacting with AWG, which is not only decentralized but does not require the user to hold ETH, making it much easier to use. Any wallet application can integrate this feature.

There is no doubt this latest innovation will attract new crypto-currency users because of the assurance that holding gold offers. Those residing in countries that impose restrictions on gold holding will find this AWG is worthy alternative. Also, small nations that want to support their fiat currencies with stable money will find AWG useful.

Ten years after the financial meltdown, ordinary people now have not just one but several alternatives to volatile national currencies. For those looking for ways to preserve their savings in ways that are permanent and transparent, there is a wide array of digital currencies to choose from.

More are in the works. This disruption momentum cannot be stopped because it is addressing a real problem. Solutions should not be cast away, instead we must embrace and encourage those creating technologies that uplift societies.

Regulatory ‘concerns’ spurs innovation in Blockchain

Ongoing regulatory concerns with crypto-currencies have spurred competition within the crypto-currency world, leading to a steady flow of new innovative products. The innovations attempt to address not only regulatory concerns but flaws observed in the pioneering digital currencies.

In less than ten years, we have seen different groundbreaking Blockchain launches, tokenized coins, smart contracts etc . Some are successful but some, not so successful. In all this, one thing is becoming clear though, crypto-currencies have done a lot of good despite the repeated denials by their chief critics, the central banks and state regulating bodies across the world.

The decentralized nature of the Bitcoin payment system have driven home the point, that monopolistic power that central banks enjoy today, contradicts their stated claims of being there to protect citizens. Central banks have not reformed or evolved because there has been no incentive for them to do so, at least until a decade ago.

It was only after the emergence and success of some crypto-currencies, that central banks are now talking about reforming or having digital currencies of their own. Even the most strident opponents of crypto-currencies do grudgingly accept the importance of Blockchain technology, something they never thought of developing themselves.

Still as highlighted earlier, central banks usually point to concerns around money laundering and terrorism when bashing crypto-currencies.

Gold backed currency

Nevertheless, such concerns have seen some entrepreneurs responding by creating products that attempt to tackle those concerns, without deviating from the central premise of crypto-currencies—decentralization.

Aurus, a Dutch based company say it has taken on this challenge by launching what is essentially a gold backed crypto-currency, the AWG. In its whitepaper, Aurus says it has created a token fully backed by gold bullion, traceable through a Smart Contract. In addition, the physical gold is redeemable at any time or one can choose to liquidate the token into fiat money, at any recognized exchange.

In other words, Aurus’ innovation is an attempt to return to a gold standard but only this time, it is happening through the Blockchain technology—the Ethereum Blockchain. A gold standard currency system worked because everyone had confidence in gold and the precious mineral cannot replicated, it has to be extracted.

In addition, Aurus proposes a supply chain Blockchain solution to be made in parallel to the AurusGOLD (AWG) currency. This provides for a transparent solution to the tracking gold through the proposed supply chain. Aurus says this solution will assist in the ‘efforts against money laundering, illegal mining, and so-called blood gold’.

Aurus is set to be rolled out in the near future and it remains to be seen how central banks will respond although we know they will not genuinely approve anything that takes away their power.

US dollar depreciation

The previous gold standard forced governments to live within their means although history shows that even under that system, debasement of currency still occurred.

The gold standard system ended in 1971, when then United States President Richard Nixon announced he was ‘temporarily suspending’ the use of gold in backing currency.

Fiat currencies, which have been around for close to 50 years now, have inherent flaws, which often lead to their failure. Of course, governments around the world try very hard to mask this unfortunate reality. Even then, there are still countless and more glaring examples of this failure, which authorities cannot hide.

Popular Forbes Magazine’s ever expanding list of billionaires is one example that proves fiat currencies like the US dollars, which are perceived to be stable, are actually losing value. The growth in wealth has more to do with loss in value of the national currencies than with actual wealth creation.

Alternatively, we can look at the growth in the value of gold in US dollar terms to see just how far the currency has lost ground. According the LBMA, the US dollar has lost approximately 97% of its purchasing power in relation to gold in the nearly 50 years since the United States went off the gold standard in 1971. The euro has lost over 75% of its value on a gold basis since the single European currency debuted in 1999.

In any case, it is hard to believe that the US dollar’s value has remained the same after the massive quantitative easing in 2009. The Troubled Asset Relief Program (TARP), an economic bailout plan as well as other similar US government interventions, helped to pour hundreds of billions of dollars into the financial system. The resulting increase in money supply naturally leads to inflation but official figures do not seem to reflect this.

By the way, this problem is not limited to the US dollar, other global currencies have taken a battering following similar interventions by the respective central banks. To illustrate again we use everyday examples that we sometimes take for granted. Twenty three years ago, a British football club Newcastle United, paid 15.5 million pounds to buy Alan Shearer, a world record then, yet today, the same figure counts as Manchester City player, Raheem Sterling’s annual salary!

Shearer was a much more accomplished player than Sterling, (a fine but an inferior player in my opinion) but the latter earns much more or is it really more? Furthermore, salaries earned by English football players today are generally several times more than what was earned in 1996. Surely this is not down to performance otherwise England based teams should be winning continental competitions.

Perhaps, that is why the best measure of sporting brilliance is not money earned but medals won, goals scored or trophies lifted. No amount of inflation or depreciation will take away the glow of being crowned champions!

Quantitative easing disastrous for small countries

Turning back to the topic of currency volatility, we see that small countries like Zimbabwe have undertaken quantitative easing interventions of their own, but the results have been catastrophic. The currency collapsed, not once but twice as the deluge of money that follows such interventions overwhelmed the fiat money.

 Zimbabwean authorities have resisted crypto-currencies on account of the perceived weaknesses, seen in pioneering innovations like Bitcoin. One of crypto-currency critics’ favorite attack line is the price volatility something which the AWG attempts to solve.

Nominally, a gold standard will cure the volatility problem, which until now makes other crypto-currencies like Bitcoin difficult to use as unit of account. Gold does not fluctuate widely, yet it maintains value and has consistently outperformed fiat currencies.

Meanwhile, Aurus says the location of gold vaults in different places across the global, satisfies a key attribute for crypto-currencies—decentralization.

In Zimbabwe, there are often whispers about the need to adopt a gold backed currency but few have confidence in the central bank’s ability to run such a currency regime. There is enough evidence to suggest that such a system will be abused.

The privately issued AWG might just satisfy those confidence issues, and if enough Zimbabweans become aware of this type of crypto-currency, there is a good chance it will be widely adopted.  Private currency issuers should understand that the key to success is mass adoption by ordinary people.

The mass adoption of WhatsApp or Telegram apps by communities in the developing world helped to propel these applications into the mainstream.  Crypto-currency developers should listen to consumer concerns more than they should listen to regulators. That way they will produce currencies that will dominate financial markets for a long time.

Asian leadership in cryptocurrency adoption should worry the West

While regulatory uncertainty continues to weigh down growth of digital currencies, cracks are growing within the regulatory world.

It appears Asian countries have made the decision to take the lead on crypto-currencies and this will give them an advantage over the dithering United States in particular. According to Global Data’s survey, the adoption of crypto-currency wallets has majorly been driven by the availability of smartphones in those countries.

Often, the US takes the leadership role in almost every other sphere and the results are clear, America remains the most innovative nation on the planet. Yet on this one, the position is up grabs as resistance to cryptocurrencies continues in much of the rest of the world.

 Japan has been bolder than the rest when it comes to embracing Blockchain technologies, and recently it gave thumps up to Coincheck, which suffered a $530 million hack in January of last year, according to a report by Coin Desk. This decision clearly underlines Japan’s aggressive approach, which is not beholden to fear mongering.

Buying with Bitcoin in Japan

Already Japan’s lead is enhancing trade with African countries, particularly those with difficult economic conditions. Popular Japanese based companies like car seller, Be Forward now accept Bitcoin as payment. Cheap used Japanese made vehicles are a hit with many on the African continent, and adoption of crypto-currencies by Japan gives those previously precluded from buying, the chance to buy directly to the seller.

The seamless Bitcoin payment option contrasts with the usually arduous process, which involves several financial institutions.

Normally, for such a transaction—buying a vehicle—there are two approaches. First, if the country’s currency situation is relatively stable, you will be able to apply to get foreign currency via your bank. It is quite a process but a lot of that happens behind scenes.

Once approval has been given by the central bank, funds are then transferred to the receiving party in Japan. A process to deliver the vehicle or anything else you are buying begins immediately after.

However, if the foreign currency situation of the country in question is desperate, then you will be forced to get this resource elsewhere, and that place is often called the black market.

Sourcing US dollars outside the banking system in places like Zimbabwe can be risky business, because there are specific laws that bar buying or selling foreign currency on the black market or the open market, where it is available to everyone.

Apparently the government blames this black market for fuelling the steady depreciation of local currency against global currencies hence anyone caught buying or selling will serve jail time!

So you begin to see Japan’s leadership in this context, a decision thousands of miles away is now enabling not only Zimbabweans, but those on the continent with Bitcoin, to buy from Japan without having to worry about running afoul of national laws.

Japan’s stance is very much in contrast with that of many African countries that have banned use of crypto-currencies because of terrorism and money laundering concerns. Invoking these terrible phrases into the crypto-currency conversation helps to augment a government’s stance on Bitcoin.

It is ironic that Japan, a country with a GDP in excess of US$4 trillion, saw the potential of Blockchain technology and after studying the risks, took a decision to incorporate them into the mainstream anyway.

On the other hand, African countries whose combined GDP is less than half that of Japan, still see the danger of crypto-currencies to their citizens, thus justifying laws that ban their use. It is trite that some opponents of crypto-currencies on the continent still make reference to the volatility of Bitcoin and alt-coins as justification for restricting their use.

It should be noted that national currencies are equally volatile, if not worse. This continent-wide risk aversion is largely responsible for the continent’s underdevelopment. The continent’s best minds are often forced to migrate to countries that encourage creativity.

Regulation should come after, not before a new product comes to life. If that had been the approach of the United States this entire time, then it is safe to assume we would have never had the internet, smart phones and that cutting edge communication technology and so on. Or alternatively these products would have been produced elsewhere and not in the United States.

It would have not been possible for Uber or Lyft to come along because people naturally resist change but smart people embrace change because it makes them better in the end. It is inconceivable that the whole African continent lags in areas like crypto-currencies considering the kind of human capital it has.

 Nevertheless, African entrepreneurs and innovators need to sell their ideas directly, to the potential customers or users, instead of wasting time trying to convince backward regulators or leaders. When there is enough buy-in by the general population, an innovation will survive. For now that should be the focus, African regulators are currently clue-less, they do not know how to respond to the growth of crypto-currencies, they wait for guidance from the IMF or other regulating bodies.

When Mpesa and Ecocash came along, the some tried to have their growth stifled because the applications threatened traditional banking operations. However, the mass adoption and the financial inclusion that these entities brought made it impossible to oppose their use in the end.

Blockchain innovations should have a similar approach if they are to see better adoption.

Re-dollarisation or Bitcoin, which way?

In the last article, I chronicled some of Zimbabwe’s economic troubles post-dollarization of the economy in 2009. It appears the economy is heading for another implosion unless some steps are taken calm restive workers and the pressure from businesses. Currency depreciation and money supply growth are the prime causes of the economic downturn.

Government’s penchant for living outside its means is amply identified as the root cause of the current economic troubles. Rent seeking by inefficient farmers and companies alike, further exacerbate the problem. To cure this problem permanently, a new, out of the box thinking is need. Businesses and ordinary folks must take the lead in any such shift in thinking and there is no better place to start than crypto-currencies.

Crypto-currencies potentially give Zimbabweans the opportunity to escape the unending cycles of economic depressions. Zimbabwe has hard working and resilient people but their efforts are often undone by acts outside their control. However, by adopting Bitcoin, a decentralized and borderless currency, citizens gain a measure of control as well as the ability to preserve value and maintain a decent standard of living, irrespective of whether government floundering or not.

Inflation—a combination of money supply growth plus currency depreciation—is particularly unfair on ordinary citizens. They are often hit hardest and rarely are there any safety nets or options for escaping. In 2008, when Zimbabwe’s inflation reached a crescendo, hundreds of thousands lost value as banks demonetized local currency bank balances. There was no insurance to cover losses at the bottom end of the chain, lifetime savings were lost. In 2009, people had start from scratch.

Pensioners were not spared either, years of making contributions counted for nothing when the economy dollarized. Pensioners received shocking payouts following a controversial process of converting Zimdollar contributions to US dollars. Apparently, hyperinflation had rendered local currency contributions almost worthless.

By adopting crypto-currencies like Bitcoin, Zimbabweans will be able to protect their pension contributions and savings from inflation and depreciation of a currency. That responsibility rests solely with ordinary people and not institutions like the Insurance and Pensions Commision (IPEC) or even government. In fact, there is a precedence of something like this happening before.

For instance, while dollarization was formally adopted in 2009, an informal dollarization process had begun much earlier and government had hitherto, resisted this. Laws barring the use of foreign currency by ordinary people were enacted but the arrests that followed failed to stop the practice. As many people understood the cost of inflation to their incomes, many began rejecting the Zimdollar despite the risk of arrest or even jail time.

By the end of 2008, it had become clear, dollarization was not only inevitable but it actually worked. So government had no option but to follow the lead of ordinary people. Bitcoin can similarly be adopted if enough people are made aware of the option it gives them.

With respect to Zimbabwe companies, the widespread use of an inflation-proof Bitcoin means, values will be preserved as there is little or no chance of debasing this currency. Companies want to operate in an environment that is stable and with optimal regulation, something that is often absent with Zimbabwe’s economy.

As explained in the last article, when Zimbabwe dollarized, it was understood to mean the dormancy of the unpopular central bank during the subsistence of this currency regime. Yet a few years later, the bank has somehow managed to issue treasury bills over currencies it does not print or preside over. 

The result has been devastating for businesses, vital foreign currency has essentially disappeared from circulation, leaving the so-called Bondnotes as the only currency widely available.

This currency, which is issued by Reserve Bank of Zimbabwe, is susceptible to the shocks that come with the growth in money supply. 

After several years of almost static prices, inflation began to accelerate as more and more treasury bills were issued. By the end of November 2018, inflation had gone from below 5% for much of the dollarization era to just over 30% although John Hopkins Professor of Applied Economics, Steve Hanke, reckons its way above 100%.

In many ways, what is happening now is a repeat of what occurred between 2004 and 2008, but only this time, it has happened under currency regime many thought was safe.

The idiom—once bitten, twice shy—has seemingly failed to apply to Zimbabwean businesspeople as the unfolding second round of hyperinflation takes its toll on business operations across the whole economy.  Business leaders were perhaps naïve in believing that central bank would not resume duties under the current currency set up. But in fairness, they have never given much thought about the alternatives to fiat currencies.

At this point, Zimbabwean companies must find ways of surviving the turbulence now while also taking steps to pre-empt a third round of government induced hemorrhage of value in the foreseeable future.

As already shown in many previous articles, Bitcoin or alt coins, do provide that break Zimbabwean companies might be looking for because these digital coins eliminate inflation from the equation. The Blockchain technology that underpins Bitcoin, makes it almost impossible for anyone, including developers of the software, to manipulate the amount of the digital currency in circulation. 

By trading in this currency, companies will be confident that no-one will debase this currency hence there is no inflation risk. Without inflation companies and economies grow.

Choosing to trade in crypto-currencies should not be seen as a challenge to the state, but a statement expressing exasperation with the way national currencies are managed.

A monopoly is something that is not ideal and that is why governments around the world have laws that seek to regulate or to even break up such powerful organizations. It should then follow that currency issuing monopolies be subjected to similar laws since their actions or decisions result in far much worse problems to ordinary people than acts by regular commercial monopolies.

Zimbabwe is a clear case study that proves the need for an alternative system.

Zimbabwe dollarisation 2.0

Zimbabwe is appears to have had an explosive start to 2019 as the deepening economic crisis enters the final stretch. To kickstart the fireworks, one of the country’s biggest companies, Delta Beverages, announced its intention to re-dollarize— a new entry to Zimbabwe’s lexicon.

Unlike others before it, Delta did not argue against the stipulated fixed rate of exchange 1:1 between the local currency and US dollars. Instead, Delta now wanted to charge all its products in the US dollar currency after all, there is parity between local currency and US dollars. 

The rationale was to allow the company to raise pay foreign suppliers and shareholders who need to be paid in hard currency, which is in short supply at the moment.

Delta also made one startling remark, it does not recognize Bondnotes or local bank balances, the so-called RTGS dollars, as currency and as such, the pricing structure does not seem to factor in the heavy premiums that one has to pay when exchanging these for the US dollars. Currently, the exchange rate on parallel markets for US dollars to Bondnotes is 1:3.2.

Now what is very instructive about this revelation by is that Delta is hanging on to the assurances that were initially made by the central bank when the Bondnotes came into circulation—that there is parity between the currencies.

The company reportedly has about $400 million in the form of RTGS balances, and at current parallel market rates, it means it has an actual balance of US$125 million. For Delta, this is unacceptable because unlike other companies, Delta has done everything by the book, it has resisted indexing prices with the movement of the parallel market exchange rate.

Prices of its products, which include beer and soft drinks, have lagged behind the growth of inflation and the rate of depreciation of currency. So to make up for lost time, Delta had resolved charging in US dollars for all its products and it appeared government had given its nod.

However, given the sheer size and influence of Delta, government made an about turn and pressured the company to reverse the decision to re-dollarise.

A decision to allow Delta to charge in US dollars would have opened the door for everyone along the chain to start demanding US dollars as payment and that has major ramifications for government in particular.

Another time bomb has to be the current at standoff between government and medical practitioners who have been on strike for over month now. Apparently, the chief demand by the striking doctors is the payment of their salaries in US dollars. Predictably government is resisting this because the rest of its labour force is waiting for doctors to win their battle with the state before they embark on their own industrial action.

Add to that, government faces ongoing challenges of sourcing foreign currency for the fuel industry, wheat importation, pharmaceutical drugs and power. 

For instance, during the first week of January 2019, it emerged that the country’s central bank had failed to pay for a consignment of wheat docked at a port in Mozambique. Suppliers of the commodity are now threatening to stop deliveries if the problem of late payments persists. Eventually this consignment will be paid for but a similar problem will start elsewhere and this cycle goes on until it reaches the breaking point.

In Delta’s case, the company only relented when government promised to meet its foreign currency requirements. There is no doubt, other companies with links to government will also resort to the same tactic used by Delta to get similar concessions.

There is one problem though, foreign currency inflows are actually shrinking and while government keeps making these promises to meet ever growing demands. This raises two pertinent questions; What are acts or events that led to these problems and how will these be resolved?

It is unfortunate that the debate about Zimbabwe’s economic crisis often does not start with the genesis of the problem, it starts somewhere in the middle. The fundamentals get lost quickly as the debate veers off into acrimonious exchanges where the focus is on individuals rather than the problem. 

For instance, Reserve Bank of Zimbabwe governor, John Mangudya, is often assailed as the mastermind of the latest economic troubles. The forced circulation of Bondnotes, in which Mangudya played a central role, played a part in accelerating the crisis but a bigger problem had occurred much earlier.

To understand the problem, we need to go back to 2009 when a new coalition government came to life while the economy was dollarized. During the short lifespan of the Zimbabwe’s coalition government, there were several key decisions that had to be taken in order to resuscitate the economy and one was the liberalization of exchange controls.

This was done to attract foreign currency into the economy as quickly as possible and this was one key condition that gave confidence to foreign investors. During a public debate in May last year, former Finance Minister Tendai Biti made this point, as he tried to fend accusations from former deputy Finance Minister Terence Mukupe, that he did not do enough to restore relations with foreign creditors.

Besides the mudslinging that characterized the discussion, one salient point that became clear from debate is the fact the liberalized exchange rate helped to build confidence and growth of foreign currency reserves to US$1.8 billion by the end of 2009, a point Biti was happy to point out.

During the subsistence of the coalition government, deficit spending was abandoned in favour of a balanced budget and as such, government departments and state owned companies that were accustomed to state bailouts toiled.

Government records show that immediately after the end of the coalition government, budget deficits returned, something that was highlighted in the Biti and Mukupe debate.

 When the economy dollarized, one thing became clear, the central bank became a central bank in name only, it could not really influence markets as it did prior to dollarization.

Of course, it did not help matters that the then central bank chief, Gedion Gono, was a source of discord within government. Upon dollarization, the central bank could not print money or avail overdraft facilities to government but more importantly, it could not lay its hands on foreign currency of private companies and individuals. The Ministry of Finance basically curtailed the central bank.

Apparently, some foreign governments, international lending institutions and donor organizations were satisfied with that set up, they supported government during that time. Therefore it was not surprising that the economy performed very well during that time with few cases of liquidity problems within the banking system.

However, the period of relative stability ended soon after 2013 and by 2015, problems began to emerge as government repeatedly failed to pay its workers on time. This would persist through to 2016 when government eventually launched a currency or something that is not a currency—Bondnotes.

During the period between 2013 and 2016, when Bondnotes began circulating, the issuance of treasury bills, the real elephant in the room, was hardly questioned. Apparently treasury bills issued ballooned to $7.6 billion by mid 2018, from about $2.1 billion two years earlier and this happened in an environment where the central bank was not supposed to issue such TBs at all because Zimbabwe by its own reckoning, does not have a currency of its own. 

In addition, the central had an overdraft facility, which again grew disproportionately, to peak at $2.5 billion.

The issuing of treasury bills in an economic environment dominated by the US dollars is akin to printing the greenback—counterfeiting by another definition. Countries with failed currencies often, reluctantly, adopt other currencies as legal tender to curtail the problem of inflation and economic decline. The reluctance stems from the trade off a country has to make—losing the power of printing money in exchange for economic stability.  

Throughout the coalition government era, pressure mounted for a return to a locally issued dollar as some in government had become exasperated with the limits that come with dollarized economy.

So it was a little surprise to learn that government, which insists that the so-called multi-currency regime remains in place, had in fact, issued treasury bills over currencies it has zero influence over. 

However, this was not entirely surprising given the government’s penchant for living outside its means.  For its part, government justifies the deficits and debts, which were accumulated as a result of subsidy program to support agriculture and other critical economic sectors. In other words, if the support had not been extended then bigger problems would have ensued.

However, as is often the case with government handouts, subsidies only breed ineptitude as evidenced by the fact that many farmers still want freebies doled out by government. This is happening a decade after acquiring farmland during the country’s land reform exercise. 

Astonishingly, Zimbabwe still imports wheat, soya beans, maize etc, and this requires foreign currency, yet the country has over the years spent billions to support farmers!

Unfortunately, the billions spent have led to the growth of money supply, which in turn causes the growth of inflation as well as debasement of currencies. So while companies like Delta, naively or not, want to believe government’s insistence on 1:1 exchange rate, the reality suggests otherwise. 

The deluge of money, which is not supported by anything only increases pressure on currency, not on US dollars but on local Bondnotes currency as well as RTGS balances, since these are only valid inside Zimbabwe.

In any case, there is now a real prospect that this deficit will grow even further as the cornered government will probably capitulate and give to some of the demands by restive workers. Without the option to pay in foreign currency, government will only be able to increase salaries, which will be achieved by unbudgeted treasury bills issuance once again. This will only work in the short term.

The solution does not come from money printing or even the currency reforms as many are advocating for. The solution might come from allowing a different system that has in built circuit breakers to stop uncontrolled spending and appetite for debt.

In another article, we discuss this option and why a small country like Zimbabwe needs to seriously consider this.

Bitcoin price should not be nexus of discussion

There is a misplaced focus on Bitcoin price, which in turn creates a wrong basis for discussions around crypto-currencies in general.  The current dynamics around the nascent crypto-currencies make it impossible for its price to stabilize in the short term.

Different interest groups, the regulators, inexperienced investors, idealists, opponents of crypto-currencies all play a part, wittingly or unwittingly, in causing the high price volatility we see in Bitcoin and other digital currencies.

As each day passes, more and more people get involved in the discussion about getting rich quickly via Bitcoin and this ensures a steady flow of new crypto-currency traders or buyers. In most cases, these are less experienced investors enticed by allure of quick gains. The fluctuation of Bitcoin price does not deter, in fact it prods novice investors into investing without clearly understanding everything about crypto-currencies.

Government regulators, too eager to control crypto-currencies also get into the mix via their statements or threats to the whole digital currency ecosystem. Obviously this has an effect on prices of these currencies in short term. People who believe in government statements will be persuaded to leave crypto-currencies and this affects the price.

Next, there are individuals that, on the surface, appear to support crypto-currencies yet in reality, their support or lack thereof, is part of a calculated plan to reap huge profits off the digital currencies. Again, this has an effect on the prices. For instance, one billionaire labeled Bitcoin nothing more than a bubble, the price tanked and immediately after, it was revealed that the same person would be investing in Bitcoin. Such double speech by prominent people also affects the price of Bitcoin.

That Bitcoin makes global headlines is not in doubt, however, only a few in the mainstream media do try to simplify this complex story on an on-going basis for benefit of their audiences. The BBC has a short Bitcoin video, which attempts to explain the topic in less than three minutes. There are of course, countless independent videos that try to project Bitcoin in positive terms, but again, a lot of these videos are created with the intention of enticing more people to buy. This also has an effect on the price movement of Bitcoin since this creates demand.

As the year 2018 came to a close, the approximately 70% drop in the price of Bitcoin became the nexus of crypto-currency debates across much of the global media.

In the developing world too, the discussions appear to have veered off the usual path for a new product, which is education, awareness and more education. In Africa, some people are now more concerned about the alleged terrorism financing or money laundering associated with crypto-currencies before they even know the basic story, not only about crypto-currencies, but the Blockchain technology that underpins Bitcoin.

The deluge of negative news against crypto-currencies is not helping efforts to highlight the real rationale for the creation of Bitcoin in the first place. There is still a chance that people most likely to benefit off a decentralized payments platform, may not even get the chance, as the on-going war of attrition crypto-currencies is hindering the widespread adoption of these technologies.

Nevertheless, crypto-currencies have shown resilience, which in turn emboldens some of the hardcore supporters to keep soldiering on. Perhaps, these supporters need to increase awareness in communities that need crypto-currencies the most but are ignorant at the same time.

As explained in previous articles, communities in the developing world who are excluded from the global financial system, stand to benefit from decentralized payment platforms. Already, the innovative mobile money platforms such as Mpesa and Ecocash have proved technology can bring financial inclusion to long marginalized communities.

Blockchain has many elements that are even better than mobile money services and one such element is cross-border payments. Popular mobile money services are only effective in the countries where the service providers operate. It is impossible to sent money from Zimbabwe via mobile phone to someone in Kenya without making prior arrangements with banks.

 This means sourcing the foreign currency, which has costs and meeting regulatory requirements, another costly process. In other words, with Blockchain, there are no other intermediaries to contend with before a transaction goes through.

With Blockchain, the transfer is seamless, no middle man/women, no currency exchange, clients pay directly and the funds are received instantly. Already, there is one crypto-currency exchange, PaxFul, which is enabling cross-border remittances by expatriate Africans to their homelands, according to a report by CoinDesk.

It is these elements of crypto-currencies that should be the focus of debate and not the price volatility. When marginalized communities begin to understand crypto-currencies in this context (remittances), it is possible then to see a faster embrace of the technology in the developing world. As long as the technology serves a need, it will become part of the mainstream just as mobile money services have become part of the mainstream in some African countries.

As explained before, crypto-currencies attract people from different backgrounds with different agendas, therefore it is hard to get everyone behind the long term agenda of the creators of Bitcoin. However, those motivated by the desire to see crypto-currencies grow and become part of the mainstream must step up efforts to engage communities where awareness is still a challenge.

This means taking the fight to opponents, some who even use religion to try and block the ascendancy of crypto-currencies and the Blockchain technology. The world needs alternatives to powerful centralized systems and more importantly, the world needs competition everywhere so that citizens rights or welfare is enhanced.