Tackling the crypto exchange hacking problem

Terence Zimwara

Regular reports of crypto exchanges getting hacked are increasingly becoming a real worry for those hoping to see the widespread use of crypto-currencies. Hackers are primarily targeting crypto exchanges although they are also known to target individual wallets.

Just like a bank robbery, hacking of an exchange is particularly rewarding for these high tech thieves. In essence, an exchange acts as a ‘vault’ for multiple wallets or private keys, therefore successfully breaking in means the score will be greater than attacking individual wallets. Hackers are known to have made off with millions of dollars in clients’ funds each time they target crypto exchanges.

For example, according to a UK financial services watchdog the Financial Conduct Authority (FCA), in the first half of 2018 alone, $731 million worth of cryptos were stolen from exchanges. This included $500 million from a hack on the Coincheck exchange and $40 million from a hack on the Coinrail exchange. By October 2018, hacking of exchanges increased to $927 million. The problem is quite significant relative to the size of this fledging market.

Perhaps the only small consolation is the fact hackers are only targeting private keys, they are not attacking the crypto-currencies themselves. This once again underlines the efficacy of Bitcoin and alt-coins, that these currencies are immutable and that there is no incentive for hackers to cripple this innovation.

While the overriding concern of all crypto-currency businesses has been getting the message about this fintech across to the masses, resolving the scaling issues and regulatory uncertainty, there is a new challenge they must now grapple with. The question now is; how do you hasten widespread adoption of an innovation that is very vulnerable to hacking attacks? In fact, this may be a worry of not only potential users but of early adopters as well.

An impartial observer may conclude that the infrastructure supporting this technology is not secure enough to help build confidence when there are regular hacking reports. How do you convince folks who have worked hard all their life to convert their savings into cryptos when there is a high risk that all such funds will be stolen with little or no prospect of recovery?

Given this current state of affairs, it is plausible to conclude that many will prefer to keep savings in bank accounts where they are ‘safe’ than in the form of Bitcoin, which is susceptible to hacking!

It is on this issue that the entire crypto-currency community need to seriously self introspect. How can they collectively work nip this problem in bud before it gets even worse? Of course, if everyone listened to Andreas Antonopoulos, a prominent Bitcoin supporter, by keeping funds away from exchanges, then the problem would not be as big as it is today.

However, in fairness, the whole crypto business is a very complex one, without crypto exchanges or similar intermediaries, this market would not have grown to current levels. Asking a non-IT person to suddenly start understanding the complexities of crypto-currencies will be asking too much, they do not have the time for that. Therefore the use of ‘trusted’ intermediaries remains inevitable if the dream of greater adoption is to be achieved. Indeed for hardcore advocates of a decentralized system, this might be a bitter pill to swallow. However, just like medicine, it may have a bitter taste but it gets the job done, crypto exchanges or intermediaries might be seen as a deviation from the peer to peer principle but they do help get the job done ultimately.

Thus for now crypto exchange businesses and custodial wallet providers need to be supported by all crypto-currency issuers for the mutual benefit of all. Sadly as it stands now, the fragmented crypto community is failing to come up with a united response to the hacking problem, individual players are working silos when attempting to combat this threat. Some insist on making or improving security features of storage devices or wallets as the best way of dealing with the hacking problem but others believe solving the problem at crypto exchange level will yield better results.

It goes without saying that compromises will have to be made if progress is to be made on this front. A balance will have to be struck between user security concerns on one hand and the Utopian ideals of crypto-currencies on the other. For those that wish to see decentralized cryptos’ domination of the market continuing, now is the time to consider such compromises before well funded players enter the market.

Failing this, there is every chance that well resourced and bigger players like Facebook and its partners will seize on this, by rewriting the rules and in the process obfuscate the original ideals of a privately issued currency. Until now, the laudable decentralization and permissionless features of crypto-currencies have been the unrivaled hallmarks of this great innovation but that may yet change.

To illustrate this point we look at the proposed Libra stablecoin and how this can potentially change the crypto-currency landscape. A glance at Libra’s whitepaper reveals that this stablecoin will start off as a permissioned Blockchain backed crypto with the possibility of it becoming permissionless eventually. However, Facebook and its partners may ultimately choose for it to remain permissioned a little longer as one way of assuaging and winning over skeptical politicians.

This means the much vaunted Libra stablecoin will not adhere to the fundamentals of a decentralized currency.

To compensate for this, the Libra Association members do have the infrastructure and the financial muscle that they can use to invest in making security features that make it difficult for hackers to target the Libra token. There is no doubt Facebook and its partners will see enhanced security features as one way of cancelling out the less desirable aspects of Libra and will thus work harder on this.

If potential users are more satisfied with Libra’s handling of the hacking challenge they will embrace it ahead of original cryptos. Apparently not everyone is sold to the idealism of crypto-currencies, security is more important for others.

Therefore it may not matter how much permissionless Blockchain supporters bleat, the world could well embrace Libra because it is scalable or due to its superior security features. If Libra succeeds, permissionless cryptos will find themselves behind in every measure; from user numbers, market capitalization, merchant embrace etc.  

Of course, the prospect of Libra taking a giant slice of the market from founding crypto-currencies is not entirely a bad thing. This market needs competition in order for it to continue improving and to be that better alternative to fiat money. However, when one player with ties to the old order becomes dominant, this will not augur well for the future of privately issued currencies.

Creators of pioneering crypto-currencies must be willing to embrace changes just as they have brought change to the way we see money. Adapting to changes will be key to survival for crypto-currencies that have dominated until now. Their survival will keep this market free from monopolies and their malpractices.

Crypto-currency-- Financial inclusion vs Tax evasion

Terence Zimwara

Reports that the United States Internal Revenue Service (IRS) has sent out letters to crypto-currency holders reminding them of their tax obligations adds intrigue to Washington’s changed tact towards this fintech.

In the last few weeks, the US government has come out more vociferous in its opposition towards crypto-currencies in general and against the upcoming Libra stablecoin in particular. The IRS is telling the world that it has ‘evidence’ that some American holders of crypto-currencies are skipping their tax obligations.

Just like other US government agencies, the IRS seems to assert that those opting to use or trade in crypto-currencies are doing so in order to hide nefarious activities like illicit financials transactions, money laundering or tax evasions. According to institutions like the IRS, the US financial system remains solid and effective, therefore there are no valid reasons for American citizens in particular to avoid using it. In fact, that is the case in pretty much all developed states, there is really no reason to start looking for alternatives when the present model works well! . By 2018, it is estimated that at least 5% of US citizens own a crypto-currency, an insignificant but telling figure.

Meanwhile, as an additional plus to the United States, the US dollar remains the world’s most dominant currency—for now anyway—and logically, there should not be any valid reason for an American to own or store wealth in the form of alternative currencies like Bitcoin.

Interestingly, the same arguments are hollow when applied to developing or poor economies which are plagued by unstable currencies. The very architecture of the financial system is designed to benefit the elite, those in living in urban centres or those in formal employment. The unemployed and the rural populations—who are the majority in many developing countries—are usually excluded from such a system.  

Since the financial system cannot accommodate the less affluent or those staying in remote areas , crypto-currencies present a unique opportunity to access financial services. Crypto-currency like Bitcoin are already popular in these parts of the world because they enable ordinary people to make small payments, send and receive money cheaply. The usual barriers like lack of identification documents or high bank service charges are not important thus are ignored. One only needs a Smartphone plus a data package and they are off.

Just like those using mobile money—another popular fintech in the developing world—crypto-currency users in poor countries have not embraced this fintech to avoid paying taxes.  Their miserly earnings mean many fall outside standard taxable income thresholds hence the tax evasion argument does stick here.

Crypto-currencies are primarily used for micro-payments, remittances and cross border payments and here too the perceived tax liability is negligible, if any.

Bitcoin and alt-coins might originate from developed and wealthy states—where the use case is presently insignificant—but for developing countries the same cryptos have emerged, either by design or otherwise, as a viable alternative to the one size fits all fiat currency financial system.

As already highlighted, the now widely embraced mobile money has proven there is place for alternatives to the conventional financial system. And just like crypto-currencies, mobile money initially faced resistance from some traditional players in the financial services sector even as it was embraced by masses.

Technology firms and mobile network operators (MNO) identified this long un-serviced need and went on to provide a solution without the involvement of banks and now the benefits are clear for everyone to see. Even those previously opposed now accept the utility of mobile money and the impact it has had on societies in some lands.

To understand this, one has to familiarize themselves with the findings of a growing number of global surveys on this topic. For instance, in its overview, the World Bank Global Financial Index survey of 2018 states that a growing body of research reveals many potential development benefits from financial inclusion — especially from the use of digital financial services, including mobile money services, payment cards, and other financial technology (or fintech) applications.

As an example, the index quotes a study in Kenya which found that access to mobile money services delivered big benefits, especially for women. It enabled women-headed households to increase their savings by more than a fifth; allowed 185,000 women to leave farming and develop business or retail activities; and helped reduce extreme poverty among women-headed households by 22 percent.

Meanwhile, in countries like Zimbabwe, mobile money has come in handy for citizens grappling with the country’s ongoing cash shortage problem. A glance at the country national payments records reveals that mobile money now leads in terms of transactions volumes, meaning Zimbabweans have largely embraced mobile money as an alternative to fiat cash, which remains in short supply. At the same time, large dollar value transactions are still being settled in the traditional way i.e. bank transfers, point of sale machines etc.

In Zimbabwe’s case, mobile money is currently the preferred method for making micro payments, hardly transactions that fund terrorism. Illicit financial flows involve huge sums of money and only traditional financial channels can efficiently carry out such transactions.

To users in developing countries, crypto-currencies are similar to mobile money in many respects, if not better. Payments are settled much quicker, the service charges or fees are lower because there are a few intermediaries involved and lastly, there are no restrictions or limits on payments across borders.

This latest fintech clearly works well in the developing world and those opposed to it have few valid reasons to justify the opposition.

So perhaps the question now is; Why should crypto-currency users in the developing world be concerned with events in the US congress earlier this month? Why should they be concerned with Maxine Walters and Co. comments and moves to curtail Facebook’s Libra and Bitcoin?

Well, in normal circumstances, crypto-currency users from developing lands need not to worry about events thousands of miles away. Unfortunately, US power is not normal power, domestic decisions made by the American Congress are often felt across that country’s borders. The US can almost single handedly cripple any economy by cutting it off from the global payments system. Crypto-currencies are a little bit more complex but the US can still have its way by attacking or reining on Silicon Valley tech firms that facilitate this nascent industry.

To illustrate this point we look at the African continent. It is true that some on the African continent are confident that Libra will bring about financial inclusion because Facebook, the US based tech firm behind the token, already has the infrastructure to successfully bring this dream to fruition.

However, that the US congress can order Facebook to halt work on Libra until it is satisfied that US government concerns are duly addressed underlines the power Washington has. Therefore this means tax evasions concerns, which primarily concern one country, the United States, could stand in the way of an innovation that can potentially bring financial services to those currently excluded and many of such people are in Africa.

So yes, citizens of developing countries have an interest in the American government’s drive to stop or stifle Libra and other crypto-currencies. American power has the potential to deny marginalized societies a chance to break from their present situation.

So perhaps, a better question would be; at what point do interests or concerns of a small group of politicians trump (no pun intended) the benefits that can accrue to a billion plus people? The question has to be asked because that is precisely what is happening, US congress is only interested in maintaining a system that gives the country an advantage even if it comes at the expense of a greater number of people.

This is a reverse for a country renowned for being amenable to change, a place that encourages innovation and where freedom is celebrated. Many innovative entrepreneurs around the world see it as the best place to launch new ideas.

Attempts to crush new innovations like Libra might as well serve as signal that the country is no longer happy to lead and rivals will now feel encouraged to seize the initiative.

Aside from that, the United States has, by virtue of its position as a global superpower as well as a defender of freedom and democratic ideals, a responsibility to help bring positive change to the poor and those marginalized. This includes supporting innovations that will bring about financial inclusion as well as the improvement of living standards of citizens of the world’s poorest countries.

While tax evasion and money laundering concerns are justified, they should not stop America from remaining a global leader. A balance must be struck between finding solutions to tax evasions or terrorism funding problems and the genuine need to bring financial services to the poor. Facebook might have taken the important steps of seeking audience with skeptical politicians but this has to be reciprocated. A solution can only be found via engagement.

Risks of associating cryptos with Ponzi schemes

Terence Zimwara

Some crypto businesses see no harm in the use of network marketing as a strategy for hastening adoption of the fintech even though the approach is also commonly used by bad actors. Indeed network marketing is a legitimate business practice that has been employed by some businesses for decades.

Ponzi or Pyramid schemes on the other hand, are essentially fraud schemes packaged to appear like a legitimate network marketing business. Even ‘smart’ people will not be able tell the difference between a scam and a legitimate one, the line is very thin. Such fraud schemes are common in poor countries as well as in emerging markets where consumer protection laws are not that robust. Victims are usually lured by the promise of huge earnings in the shortest period possible time or by a passive income that promises a healthy lifestyle.

Usually with such schemes, the emphasis is on getting more members to join than the marketing of the actual product. Apparently the core business is getting new members to join but this is never said upfront. Victims usually realize they have been conned when they have already joined or paid but the schemers are confident that only a few will take action to recover lost funds.

The fraudsters often gamble that the rest of the victims will be in on the con because; firstly they want to recover their own ‘investment’ and secondly they can also profit by luring their own victims. Indeed, those joining such an elaborate scheme much earlier, will realize substantial revenues that are mainly extracted from fees paid by later recruits.

Successful members/investors are then used as testimonies to lend credibility to the grand scheme. This maybe the reason why some defend Ponzi schemes, the earnings are real for the early investors. Indeed, even Bernie Madoff’s multi-billion grand theft might have duped many investors in the end but those who joined early earned handsome rewards.

Regrettably, all Ponzi network marketing schemes often collapse as it will become mathematically impossible to continue getting new investors or referrals as they commonly known. When that point is reached, such a scheme collapses like a deck of cards and the last members to join often lose out. There is neither compensation nor relevant laws that provide cover while consumer watchdogs only react when the schemers are already gone.

For example, controversial organizations like OneCoin, MMM and RRR Link conned unsuspecting people into parting with millions of dollars by employing similar tactics. Arrests have been made but masterminds might not even serve time!

As the old adage goes, once bitten twice shy, some in African countries where Ponzi schemers regularly strike now view with suspicion any organization using any such marketing methods.

Sadly when a legitimate business attempts to employ the same tactics in a market that has seen its fair share of Ponzi schemes, such a business will see their image getting tainted by this association. That also goes for Blockchain or crypto businesses, distrustful potential users will steer clear of crypto-currencies when a suspicious referral system is brought into the picture.

Blockchain is real and its utility has been proven countless time but this association with such unpopular schemes will only slow down the embrace of the innovation. Already some crypto businesses on the continent constantly have to bat away accusations that they are running pyramid schemes. This does not augur well for cryptos in a market that represent the best user case scenario.

One Bitcoin mining company is using such an approach as it attempts to recruit more miners to its pool and its officials believe they are conducting a legitimate and genuine operation.

Potential miners are told of enticing but surreal income projections, which are dependent on the number of successful referrals. After attending one of their regular investor meetings, one gets a feeling that the organization is running a pyramid scheme but using its association with Bitcoin to claim legitimacy. 

For opponents of Bitcoin, this particular case is manna from heaven, they are quick to seize on this by warning the public to avoid this ‘latest’ Ponzi scheme in reference to Bitcoin and not the said organization. Such an attack is at best disingenuous but it sticks if the targeted audience has had previous encounters with actual Ponzi/Pyramid schemes.

MMM was grand scheme that left hundreds of thousands counting losses across the African continent. Crypto opponents on the continent are able to weep up emotions by invoking these memories when they attack crypto-currencies and they may have a ready audience in the form of ignorant government officials. A few years ago, Nigeria and Uganda lawmakers were both reportedly contemplating tougher regulation for cryptos, which authorities are repeatedly linking with the growing problem of Ponzi and Pyramid schemes.

Therefore crypto businesses must avoid falling into this trap by choosing marketing methods that make the task of marketing tokens easy. Perceptions are stronger and difficult to alter though the passage of time will. It does not matter that a crypto company believes that it is running a legitimate operation, what matters are the potential users’ perceptions. If the perceptions about network marketing are currently negative and they cannot be changed immediately, the best course of action would be to avoid relying on this referrals business as strategy of driving up numbers.

It is best to only resort to that method when the air has been cleared that crypto-currencies are not scams but are real solutions to the continent’s problem of inaccessible banking services.

Intrinsic value—does it matter for Bitcoin

Terence Zimwara

Opponents of pure crypto-currencies including those supporting stablecoins have consistently used the tokens’ perceived lack of intrinsic value as their main line of attack. Stablecoins are backed by ‘stable’ fiat currencies like US dollar and Euro or alternatively with commodities like gold. Fiat currency itself is stable because it has state backing, it’s the legal tender.

Ordinarily this lack of intrinsic value means a pure crypto-currency like Ethereum is not really backed or tied to anything of value. Matters are made worse by the fact that few countries have given recognition to Bitcoin or any of the so called alt-coins.

Without official or legal recognition as well as real assets to back them, growth and acceptance of crypto-currencies will remain stymied we are reminded. But just how far this intrinsic value argument goes is unclear. Most government issued currencies are also not backed by underlying assets, they have no intrinsic value but they remain in play.

Legal tender status

Indeed, prior to 1971, the world was accustomed to a gold standard; the US dollar was redeemable for gold. The world has since moved away from that system to one where value of the currency is determined by the forces of supply and demand. Under such a system, it is the central bank that is entrusted with the task of maintaining or stabilizing the value of a currency by either injecting or limiting the amount of money in circulation.

The abandonment of the gold standard meant a central bank issued currency was now just a token with no real value. Besides the legal tender status that is assigned to it by a government, it has no intrinsic value per se, the currency only functions because it has state backing. Logically people will have confidence in that currency’s ability to act as a medium of exchange or a store of value simply of because it has the legal tender status.

It is this confidence that matters particularly when a currency has nothing backing it. Pure crypto-currencies like Bitcoin are not backed by anything nor do they enjoy the legal tender status but have exhibited signs of a fully functioning medium of exchange. That is only possible because early users have confidence this novel currency.

In 2018, when Bitcoin’s value began heading south, critics began predicting a total crash but that has not happened just yet. After peaking to just under $20 000 in late 2017, Bitcoin value fell to below $4000 by late 2018 but only to stabilize around that price. The so-called analysts pointed to the price of $3600 being the resistance level; Bitcoin could not drop further than that, the only direction was up.

That assessment seems correct for the moment because Bitcoin has since rallied, briefly peaking at $13 000 in July 2019. Some are predicting that it will breach the $20 000 barrier later this year with reports suggest that institutional investors have joined the club.

Why the confidence in Bitcoin

Bitcoin and alt-coins have maintained their values precisely because users have confidence in the mathematics behind the creation of such tokens. The Blockchain— the technology that underpins crypto-currencies—occupies the role usually reserved for a central bank, it ensures the currency in circulation is immutable, it cannot be duplicated and more importantly, it allows users to verify if the founding rules are being adhered to. In other words there is no debasing of currency through over printing or uncontrolled borrowing as is the case with fiat currency because the Blockchain pre-empts this even if that were the only ‘options’ left .

As a growing number begin to understand this about the Blockchain, more people get attracted to Bitcoin even as it has no intrinsic value. As often is the case with currencies, it is confidence that translates to a strong and stable currency. High confidence means a strong currency and vice versa. Backing a currency or even a stablecoin with gold or oil might not be enough to sustain or support a currency when there is no confidence. That is what Venezuela has learnt with its petro crypto token.

Oil not enough

Venezuela is in the midst of a crippling economic crisis; its currency has all but collapsed and generally the country is short of confidence. In response, the government launched its own crypto, which it said is backed by oil or gold. However reports coming from that country indicate this project may have suffered a stillbirth; few people are accepting this as a means of payment. Instead, Venezuelans have placed trust in Bitcoin, a privately issued crypto-currency with no intrinsic value. Reports suggest many are using Bitcoin to settle transactions as well as to hedge against runaway inflation.

This example proves that while precious resources or commodities are important in backing a currency, confidence in the process of issuing that currency remains paramount. Venezuela is a renowned oil producing country and backing the petro token with oil made all the sense, yet for citizens of that country that is simply not enough. Reports of abuse of national resources as well as corrupt practices by government officials are some of the factors that drain confidence in a currency as well as the economy in general, and this may have contributed to the petro failing to take off.

Legal tender not enough

Zimbabwe is another example that has proven that without satisfying certain conditions like confidence, a currency cannot stand even as it enjoys the so-called legal tender status. When the Zimdollar collapsed in 2008, the country adopted the popular and stable US dollar as the new legal tender or as the process is known, Zimbabwe dollarized. It was during this dollarization era when officials repeatedly complained that the US dollar had curtailed the central bank. The central bank could not issue out effective monetary policies without a local currency. 

Things like inflation targeting and foreign exchange controls were not possible without a domestic currency was argument.

Sometimes the arguments had little or no economic rationale. For instance officials averred that a country just had to have its own currency for the sake of it. A local currency was a source of nationalistic pride. Local currency supporters did not want to be reminded why the currency had collapsed in the first place.

Consequently, in late 2016, the government reintroduced the Zimdollar, then initially disguised as the so-called bond notes, which were supposed to be at par with the US dollar. The Zimdollar was brought back to ostensibly enable the central bank to positively tackle monetary issues.

Of course, this is not the only reason. With capacity to mint your own currency comes the ability to print money well beyond a country’s economic means. With printing money comes power, an entire population is at the mercy of a few central bank appointees who are in fact more subservient to their appointers than to the interests of the masses.

In countries with weak governance systems, such an arrangement enables corrupt politicians to finance expensive but ultimately unviable public projects and Zimbabwe is no exception.

In early 2017,Zimbabwe launched Command Agriculture, an ambitious but costly agriculture funding initiative and this expansive exercise gobbled $3 billion between 2017 and 2019. Government had initiated this in order to bolster the country’s agricultural output and food security after years of grain deficits. Two years later, government now says Zimbabwe needs to import at least 800 000 metric tonnes of maize in order to avert a famine following a poor agricultural season! In other words, the giant agriculture project has failed even after the central bank created or printed money to fund this.

Just recently, the country’s auditor general produced a report which exposed the rampant abuses that plagued Command Agriculture leading to its now apparent failure.

It is imperative to note that this kind of unrestrained spending coincided with the return of a local currency. Command Agriculture would not have been possible without the fictitious money coming out of the central bank.

Now ordinary people are paying the price, a legal tender status or state backing will not save a currency from collapsing. The new Zimdollar has depreciated by 900% against the US dollar since its reintroduction in late 2016 and looks destined to fall even further. With official inflation figures now at 175%, ordinary Zimbabweans are dumping the currency in favor of the USD and Bitcoin.

The growing interest in Bitcoin by some Zimbabweans is particularly important as it is happening despite public warnings against the use of crypto-currencies which were issued by the country’s central bank.

Bitcoin’s popularity in Zimbabwe underlines the importance of transparency in managing a currency. This crypto-currency has a known number of coins in circulation as well as the total number that will be issued. There is no possibility of reneging on this because this is already wired in the Blockchain and no one party can alter this. Knowledge of this creates confidence, a key attribute for anything that functions as a medium of exchange.

Intrinsic value matters yes but on its own it cannot sustain a currency. However, with just confidence, a currency will survive as Bitcoin and alt coins have shown us. Bitcoin opponents may have to look for another reason to attack the crypto, the intrinsic value is argument does not stick anymore.

Crypto-currency inevitable despite Trump outbursts

Terence Zimwara

United States of America President is not one given to diplomacy, Donald Trump speaks his mind and in many ways that endears him with his supporters. Trashing Washington’s well established etiquette and its venerable poise, this president has taken on powder keg topics or issues with breathtaking unruliness. From the trade spat with China or a brawl with Iran to lashing out at a special counsel investigation into 2016 US elections, Trump’s showmanship looms large.

However, for those searching for clues of the exact happenings inside the Trump White House, the twitter rants are a treasure trove. Journalists now seem to prefer reporting on his twitter feeds to official government announcements. Anything he says grabs headlines around the world.

So many crypto-currency enthusiasts and supporters could not believe their luck when the man teared into Bitcoin and the upcoming Libra recently. Trump attacked Bitcoin and claimed the US dollar was the strongest currency before suggesting (or threatening) that Facebook had to establish its own banking charter if it wanted to launch Libra.

As usual, those looking for clues from the twitter rants found this to be quite bemusing but interesting nonetheless. For crypto-currency discourse had until now remained limited to a motley of crypto supporting websites, some tech magazines and on rare occasions, the mainstream media. The bigger media may have been avoiding this subject, possibly out of ignorance or perhaps due to sinister motives. Whichever the case, the effect has been clear and consistent, it suffocated this debate.

So when an unhinged Trump tears into crypto-currency there has to be something much bigger about the topic than the attention it had been getting. Interestingly, the US Treasury Secretary Steve Mnuchin addressed the same issue but was more measured as did Jerome Powell, the chairman of the US Federal Reserve. The two men may have been trying to walk back some of the president’s unrestrained comments earlier.

Nevertheless, it is Trump’s utterances that matter because they are not laced with the usual diplomatic niceties, when he sees a threat he makes sure everyone knows about it.

So what is the threat here anyway? Apparently the US government establishment believes a crypto-currency like Libra stands a good chance of succeeding and thus possibly ending the US dollar’s global dominance. That is the first clue to be gleaned from Trump’s twitter rants; it is primarily about the impeding loss of power and not the usual money laundering or terrorism funding talk that officials have tried to use to sanitize their alarm.

Bitcoin and Libra are real threats to Washington’s foreign policy and its sanctioning toolbox, the Office of Foreign Asset Control (OFAC). It seems a widely adopted crypto-currency as Libra is promising to be, can potentially nullify the effectiveness of the financial sanctions policy. Facebook and its Libra partners may have taken the unusual step (in the crypto world) of engaging or of trying to submit to authorities first before launching but that is being rebuffed because the issue has more to do with threats to America’s global dominance by crypto-currencies. KYC or AML concerns are just smoking guns!

The second clue comes from the stance taken by congress, a body often at odds with Trump, but seemingly happy to back him on this one. Such unity should be enough to raise stink to any neutral observer. When a polarizing president’s utterances are in sync or are supported by a usually divided congress, it means the threat is real. In fact, a bi-partisan congress has even gone a step further by asking Facebook to halt its march towards Libra launch because lawmakers want to time to study or to have their concerns addressed first. Of course Facebook may not be in a position to adequately address any such concerns. Simply put, congressional leaders do not want Libra to compete with the US dollar period! No amount of glossing over will hide this fact.

Facebook’s blockchain lead David Marcus tried to point out that the US need not be left behind with this technology when appearing before the Senate Banking Committee but lawmakers were unmoved. Their disdain of Facebook and general fear of competition blinds them to a point that any rationale argument in favour of privately issued currency is assailed.

While Facebook is hardly the right candidate to speak on behalf of this industry, Marcus did manage to highlight one important fact, the need to serve those without access to financial services. The world has 1.7 billion people who are unbanked and many more who under-banked and this is has been the case pretty much for years. 

Some lack a bank account not because there are no financial institutions around them but because they do not trust them or lack the necessary documents needed. A World Bank Global Financial Index survey found that close to 20% of unbanked respondents said they do not trust financial institutions as their reason for avoiding the banking system.

Banking fees as well as accessibility are some of the key issues of concern to those without bank accounts and it these areas where crypto-currencies hold an advantage over traditional banks. One only needs internet access to be able to access or use crypto-currencies, which are also better at making cross border payments or remittances.

These are real life use cases and trying to forestall a US company from providing such services will only result in non-US companies or the difficult to regulate cryptos like Bitcoin filling this void. Crypto-currencies are inevitable, whether privately, anonymously or publicly issued, the world actually needs them.

Governments need to come to terms with this reality sooner rather than later and embrace this technology. Moreover, efforts should be undertaken to see how these technologies can be integrated with the conventional financial system.

Attempting to legislate against innovation— as the Capitol Hill rumor mill seems to suggest—will be a signal to rivals that the United States is relinquishing its position as the number one hub for innovators. In any case, any such legislation will be akin to putting cart before the horse, it goes against the conventional way of doing things. A new product or an innovation must given a chance to grow and express itself before one passes judgment. Legislation should only come when there is sufficient information and knowledge about an innovation.

Indeed fear and cynicism might win votes and elections sometimes but that should never be the case when it comes to lawmaking or government policies, which often outlast elected governments. Instead, sobriety must always take precedence.

Stablecoins—the critical final piece

Terence Zimwara

The impasse that has prevailed between crypto entrepreneurs and regulatory authorities meant mass adoption of crypto-currencies was not going to happen unless a breakthrough was found. To potential cryptos users, an endorsement of crypto-currency by authorities is seen as an important step towards instilling more confidence.

 On the other hand, regulators are unwilling to give such an endorsement to any innovation which they see as a threat, and now with US President Donald Trump accentuating these fears, endorsement may not come anytime soon.

Prior to Mr Trump’s outbursts against cryptos, central banks/regulators had for years been adamant that all players in the financial services industry had to comply with KYC and AML processes without exception.

Central banks genuinely believe they should be able to track and trace all financial transactions that fall within their jurisdiction; privacy is not something that overly concerns them. In nutshell, central banks want to maintain total control.

Obviously creators of purely decentralized cryptos will never accept this because their innovations are already popular, in part because they give users complete privacy. Also anyone who wishes to acquire crypto-currencies is free to do so as long as they have the funds to make the purchase. There is no documentation required or the usual KYC procedures, which may be responsible for the exclusion of some 1.7 billion from the banking system. Crypto-currencies like Bitcoin are permissionless!

This unhealthy stalemate has subsisted for a few years now although both parties are in agreement that the Blockchain technology is actually beneficial. Naturally, this situation has been seen as a call to action for entrepreneurs to create a hybrid that satisfies the seemingly mutually exclusive needs/concerns of users and regulators.

For the moment, stablecoins appear to be that important compromise albeit with some limitations. Stablecoins are cryptographic tokens collateralized with a physical asset, most commonly being fiat money such as the USD or commodities such as gold or silver. Tokenization of an asset essentially transfers the ownership and value of an asset to the correlated token. Pure crypto-currencies may have failed to achieve mainstream adoption thus far due to the fact they have no ‘intrinsic value’ hence the price volatility.

This tilt from the extreme end of the spectrum—a decentralized crypto like Bitcoin—to stablecoins indicates an understanding of challenges stifling pure cryptos. Consequently, there has been a deluge of generic forms of crypto-currencies, from USDT, a privately issued stablecoin which is backed by the USD to petro that the Venezuelan government issued coin and now Libra.

Indeed, pure crypto-currencies were initially created to compete or replace fiat currency as a medium of exchange and a unit of account. This has not really happened on a large scale partly due to the aforementioned reasons and not forgetting the instability of most crypto-currency values, if not all of them.

As we have seen in preceding articles, many other factors also contribute to this challenge of slow adoption hence their failure to upstage fiat money thus far. To illustrate, crypto market capitalization as at March 11, 2019 was estimated at about $134 billion. At around the same time, the overall value of banknotes and coins in circulation is over US$7.5 trillion, the global narrow money supply (banknotes and coin, including cheque account deposits) is US$36.8 trillion, while the global broad money supply (banknotes and coin, cheque account deposits as well as money market accounts, savings accounts and time deposits) is more than US$90 trillion, making cryptos still relatively immaterial compared to fiat currencies. (At the time of writing, crypto market capitalization had surged to over $300 billion largely spurred on by Bitcoin, which is set to breach its previous peak.)

As already noted, a number of stablecoins have emerged and more are coming with the most notable being the upcoming Facebook Libra. The Libra story supports the growing realization that stablecoins are the future of cryptos for now and why an alternative system is necessary. Also, the Libra story could amplify the debate about the importance of Blockchain technology in bridging the financial services gap.

However, in spite of all this, stablecoins including Libra are a deviation from the original ethos of digital currencies and thus they cannot pass as decentralized or permissionless currencies. To understand this point, one has to observe the structure of the organization behind the Libra stablecoin for instance. An umbrella body representing the interests of organizations who are party to this project, the Libra Association Members is being set up.

Purportedly this body will not be under the direct control of any of the participating organizations but the fact that it is there underlines the critical difference with Bitcoin which does not have a similar body.

This is one key deviation from the original principles; pure cryptos have no central point of failure, there is no big brother snooping around so to speak. Today politicians and regulators gripe against Bitcoin because they cannot influence or control those using it or where it is used because it is decentralized, there is single point to attack.

To illustrate this last point we take the example of the United States government, which presently relies on the US dollar’s global dominance to project its power around the world. Washington can literally cut off any country from the global financial system if it feels that country threatens its foreign policy objectives for instance. So when the world switches to a currency, which it cannot control like Bitcoin, the US government will resist this because such a currency erodes its power.

The much anticipated Libra may not pass the same decentralization test as Bitcoin because it has a central point of failure, governments can always exert pressure on either Facebook or the organization charged with overseeing the Libra project. This is already happening even before Libra is launched; the US government is essentially asking Facebook to make certain changes or to slowdown the project and the internet giant will oblige or risk punitive action. 

Indeed most stablecoins are designed in a way that allows governments and regulatory bodies to have influence in their issuance or circulation thus setting them apart with pure crypto-currencies.

Stablecoins may be permissionless but there may be exceptions to this as the Libra case once again shows. Facebook is currently engaged with US authorities over concerns that Libra might be used as a conduit for illicit transactions, money laundering and even terrorism funding. The US government wants be to assured that those it flags as possible money launders or terrorists, be precluded from using Libra. Facebook may be in position to give such assurances given its control over the massive user database as well as the network that will be the key in supporting the stablecoin.

It is quite possible that people in OFAC blacklisted countries might not be able transact freely with this stablecoin, that is if the US government has its way. This effectively renders Libra a permissioned stablecoin!

Lastly stablecoins are a deviation from the original principles of cryptos because they rely on or are backed by fiat currencies issued by central banks. Backing a crypto with a fiat currency— not matter how strong—means it will be susceptible to monetary policies and consequences thereof. Such a coin will be affected by inflation or devaluation of the underlying currency leaving holders worse off.

As we have observed here, stablecoins are fraught with these challenges which can potentially render them ineffective. Nevertheless, they are an important step forward in the quest to have crypto-currencies widely accepted.

In any case, this market needs competition and stablecoins could prove to be just that competition. There is no doubt issuers of pure crypto-currencies will be thinking of ways of responding to the upcoming Libra stablecoin. This means existing pure crypto-currencies will see improvements or changes that make them more acceptable to potential users thus making the goal of greater adoption achievable.

Stablecoins are well poised to break the ice and end the impasse between regulators/governments and the Blockchain movement. Most important, stablecoins could be the final piece needed to bring financial services to those who do not have them. The next few years will be important for this small but critical industry.

Why Taiwan is a promising Blockchain leader

Blockchain technology has been around for quite a while now. It is only now that the technology is starting to take a firm hold. By 2021, the blockchain market will approximately be worth $2.3 trillion. Many governments are now starting to realize the value of the technology and some are adopting the technology for a variety of tasks including health care, voting and land administration services.

A legislator in Taiwan, Jason Hsu intends to find ways to integrate the blockchain technology on a grand scale and steer his country towards the adoption of blockchain for uses other than cryptocurrencies. Hsu has been lauded as the “crypto congressman” by Vitalik Buterin from Ethereum. He is a tech entrepreneur who successfully ran for Congress and now wants to turn Taiwan into a haven for innovators working on different application technologies.

Change of legislation

In September 2017 when China slapped a ban on ICOs, Hsu saw this as an opportunity to propose some changes to legislation that would help Taiwan capitalise on China’s move. His intention was to introduce more friendly laws that would not only nurture the blockchain technology but entice more startups to set up base in the Island nation.

As Hsu reflects the today, a number of technological disruptions are making an impact on how our lives manifest. The country ought to recognize this fact and update its policies to incorporate new ideas into the current system.

Subsequently Jason helped to launch the regulatory sandbox in the finance department to explore future opportunities for financial technology start-ups. The sandbox also helps to ensure that start-ups are able to create workable solutions and technologies that are usable by all and sundry.

Sandbox

Hsu believes that today’s environment is moving very fast and sandboxes in such areas as a medical technology are vital in order to test new devices that can incorporate digital health. In Dec 2017, parliament passed into law Taiwan’s regulatory sandbox, which allowed certain selections of startups to unveil new products or services while enjoying immunity from the existing laws.

The Taiwan Financial Technology Experimentation and Innovation Act (Regulatory Sandbox Bill) is supposed to help bridge the fintech gap in Taiwan. Hsu was a major player in the drafting of the bill as well as the entire legislative process. The sandbox was unveiled to create opportunities for upcoming fintechs on the island and help build innovations that would create solutions globally.

Applications

Jason Hsu, the congressman who is turning dreams into reality is also exploring different initiatives along with a few other industry enthusiasts and these include:

●        Digital content proof of ownership

●        Decentralized internet for every citizen

●        prediction platform for  politics, or share markets and many more

Parliamentary support

Taiwan is modeled in such a way that the Executive Yuan can propose their own legislation.  Legislators are also allowed to propose and draft laws and the norm is the different versions can be debated on. The Executive branch is still very conservative, but they do share a common goal with the legislature, it is the pace in which the two are moving at that is different.

Hsu intends to create opportunities for the youth, and he is not worried much about convincing his parliamentary colleagues but makes it a point that start-ups do support his proposals. Support from the startup puts a lot of pressure on officials and congressional representatives to give a response.

The Financial Supervisory Committee and the Ministry of Finance are well on the way towards passing cryptocurrency and blockchain legislation. They have formed a parliamentary level commission for blockchain that is working towards building the necessary framework.

Skepticism over Blockchain

Hsu says that people will always be skeptical about any new innovation. When the internet was new, people said it was a scam but today many acknowledge its utility. As a legislator, Hsu’s intention is to create a fair environment that cultivates innovation while safeguarding consumer rights.

Development and adoption of blockchain

Many countries are still struggling to understand the blockchain technology as well as how to develop and implement it. In Taiwan’s case however, the country has been a computer and electronics integrator since the 1970s and is endowed with a pool of talented and experienced engineers. With this in mind, Hsu has set out to build up Taiwan as a blockchain haven where innovators can pioneer new projects that will churn out applications for blockchain.

Blockchain implementation

Blockchain has been underrated for as long as it has been around. As with any new technology, once a useful application comes up, people start to take notice. Blockchain gave birth to Bitcoin, but now the technology is growing and integrating other applications.

Hsu has plans to ensure the government recognizes and uses blockchain on a larger scale. It has already moved to the Departments of Justice, Education, and Health onto the blockchain. The average person needs to recognize the improvement of life is via blockchain’s efficiency. As part of his many objectives, Hsu has introduced 25 pilot projects in various departments to look into the potential use of Blockchain in areas such as court records, supply chain, and drug tests.

Blockchain’s future

Blockchain is not going anywhere. The world’s governments are slowly accepting the technology and in no time, these hurdles and scaling issues will be a thing of the past. Jason also believes that Cryptocurrencies and fiat currencies can co-exist. Cryptocurrencies are a financial alternative that can create solutions for poor countries like Zimbabwe and Venezuela.

Taiwan is a haven for technological start-ups that focus on blockchain, IoT and AI. An escalation in the creation of major start-ups and incubators are thrusting Taiwan into the blockchain limelight. Taiwan Tech Arena is one such startup incubator that will initiate at least 100 start-ups every year, and accelerate the expansion overseas of 300 more in a span of the next three years.

Conclusion

The only way to grow blockchain technology lies in its demystification. This can only be done by changing blockchain’s narrative from the complex tech talk to a language understandable and that an average person can relate to. This means showing people what the blockchain technology can really do, the real-life problems it can solve as well as laying out its many advantages.

A lot is happening behind the scenes, not just in Taiwan, but globally as the race to integrate blockchain with everyday life gathers momentum. It is only when people realize the real benefits of the technology and how they stand to benefit will a greater adoption of the technology be realized.