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Charting the course in cryptocurrency era

Md. Mashiur Rahman and Ayon Dutta | Published: July 12, 2019 21:00:15


Cryptocurrencies are s a form of digital money that is designed to be secure and, in many cases, anonymous. They are used in online transactions and the internet uses cryptography, the process of converting legible information into an almost uncrackable code, to track purchases and transfers.

The emergence of cryptocurrencies has put policymakers across the globe on the horns of a dilemma. They are confused about what to do. The Bangladesh Bank, the central bank, has issued a notice warning against any online transaction through cryptocurrencies like Bitcoin, Ethereum, Ripple, Litecoin, etc. Moreover, the online giant facebook has a plan to introduce its own cryptocurrency named Libra in 2020. The disclosure has been greeted with concern by the G20 nations. They have decided to gauge the impact of the Libra and tread cautiously.

The first cryptocurrency was bitcoin, which was created in 2009 and is still the best known. There had been a proliferation of cryptocurrencies in the past decade and there are now more than 1,000 available on the internet. The cryptocurrency market has evolved unpredictably and at an extraordinary speed over the course of its short lifespan. Of the 1,000 cryptocurrencies, the majority saw only a little of success. However, if the cryptocurrency is introduced widely or popularly, the economy of a country and its banking system may be affected severely.

The cryptocurrencies will lower the barrier to entry with a wide entrance and a very narrow exit. The exit can be barred due to technological constraints, currency inconvertibility and few counterparties with whom to trade. The asset class generally does not match the traditional economy, which can create some sort of panic in the market.

What is miraculous is that blockchain-based cryptocurrencies, such as bitcoin and libra help address the issue of double counting without any intermediary, such as a bank or a banker. This feature is derived from the notion of digital singularity. However, the intangible and illiquid nature of cryptocurrencies hampers their convertibility and insurability as there is no physical existence. Despite the intangible and unseen nature of cryptocurrencies, one of the single biggest issues plaguing the market is care, custody and control. Not unlike the recurrent challenges of cyber and physical security of the traditional banking sector, there is a veritable standards war taking place among crypto custodians on who is providing the highest standards of investor protection and asset security.

As smart phones and digital wallets will be utilised for the transaction purpose without control of any country, there exists great scope of real cyber threats. All cryptocurrencies are not created equal in terms of their traceability, transaction ledgering and levels of trust or fiduciary responsibility. For this, risks as simple as "mysterious disappearance" and as complex as ransomware attacks and artificial intelligence (AI)-powered bots scouring the Internet for weak links and easy prey are complex and fast-moving perils. The intangible nature of the asset class, human error and something as confounding as password amnesia can spell the total loss of a crypto fortune. The prospect of being locked out, losing hardware or facing geophysical risks, is often enough to create losses.

Another key risk of using cryptocurrencies and this asset class more generally is the lack of coordination and clarity on regulatory, financial, tax and legal treatment. This is unsurprising, given the relatively new nature of this market and the often slow moving and lagging quality of "regulatory catch up."

Governments control fiat currencies. They use central banks to issue or destroy money out of thin air, using what is known as monetary policy to exert economic influence. They also dictate how fiat currencies can be transferred, enabling them to track currency movement, dictate who profits from that movement, collect taxes on it, and trace criminal activity. All of this control is lost, when non-government bodies create their own currencies. Control over currency has many downstream impacts, perhaps most notably to a nation's fiscal policy, business environment, and efforts to control crime like kidnapping, ransom and extortion. So much has been written about virtual currencies and crime that it is enough to recap the issue by stating that untraceable financial transactions facilitate crimes. Drug trafficking, prostitution, terrorism, money laundering, tax evasion, and other illegal and subversive activities all can benefit from the ability to move money in untraceable ways.

Presumably, one of the biggest drawbacks and regulatory concerns surrounding cryptocurrencies is its ability to facilitate unlawful activities. There are many grey and black market online transactions which are denominated in cryptocurrencies. For example, an infamous "dark web" marketplace used Bitcoin, facilitating illegal drug purchases and other illicit activities before it was shut down in 2014. Also, cryptocurrencies are increasingly becoming popular tools for money laundering. They funnel illicitly-obtained money through a "clean" intermediary, which conceals its source.

While the potential for crime captures the public's attention, the role currency plays in a nation's monetary policy has the potential to have a far greater impact. Since governments intentionally increase or restrict the amount of money circulating in an economy in an effort to stimulate investment and spending, generate jobs, or avoid out-of-control inflation and recession, the control over a currency is a big concern. It's also an extraordinarily complex topic.

Cryptocurrency users don't need the existing banking system. The currency is created in cyberspace, when so-called "miners" use the power of their computers to solve complex algorithms that serve as verification for cryptocurrency transactions. Their reward is payment with cyber currency, which is stored digitally and passed between buyers and sellers without the need for an intermediary. If cryptocurrencies become widely adopted, the entire banking system could become irrelevant. While this may sound like a wonderful concept in light of the recent behaviour of the banking industry, there are two sides to every story. Without banks, who will call you when your deposits get hacked? How will you earn interest on your savings? Who will provide assistance, when a transfer of assets fails or a technical glitch occurs? Without banks, those jobs disappear, as does the tax revenue those banks and their employees' paychecks generate. Money transfer business would also disappear in a virtual world. Nobody needs a Western Union or its competitors, if everybody is using a cryptocurrency.

Cryptocurrency is a technological innovation run by corporate houses and/or private companies where control by a central bank is minimum. Moreover, commercial banks will not have participation under the control of a central bank for cryptocurrencies. Ultimately, control over a currency by the country will be downsized and go to the private company. Making the monetary policy and fiscal policy as well as implementation of the same will be very difficult as control will be going to the private company which is now done by a central bank with the help of commercial banks. As cryptocurrencies involve high risks, the central banks with the consent of their respective governments can increase the digital transactions in a cheap and secure way through the commercial banks. In case of digitisation of transactions there is a hundred per cent chance to improve the financial inclusion which will strengthen the economy and the country as a whole. Through the digitisation of financial transactions, transparency can be ensured and a healthy economy can also be formed. So, go for digitalisation of transactions but not for any privately-controlled cryptocurrnecy.

 mashiur.du@gmail.com; ayonais178du@gmail.com

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