Cryptocurrency: challenges and opportunities

Govts have begun exploring, experimenting with central bank digital currencies

KARACHI:

The distinction between what is real and what is not is diminishing rapidly these days. The recent move by Facebook to rebrand itself as Meta speaks about pace of transition from physical to virtual realm. So far, the younger generation is being prepared to live and breathe in this metaverse where one can do anything or become anyone without even moving out of their couch. However, the architects of these virtual realities are not doing it for charity and the end goal is to monetise the whole experience by creating a parallel financial system free from the shackles of regulations and physical constraints. Here, cryptocurrencies take the stage with a tall promise to fuel this paradigm shift.

To counter the rising demand for digital currencies, governments around the world are exploring or experimenting with central bank digital currencies (CBDCs). Out of all major economies, China has advanced the furthest towards a fully-fledged CBDC with its digital yuan. The digital yuan is China’s electronic currency. Also known as e-CNY or e-RMB, this new currency stands in direct competition with cryptocurrencies, corporate payment systems and mobile payment apps. China has completely banned all the cryptocurrencies and the list of countries taking such measures is growing. It now includes major economies such as Indonesia, Turkey, Vietnam while Egypt’s Dar al-Ifta, the country’s primary Islamic advisory body, issued a religious decree in 2018, classifying Bitcoin transactions as Haram. Some countries, that have not banned the digital currencies yet, are seen to quickly hardening their stance against cryptocurrencies like India which recently passed legislation to criminalise the possession, issuance, mining, trading and transfer of crypto assets.

Although the strong recommendations, issued recently by the State bank of Pakistan, to ban cryptocurrencies created an uproar on the social and mainstream media, it was not a surprise because central banks all around the globe are growing wary about cryptocurrencies and challenging their existence and authority on regulating the financial system of their countries. The question here is not convenience or mere digitalisation of transactions because most monetary transfers are already digital and do not require physical currency.

The other angle is the lack of oversight and usual late/ knee-jerk response by the authorities in Pakistan after many illegal applications have fleeced crypto traders of billions of rupees. Lack of any regulatory framework provided a perfect breeding ground for unscrupulous operators to dodge (not the name of cryptocurrency) the traders by showing affiliation with crypto exchange companies such as Binance.

In my article “Decrypting the bull-run in cryptocurrency”, I analysed major moves in the crypto space lately which were mainly speculative in nature without any fundamentals behind them. Therefore, even if everything is hunky-dory in terms of compliance and regulation, there is no way to find out which direction the cryptocurrencies will go on any particular day.Cryptocurrency is not the kind of invention that has had clarity since its inception unlike many major inventions so far. Even the inventor of cryptocurrency Satoshi Nakamoto never came out to the public to explain what his (or her) discovery was all about. So far, cryptocurrency transactions are only found to be associated with many dodgy transactions on the dark web, illegal trading, money laundering, and ransom payments to hackers.

However, the fact that cryptocurrency has survived all the backlash and crackdown from the establishment and the existing financial authorities speaks about its robust demand from a different breed of investors who have been brought up under the influence of virtual world of social media, games, selfies, skins, non-fungible token and virtual coins. In addition, the underlying blockchain technology has shown immense potential and it will form the backbone of future innovations such as Web 3.0.

Despite strong criticism from many sophisticated investors like Charlie Munger, who wished that cryptocurrencies were never invented, there is a genuine growing demand for the new breed of the asset class that provides real diversification to seek refuge especially when the ill-effect of relentless printing of fiat currencies by central banks globally will take its toll on its valuation.

The writer is a financial market enthusiast and is attached to Pakistan’s stocks, commodities and emerging technology

 

Published in The Express Tribune, January 17, 2022.

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