Crypto: the currency of the future?

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In May, the South African Reserve Bank (SARB) announced that it would be investigating the feasibility, desirability and appropriateness of a central bank digital currency (CBDC) as electronic legal tender. The SARB’s digital currency would be for general-purpose retail use and would act as a complement to cash. “The objective of the feasibility study is to consider how the issuance of a general-purpose CBDC will feed into the SARB’s policy position and mandate,” reads a SARB statement.

What’s a stablecoin?

Stablecoins are a form of cryptocurrency that originally appeared in response to the volatility of ‘standard’

cryptocurrencies, like Bitcoin. These coins are backed by stable assets, like a traditional currency or a precious metal, like gold. This makes them less vulnerable to wild price fluctuations. According to Forrester Research, there are four main categories of stablecoins:

1. Coins backed by off-chain deposits in a fiat currency, such as US dollars (USD). Regulated stablecoins like USD Coin (USDC), Paxos Standard (PAX) and the Gemini Dollar (GUSD) hold their funds in established, regulated financial institutions and are audited at regular intervals.

2. Coins backed by off-chain reserves in the form of other assets. These assets include stocks, bonds or commodities. Ideally, they should have short-term maturity, low risk, and high liquidity.

3. Coins backed by other on-chain assets. These assets could be cryptocurrencies or crypto assets like fungible or nonfungible tokens on a public blockchain. These coins are currently unregulated.

4. Synthetic stablecoins or algorithmic stablecoins. These rely on mathematical formulae to maintain the price peg against another currency (usually USD). There are no backing assets.

Marius Reitz, Luno’s GM for Africa, describes the move as ‘progressive’. “The SARB understands that a shift to digital currencies won't happen overnight, but it’s clear that they’re here to stay.”

So what might a study into the world of digital currencies find?

Much like debates around putting pineapple on a pizza, there are two distinct camps, with very strong opinions, around the value and viability of virtual currencies. And understandably so. The potential offered by these digital assets, especially in the developing world, makes a solid case for their widespread use. But the drawbacks are equally notable.

“If the Reserve Bank did issue its own digital currency, this would be a significant step forward,” notes Reitz. “While much of the focus elsewhere has been on investment, speculation, and trading, in Africa, the utility of cryptocurrencies is attractive,” he says. He describes Africa as one of, if not the most, promising regions for the adoption of cryptocurrencies due to its unique combination of economic and demographic trends. Africa is a fast-growing, young and mobile-native population, making the region well-suited to the use of cryptocurrencies, he adds. We already have peer-to-peer money in the form of cash, but cash transactions are inconvenient, unsafe and fail to offer the ease and simplicity of digital alternatives, notes Reitz. Cryptocurrencies enable us to send and receive money to and from anyone, anywhere in the world using just a mobile phone or computer and an internet connection. And unlike traditional payment systems, digital assets like Bitcoin work without a middleman, which makes it faster and cheaper to process these transactions. This makes crypcurrencies ideal for working-class immigrants wanting to send money across borders.

While much of the focus elsewhere has been on investment, speculation, and trading, in Africa, the utility of cryptocurrencies is attractive.

Marius Reitz, Luno

“These assets mean that anyone who wants to transact can do so without limitation, creating a fairly open market for all,” says Wiehann Olivier, a partner at Mazars, an international audit, accountancy, advisory and tax services firm.

So what are the stumbling blocks?

Getting started

Your crypto journey should start with research. Read up about the benefits and risks, advises Luno’s Marius Reitz. “Do your research and find a safe platform with a strong focus on security and education.”

Then, look at your budget. “At the end of the month, after you’ve paid your rent or mortgage, after making your car and transport payments, after you’ve paid all your utilities and bills, after you’ve maxed out your retirement annuity and donations, after you’ve bought some low-cost ETFs, put aside the money you might need in the coming month to eat and live, then, and only then, should you actually consider buying Bitcoin or any other cryptocurrencies,” he says. Start out by taking a small amount and consistently buying — on the same day — a little bit of cryptocurrency with it. This approach will allow you to enter the market slowly so that you can smooth out the large swings up and down and don’t over-expose yourself to a single asset class.

A look at the industry’s first-born, Bitcoin, highlights some of the most prominent downsides, including volatility, environmental impact and a lack of regulation.

Volatility and Bitcoin go hand-in-hand, says Reitz. While market volatility is good for traders who buy during the dips and sell during the highs, these ‘wild swings’ in the price of Bitcoin have led some to question its legitimacy. The high energy consumption associated with Bitcoin mining is another area of concern for sceptics. Recent analysis by Cambridge University suggests that Bitcoin uses more electricity annually than the whole of Argentina.

Ponzi scam

And if recent months are anything to go by, digital assets can easily be used to for illegal activities, Olivier points out. The local industry took a knock earlier this year when South Africa’s Mirror Trading International (MTI) was found to be using cryptocurrencies to commit fraud. Described as the world’s largest cryptocurrency Ponzi scam, the MTI scandal saw a total of around $589 million being lost, affecting thousands of investors.Then of course there’s the Africrypt story. At the time of going to print, the whereabouts of its South African founders, Ameer and Raees Cajee are still unknown, and the value of Bitcoin that’s gone missing also unconfirmed. ITWeb recently put the figure at R140 million, however, others have estimated it could be up to $3.6 billion (around R50 billion). The Cajee brothers closed the Africrypt crypto investment platform in April following an alleged hack and have vanished along with the Bitcoin, leaving investors out of pocket. At the end of June, Ameer denied that the pair were on the run, claiming that they were in hiding as they feared for their safety following ‘numerous’ death threats.

A look at decentralised finance (DeFi)

Decentralised finance (DeFi) systems make financial products available on a public decentralised blockchain network. For Luno’s Marius Reitz, DeFi is one of the most compelling use cases for crypto. “It creates the ability to access financial services – like loans, savings, insurance and trading – without the need to work through an intermediary, such as a bank or broker. With over 1.7 billion unbanked and underbanked individuals across the world who struggle to borrow money legitimately, the idea of connecting borrowers and lenders directly and eliminating the need for credit checks makes sense.”

According to Olivier, regulation is essential if we wish to mitigate these drawbacks and achieve mass adoption. “The aim of regulation is to provide a level of economic stability and accountability, to mitigate tax evasion and to protect users against fraud.”

Determining what these regulations look like demands that representatives from more traditional financial institutions, like the South African Revenue Service (SARS), the Financial Sector Conduct Authority (FSCA) and the SARB, sit down with experts from the virtual assets space who understand all the ins and outs of this technology. These different parties need to discuss various use cases and determine what regulation is needed to ensure that all players are in check and that all users are kept safe.

People expect crypto to be faster, cheaper and more secure than the existing financial systems overnight, but this is an unrealistic expectation, says Reitz. Our existing financial system was built over many decades, with lots of trial and error. “While we believe that crypto can be all this and so much more, it’s still early days. We need to allow the crypto market to develop, evolve and mature.”

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