Digital fluency, which refers to the ability to select and use the appropriate digital solutions to achieve a desired outcome, will be the number one skill required to advance in the workplace. (John McCann/M&G)
Cryptocurrencies have been collapsing. Market leader Bitcoin this week fell below $5 000 for the first time in more than a year. It traded on Tuesday near $4 000 before recovering to $4 500 on Wednesday, down from a lofty $20 000 in December.
The cryptocurrency industry has now lost more than $660-billion from a January peak, according to data from CoinMarketCap.com, Bloomberg reported this week. Bitcoin is down more than 70% from its December 2017 high, the data shows, it said.
The present price is below the cost in the United States of mining one Bitcoin, $4 758, as calculated by research house Elite Fixtures in March this year.
At this level, Bitcoin miners will switch off their machines as it costs more to mine the coins than what they’re worth, with critics predicting that as the bursting bubble continues the coins will soon head towards their true value: zero.
For Bitcoin believers, cryptocurrencies are the future of commerce, digital money that lives on a distributed ledger beyond the control of the monetary authorities. Cryptocurrencies are seen by their supporters to have true rather than legislated (or fiat) value and are global, transcending national borders.
Critics, though, have pointed out for as long as these coins have been around that they have no real value other than for those wanting to trade illegally in drugs or launder money. Bitcoin has little use besides this, these critics charge. Few major retailers accept Bitcoin, mainly because of its volatility; it offers no advantages in cost or speed of transaction over credit cards and is controlled by a small group of unelected people who make decisions such as on allowing other coins to split or “fork” from the main coin, the critics say.
As more and more miners have chased this virtual gold, cryptocurrencies have made use of alarming amounts of electricity, using as much as some countries do.
Crypto has attracted many other controversies regarding regulation amid continuing allegations that fraud is rampant and widespread.
A key differentiator between mainstream currency, notes and coins, as supplied by central banks, and Bitcoin is that the latter is designed to become more scarce — and hence more valuable — over time. This increasing scarcity has encouraged miners and speculators, but is no way to run a monetary system.
Money as a medium of exchange needs to be readily available to those wanting to transact. It should not be in short supply so that the shortage encourages hoarding and speculation. Central banks ensure there is sufficient cash available for the economy to work; they would not want the value of their notes to be driven up because of scarcity.
Crypto may be in trouble, but the International Monetary Fund (IMF) in the person of its managing director, Christine Lagarde, last week threw its weight behind a new central bank digital currency. Speaking in Singapore, Lagarde said the fintech revolution is questioning the role the state should play in providing money.
“A new wind is blowing, that of digitisation. In this new world, we meet anywhere, any time. The town square is back — virtually, on our smartphones. We exchange information, services, even emojis, instantly … peer to peer, person to person.
“We float through a world of information, where data is the ‘new gold’, despite growing concerns over privacy and cybersecurity.”
Money itself is changing, said Lagarde. “We expect it to become more convenient and user-friendly, perhaps even less serious-looking. We expect it to be integrated with social media, readily available for online and person-to-person use, including micro-payments. And, of course, we expect it to be cheap and safe, protected against criminals and prying eyes.”
The demand for cash is decreasing, she said. “Already signs in store windows read ‘cash not accepted’. Not just in Scandinavia, the poster child of a cashless world, in various other countries too.
“Think of the new specialised payment providers that offer e-money — from AliPay and WeChat in China, to PayTM in India, to M-Pesa in Kenya. These forms of money are designed with the digital economy in mind. They respond to what people demand and what the economy requires.”
Lagarde acknowledged that cryptocurrencies such as Bitcoin, Ethereum and Ripple are vying for a spot in the cashless world “constantly reinventing themselves in the hope of offering more stable value and quicker, cheaper settlement”.
Although there is an argument for the state to back down and trust technology to lead the way, and the tech-savvy may trust these services, Lagarde said proper regulation of these entities remained a pillar of trust.
She asked whether the state should not go further: “Beyond regulation, should the state remain an active player in the market for money? Should central banks issue a new digital form of money, a state-backed token, or perhaps an account held directly at the central bank, available to people and firms for retail payments?”
Although deposits in commercial banks are already digital, this would constitute a digital currency that is a liability of the state, like cash today, not of a private firm, she said.
The suggestion would be for central banks to supply digital currency in the same way they make cash and coins available, but perhaps directly through an account held at the central bank rather than through intermediaries such as banks.
This envisages a digital currency under the control of the monetary authorities rather than that of cryptocurrencies such as Bitcoin, which have sought to operate independently of regulators.
Lagarde suggested central banks could enter partnerships with the private sector — banks and other financial institutions. “You interface with the customer, you store their wealth, you offer interest, advice, loans. But when it comes time to transact, [the central bank] takes over.”
Central banks around the world are seriously considering these ideas, she said, including Canada, China, Sweden and Uruguay, as is the IMF, which has released a paper on the pros and cons of central bank digital currency.
The state, in supplying money to the digital economy, could satisfy public policy goals such as financial inclusion, security and consumer protection and privacy in payments, said Lagarde.
Digital currency offers great promise in the area of financial inclusion with its ability to reach people and businesses in remote and marginalised regions. “We know that banks are not exactly rushing to serve poor and rural populations.”
Digital currency can also enhance security and consumer protection. “This is really a David versus Goliath argument. In the old days, coins and paper notes may have checked the dominant positions of the large, global payment firms — banks, clearinghouses and network operators — by offering a low cost and widely available alternative,” Lagarde said.
“Without cash, too much power could fall into the hands of a small number of outsized private payment providers. Payments, after all, naturally lean toward monopolies — the more people you serve, the cheaper and more useful the service.
“This means private firms may underinvest in security to the extent they do not measure the full cost to society of a payment failure.”
A third benefit of digital currency lies in the privacy domain, said Lagarde. “Cash allows for anonymous payments. We reach for cash to protect our privacy for legitimate reasons: to avoid exposure to hacking and customer profiling, for instance.”
Although a fully anonymous digital currency offered by central banks would be a bonanza for criminals, a trade-off between privacy and financial integrity may be found.
“Central banks might design digital currency so that users’ identities would be authenticated through customer due diligence procedures and transactions recorded. But identities would not be disclosed to third parties or governments unless required by law,” Lagarde said.
“So when I purchase my pizza and beer, the supermarket, its bank and marketers would not know who I am. The state might not either, at least by default. Anti-money laundering and terrorist financing controls would nevertheless run in the background. If a suspicion arose, it would be possible to lift the veil of anonymity and investigate.”
The advantage is clear, Lagarde said. Your payment would be immediate, safe, cheap and potentially semi-anonymous, as you wanted it to be. And central banks would retain a sure footing in payments.
This could provide a more level playing field for competition and a platform for innovation.
“While there are potential downsides of digital currency, such as risks to financial integrity and financial stability, there is also a risk in stifling innovation, the last thing you want,” said Lagarde.
“We should face these risks creatively. How might we attenuate them by designing digital currency in new and innovative ways? Technology offers a very wide canvas to do so.
“The case is based on new and evolving requirements for money, as well as essential public policy objectives. While the case for digital currency is not universal, we should investigate it further, seriously, carefully and creatively.”