5 minute read
The rise of cryptocurrencies and virtual asset technologies
In recent years, cryptocurrencies or virtual assets, such as Bitcoin and Ethereum, have surged into the spotlight, captivating speculators, investors and technologists alike with their potential to revolutionise finance. Yet, amidst the hype and speculation lies a complex web of economic implications that extend far beyond the realm of traditional finance. Coupled with blockchain technology, cryptocurrencies are reshaping industries and challenging conventional economic paradigms. In this article, we delve into the economic ramifications of cryptocurrencies and their regulatory aspects as we explore the diverse applications of blockchain technology.
After the 2008 financial crisis, people’s trust in government institutions and banks declined. Many felt the need to move away from the antiquated, centralised structure of currency. Cryptocurrencies, spearheaded by Bitcoin, were created to address this distrust. Bitcoin emerged as a decentralised digital asset that operates independently of central authorities like banks or governments. Bitcoin provides transparency, immutability, resistance to censorship, and ensures a degree of anonymity that fiat money cannot match.
One of the most significant economic implications of cryptocurrencies lies in their potential to disrupt traditional financial systems. By eliminating intermediaries, such as banks and payment processors, cryptocurrencies offer cost-effective and efficient alternatives for transferring value globally. Moreover, they provide financial inclusion to the unbanked population, particularly in regions with limited access to banking services.
The adoption of cryptocurrencies presents both risks and opportunities for retail investors, businesses and governments. The volatility of cryptocurrency prices poses significant market risks to investors. There have been instances where Bitcoin and Ethereum experienced a staggering 30% drop within a 24-hour period. The users are exposed to market manipulation and regulatory uncertainty. Moreover, the abundance of fraudulent schemes and scams in the cryptocurrency space underscores the importance of investor education and due diligence.
However, on the other hand, there were days where the digital assets’ price rose by 30% in a 24-hour period. From an investment perspective, these assets offer opportunities for diversification and portfolio hedging, particularly in environments characterised by currency devaluation or economic instability. Recently, we witnessed the approval of various Bitcoin exchange-traded funds (ETFs) in the United States, which allows institutional investors to allocate Bitcoin as part of their investment strategies.
While the anonymity offered by cryptocurrencies is attractive to users, it has raised serious concerns for governments, central banks and regulators globally. Cryptocurrency regulation varies significantly among US states. However, all businesses involved in exchanging cryptocurrencies in the US must register with the Financial Crimes Enforcement Network (FinCEN) and implement anti-money laundering measures. China has declared cryptocurrency business activities illegal, while in Australia, digital asset businesses operate legally but are subject to extensive regulatory requirements. The UK has imposed registration requirements on cryptocurrency businesses as well. These examples only scratch the surface of global cryptocurrency regulation, highlighting the diverse perspectives adopted by different countries.
In 2018, the Bank of Namibia (BoN) released a statement in which they strongly discouraged the public to invest or trade in cryptocurrencies. However, in July 2023, the Namibian government enacted a law to regulate virtual asset service providers (VASPs) operating in the country. The Act aims to regulate digital assets, such as cryptocurrencies, and VASPs in the country. This move represents progress in regulating this alternative asset class in Namibia, with the government creating legislation to serve as a framework for granting licences to VASPs. Virtual currencies are, however, not recognised as legal tender in Namibia.
In South Africa, the adoption of cryptocurrency became evident when Pick n Pay started accepting Bitcoin as a payment method at its various stores. Additionally, in April this year, the South African Financial Sector Conduct Authority (FSCA) approved several institutions to be licensed as crypto asset service providers (CASPs). The main objective of the licence is to protect investors and consumers, and to promote sustainable growth within the crypto industry. The FSCA, however, reiterated that the granting of licences to CASPs does not mean virtual currencies should be viewed as a legal currency tender in South Africa.
Beyond the finance and regulation side of cryptocurrencies is the blockchain technology on which these are based. In simple terms, a blockchain is like a digital ledger that records all transactions of a particular cryptocurrency in a secure, transparent and decentralised manner. The transparency factor of a blockchain is notably impressive, as it allows anyone to view the entire transaction history on the blockchain.
Blockchain technology offers several advantages, including decentralisation, security and efficiency. Its decentralised nature ensures that no single entity has control over the network, enhancing security and reducing the risk of a single point of failure. Transactions on the blockchain are encrypted and tamper-evident, making it secure against fraud and unauthorised changes. Additionally, the transparent and immutable record of transactions promotes trust and accountability, while the automation of tasks through smart contracts improves efficiency across various industries.
However, blockchain technology faces several challenges, including scalability issues as the network becomes congested with increasing transaction volumes, leading to delays and higher fees. Additionally, the energy consumption associated with some blockchain networks, particularly those using proof-of-work consensus mechanisms, raises environmental concerns. Regulatory uncertainty and the lack of interoperability between different blockchain platforms also pose challenges for businesses looking to adopt the technology. Moreover, while blockchain provides transparency, it raises privacy concerns as transactions are recorded on a public ledger, potentially exposing users’ transaction details.
In conclusion, the rise of cryptocurrencies and blockchain technology has ushered in a new era of innovation and disruption in finance and beyond. While offering potential benefits such as decentralisation, security and efficiency, they also pose challenges like scalability issues and regulatory uncertainty. The regulatory landscape varies globally, with countries like Namibia and South Africa taking steps to establish frameworks for the regulation of cryptocurrencies and virtual asset service providers. As these technologies continue to evolve, addressing these challenges and harnessing their potential responsibly will be crucial for realising their full transformative potential in Namibia, South Africa and around the world.
