In the past couple of weeks, both mainstream and social media have been awash with financial havoc among households and individuals caused by collapsing cryptocurrency markets.
With the information filtering out, it would appear the cryptocurrency menace is more widespread and deeply entrenched in our society than official reports have acknowledged.
For the record, the cryptocurrency dealings as currently structured have never attracted my curiosity, both in academia and practice. This does not, however, mean I am ignorant of this side of the world’s payment. I was enrolled into an international finance programme in 2014 when the cryptocurrency market was forming. I was still on the academic side of it when cryptocurrencies exploded into a worldwide phenomenon around 2016-2018.
The thing is, cryptocurrencies in their current form and design breach the established norms of a valid legal tender. They offer no persuasive economic sense to justify investing in them. It still baffles me how folks never seem to learn tough lessons from the past. The pyramid schemes of the late 2000s, the quail business craze of the early 2010s, and the Goldenscape Greenhouses-type of properties. In between, forex trading scams and now cryptocurrency mania have thrived unabated.
Similar to our bad politics, we seem to be a society wired to either pursue perpetual shortcuts, or deluded to believe in the existence of a world of freebies somewhere.
Yet, the world of economics harbours no such phenomena. Even the ticket to heaven is well known to be the deprivation of one’s self of the many pleasures under the sun. How then can so many people believe they can make easy money from people unknown to them with no underlying assets, products or services?
An online survey report by Quartz Africa of 52,883 people from across 27 countries, estimates that 16 per cent of Kenyan adult internet users own cryptocurrencies. This translates to about 4.8 million Kenyans. The bitcoin ownership rate in Kenya is estimated at 54.7 per cent, way above the global average of 39.1 per cent.
Kenya ranked 12th
The country is a leader in the world of peer-to-peer (P2P) trades. The cryptocurrency adoption index ranks Kenya 12th in currency ownership out of 27 countries surveyed globally.
The introduction and continued use of cryptocurrencies, however, is outside the official and formal financial markets.
The first time the Central Bank of Kenya (CBK) issued a warning on the use of virtual currencies in its jurisdiction was in response to media reports on bitcoin. Officially, there is no entity licensed to offer virtual currency products and services in the country. Commercial banks are banned from opening, operating or allowing accounts to trade in such currencies.
The CBK warns of three major risks of cryptocurrencies that also underlie the lack of sound economic logic for the virtual currencies in their current form. These include absence of traceability and anonymous nature that make them susceptible to abuse by criminals, they are unregulated the world over, and they have no underlying or backing assets.
Their value is purely speculative. Early this month, one of the bitcoin services supposedly registered in the UK in October/November last year defrauded its nearly 10,900 Kenyan investors of an estimated Sh1.18 billion in less than six months. The proprietors even had the audacity to insult these investees.
As late as April this year, the CBK governor maintained that their views and position on cryptocurrency had not changed. The question then is: why would anyone want to risk their gainfully earned money against products that have been disowned by the country’s sole guarantor of monetary value? Why aren’t folks learning from past painful experiences?
Investopedia.com has prepared a detailed report on the status of cryptocurrencies based on data available from the Library of Congress. This is the research library that officially serves the US Congress, and is the de facto national library. According to this data, by November last year, there were 103 countries whose governments had directed their financial regulatory agencies to develop regulations and priorities for these virtual currencies. A total of 42 countries have an implicit ban on dealing with cryptocurrencies while nine others have an absolute ban.
The only country in the world that had adopted bitcoin as legal tender by last November was El Salvador. On April 28 this year, CNBC reported that the Central African Republic had become the second country to adopt bitcoin as legal tender. The US and most of Europe appear to maintain a friendly attitude towards virtual currencies, but not as legal tender for their countries.
That notwithstanding, the market capitalization for cryptocurrencies surpassed $3 trillion (about Sh350 trillion) last year before the ongoing market crash. But ever since the creation of the Bitcoins in 2008, the values have been extremely erratic, underlying the dangers there in.
The primary question to ask now is whether there is a legitimate future for cryptocurrencies. To correctly answer this question, we have to go back to the basics of monetary economics. From history, the search for a borderless currency started in the late 1980s and continued until the blockchain technology that support bitcoin was invented by an unknown person or group of people under the pseudonym Satoshi Nakamoto. This background is extremely critical in understanding the future of cryptocurrencies.
First, money is simply a piece of paper except and until its value is underwritten and guaranteed by a sovereign authority. That explains why the Kenya Shilling is a useless piece of paper the moment you go outside our borders. The US dollar is treated as the world currency because the Federal government underwrites not only its value, but also the world economy as leader of the free world.
Therefore, for as long as there is no single authority to underwrite the value of cryptocurrencies in the world, it will never become a legal tender. Furthermore, doing so will require major destabilisation of the existing geo-economic and political order.
Secondly, to achieve a monetary union for trading economic blocs it takes major re-organisation, integration and policy harmonisation among trading partners. Even then, lessons from the European Union indicate some of their economies ended up being overvalued hence triggering currency shocks later on.
Here, with the East African Community, the monetary union target has remained a pipe-dream due to economic disparities among member countries. How then will it be possible to ever harmonise policy for majority of the countries in the world? Who will take the lead role and risk losing their bragging rights among the community of nations?
Finally, while it is true that individual countries will eventually adopt blockchain technology to create their own digital currencies, the current forms will remain an extremely risky affair. Money in itself is a measure and store of value. There can never be any value if none has been guaranteed by a global central authority, or an underlying asset with a recognisable standard value across the world like gold, for instance.
Therefore, investing in cryptocurrencies now is similar to throwing your money in the winds. This explains my position to better err on the side of caution than to lose my hard-earned cash on such schemes.