Philippe Ghanem – Chairman, SquaredFinancial
In recent weeks Bitcoin hit US$41,000 as the leading cryptocurrency continues to make headlines with a global investment bank predicting it will, eventually, become the new gold. We believe BTC will become ‘Millennial’ gold, but like physical gold it will not be used for buying or selling. It will be the blockchain technology which powers cryptocurrencies which will be universally adopted and create the change that Bitcoin always set out to achieve – says Philippe Ghanem, Executive Chairman SquaredFinancial.
There have to be very compelling reasons to introduce major changes to a market as large and complex as the global financial system. As is often the case the drivers of change are negatives rather than positives. In the same way we are moving away from hydrocarbon fuels and developing renewable energy because of the damage being caused by climate change, the changes to global financial systems are needed because the current systems are no longer fit for purpose.
The ongoing movement from physical money to electronic payments has stretch the existing infrastructure to breaking point. The level of hacking, lack of security or ability to offer sophisticated KYC and AML systems mean that there is no capacity to keep developing current financial systems. There needs to be a complete rethinking and change.
Blockchain has never been the perfect answer. The decentralisation which provides many of the essential benefits make it slow and cumbersome, not suited to the global financial volumes it would have to handle. However, the positives are now starting to outweigh the negatives, which is why every serious bank, investment bank and central bank has spent the last few years developing their own blockchain applications.
In recent months the views of some highly regarded individuals and institutions, who were once dismissive or cautious over cryptocurrencies, have changed and they are now making bullish statements and creating headlines about the future of Bitcoin. This may be part of a classic ‘FOMO’ response as traders see the value being added to BTC and the other major coins, however for Central Banks to look in detail at digital currencies there has to be a lot more than an increase in value.
We believe there are two questions which we need to ask, and the answer, which show the way that global financial markets are going.
Firstly, is the current system fit for purpose?
This is simple to answer. No-one really believes that traditional fiat currencies offer a viable future for the exchange of value from individual to individual or organisation. We just have to look at countries in Africa where the levels of fraud and misuse of physical and electronic currency has forced millions of people to use alternative means of value exchange, including M-Pesa and cryptocurrencies. Or to look at the day-to-day losses for global banks through online fraud. Fiat currency transactions are not transparent, secure or an efficient way to exchange value.
There are also growing concerns over the supply and management of fiat currencies. If the US$ 2.3 trillion stimulus package does get passed by the US Senate, this could be a shot-in-the-arm for the US economy but what does it mean for the US dollar. The dramatic printing of fiat currencies to try and energise economies hit hard by the pandemic has shown the weakness of paper money and is clearly one of the reasons investors are converting their dollars to Bitcoin. There may be large levels of volatility associated with BTC, but at least there is a finite supply of the coins. Like gold or other precious metals, you cannot just keep producing more Bitcoin. It has to be mined, not just printed, so if we return to an inflation led economy it will not devalued in the same way as fiat money.
It is ironic that the ability to ‘print’ money through the pandemic as governments around the world increase their levels of debt that a substantial amount of this liquidity has ended up in cryptocurrencies and helped fuel the price rises.
Secondly, we have to ask whether blockchain can actually provide a workable answer.
Blockchain was only released in 2008 but in just 12 years it has become a growing part of the financial world. One of the original claims was that Bitcoin would be ‘free from government restrictions’ and act as an independent financial system. For many this is a positive, but for others it represents a direct challenge to governments and regulators.
There have always been a number of very strong arguments against blockchain based cryptocurrencies. The main one is that the lack of regulation undermines existing financial systems. It would be impossible for governments, regions or businesses to operate with a currency which they have no control over.
My view is that in an unregulated form blockchain cannot change global financial systems, but it is technology which all Central Banks will need to adopt. So, we will see the move to a centralised or partially decentralised form of blockchain which can provide the next generation of financial services.
If, and when, Central Banks move to blockchain the rate of development we have seen in 12 years would be replicated in just 12 months. The acceleration in use, implementation and functionality would move to a different level. We just need to look at the speed of introduction of Covid vaccine to understand what can be achieved if there is a single focus.
Behind the scenes a number of governments have been advancing the development of their own digital currencies to replace dollars, yen, yuan and euros, but it will only be when this is the accepted path that the full development potential of blockchain can be realised.
The Central Banks are looking at blockchain because they know they need a safer, more transparent and secure financial system and in 2020 a number of governments made significant advances in their digital currency plans. The Bahamas even launched its own ‘official’ national digital coin, a cryptocurrency version of the Bahamian dollar, called the ‘Sand’ dollar.
However, it is China which is outstripping the other economic powers. They announced the launch of their own national digital currency several years ago and recent reports have indicated that they hope to start officially issuing the digital yuan before the Winter Olympics in Beijing in February 2022.
If other nations thought they were just testing the water, the People’s Bank of China (PBOC) has recently published a new draft law which states that the yuan is the official currency of the People’s Republic of China whether in ‘physical or digital’ form. They have also conducted a major test of their yuan digital currency/ electronic payment (DCEP) system, in Shenzhen. Close to 50,000 residents could claim 200 yuan (US$30) which they could spend in 4,000 different outlets across the city, including at brands like McDonald’s and Starbucks. Linked to this trial the Agricultural Bank of China, has released a test app allowing yuan DCEP payments to be made between users.
Other central banks around the world will be watching what happens in China with the US Federal Reserve, the European Central Bank, the Swedish Riksbank, the Bank of Canada and the Bank of Japan, as well as the Bank of England all actively progressing their own CBDCs.
The yuan has always been a carefully controlled currency, and a centralised blockchain, although it may be contrary to the original ethos of bitcoin, it answers many of the problems of the current financial systems. However, how much control governments have of their CBDC is one of the main questions of many people.
For a number of years, we have been seeing the slow death of cash. A trend which has been accelerated by lockdown. The move to electronic money has created a monopoly for payment providers, security is weak and there is a lack of transparency, so there is no surprise that this has opened the door for cryptocurrencies. However, digital currencies, sit outside the control of government which creates a new set of problems.
The strong reaction to initiatives such as Libra (Diem) show the concerns that exist. The overall objective has to be to reduce the friction to payments and money transfers and to create a secure, transparent and scalable system. Blockchain technology would make a digital currency less vulnerable to attack, as the distribution model means there is no single point of failure. This would require a Central Bank to release some control over the currency’s rails and, until further distributed ledger technology development work is undertaken, it could lengthen the amount of time needed to verify transactions.
If CBDCs are introduced and a balance between speed, efficiency, security and resilience can be agreed then the benefits could be extremely exciting. From verification through to stopping money laundering, and allowing global distribution, blockchain is a gamechanger in providing a secure and frictionless way to buy, sell or invest value.
The question is, of course, whether CBDCs are fully centralised or partially decentralised. If they are centralised then Central Banks would need to act as a commercial bank, taking deposits, which is unlikely. So, we would expect there to see a mirror of the current system developed with banks handling deposits but with the Central Bank overseeing the blockchain.
If this route is taken, we can look forward to a fast and efficient method of payment and exchange. We can also expect to have a far more transparent global system of currencies which allows the frictionless movement of value from international development to ebay transactions, but all within the sight of regulators.
Cryptocurrencies are of their time
Bitcoin has been volatile and unpredictable but for investors it keeps producing high level returns. A new generation of traders has grown up with cryptocurrencies and for them BTC has been ‘Millennial’ gold. They are holding the digital coins as investments but can see that blockchain will provide them with the systems for value exchange they want.
This audience has apps for every facet of their lives. They stream videos, download music and access information in seconds. This democratisation of data and content is why digital currencies will be part of all our futures. Telling a millennial that they need to drive somewhere to see a movie, wait for the radio to play their favourite tune or ask an investment manager how the markets are doing is not going to work. The world has moved on.
We have reached a moment in time when it is now essential we accept that blockchain and distributed ledger technology will be a central part of our financial systems. The threats from hackers and the continued move from cash to electronic payments can only be managed through a secure network of digital currencies. These cannot be fully decentralised, as originally envisioned by Satoshi Nakamoto, and Bitcoin will not be the coin we use, but blockchain will be part of our everyday life.