Cryptocurrency could create a transparent, decentralised medium of exchange, challenging the very concept of sovereign fiat currency.
Pindar Wong is an Internet pioneer, who co-founded the first licensed Internet Service Provider in Hong Kong in 1993 and is the Chairman of VeriFi (Hong Kong) Ltd., a discreet Internet Financial Technology infrastructure consultancy. He chairs the Internet Society’s Blockchain Special Interest Group. Previously, he was the first Vice-Chairman of ICANN; Chairman of the Asia Pacific Internet Association; alternate Chairman of Asia Pacific Network Information Center; Chairman of APRICOT; Commissioner on the Global Commission on Internet Governance; and elected Trustee of the Internet Society. From 2010-2015, he served on the Digital 21 Strategy Advisory Committee of the Hong Kong Government and the Task Force on Industry Facilitation.
Pindar Wong was the key speaker at the 11th Synergia Foundation webinar 'Digital Fool's Gold? Cryptocurrencies and National Insecurity', moderated by T.M. Veeraraghav and Megha Vishwanath (Technical Editor, CNBC).
A cryptocurrency is a digital asset that functions as a medium of exchange. Individual ownership records are stored in a digital ledger or computerised database (blockchain) using cryptography to secure these transaction entries. This also allows to control the creation of additional digital coin records and to verify the transfer of ownership. It does not exist in a physical form (like paper money) and is not issued by a central authority. The crux of cryptocurrency is that it is based on a decentralised network of all users who are involved in dealing with cryptocurrencies.
In the original whitepaper by Satoshi Nakamoto (developer of the bitcoin), the use of terminology like ‘coin’ and ‘wallets’ suggested that the developers attempted to use this as a substitute for the direct transfer of cash for payments or other financial assets. This had the added advantage of affording transparency to the process of transfer, along with privacy from more centralised institutions.
There are two main features about cryptocurrency which distinguishes it from sovereign currency. One, it focuses on a network rather than the usual geographical perspective of transferring value. People all over the world, if linked to the bitcoin network, can trade with each other without the need to be present in the same country. On the other hand, in traditional credit systems, an exchange takes place when people are in the same geographical location and have the same currency to exchange.
Second, cryptocurrency is both transparent and private, while traditional credit systems come under a centralised regulator and are at best opaque to all but the state regulator. Digital currency claims transparency in the sense that it is being based upon an open-source network allowing wider participation. However, bitcoins are created only when the previous transactions have been validated and approved.
ARE CRYPTOCURRENCIES HERE TO STAY?
Cryptocurrencies have grown over the years. Close to 180 are accepted by the U.N, and by 193 countries. Technological companies like AliBaba (AliPay) and WeChat have introduced their own cryptocurrencies in China. Facebook is also considering Libra, although the currency and network do not yet exist, and only a basic experimental code has been released.
The congruence between digital technology and currency has given rise to a new sector -- the 'techfin' -- where new digital platforms with a network-centric view are being created for use across borders. This could disrupt the prevalence of conventional fiat currencies, although there is no threat of a total replacement, as yet. Forex continues to dominate with over US$5 trillion transactions a day in comparison to US$ 270 billion of cryptocurrency.
Assuaging the concerns of decentralised cryptocurrencies, Mr. Wong called it a case of censorship resistance, i.e., once you submit a transaction, it will be processed without judgement. However, the transaction is hard to track. With networks like the SWIFT system in the U.K., there could be political policy objectives that may arise. From the states regulators’ perspective, it is all about losing control.
CENTRAL BANK DIGITAL CURRENCIES
Due to the growing popularity of cryptocurrencies, governments have started experimenting with Central Bank Digital Currencies (CBDC). These would be digital forms of fiat money. The central bank of Sweden is the closest to consider its implementation through its e-krona initiative. China has introduced its digital currency in a centralised manner called the eRMB. These forms, however, move away from the basic libertarian idea of cryptocurrencies, where anonymity allows people to buy and sell without leaving a digital trail. CBDCs by themselves are not really cryptocurrencies. There is the question of whether CBDCs could themselves be destabilising through the digitalisation of fiat currencies since it turns a geographical view to an electro-centric one. Unlike onshore and offshore trading, it would be part of a network now.
Since currencies are programmable, a prime concern is their weaponisation, such as the USD in Hong Kong, warned Mr. Wong. There needs to be a combination of traditional regulators with digital currency electronic payments, which is where CBDCs could be successful. This can be seen through People's Bank of China’s (PBoC) attempt to set up their digital currency payment as an experiment against the two prominent modes of payment in China right now - AliPay and WeChatPay. When it comes to the question of privacy, the transactions could be private between users, but not from the Centre. Privacy is also something that needs to be properly defined. Other concerns are how to manage taxations and other monetary tools like capital controls, money supply, and interest rates, as well as financial crimes such as money laundering, tax fraud, and financial irregularities.
Countries have the option to accept cryptocurrencies or ban it. Central banks feel threatened by cryptocurrencies because they are not used to competition, and fear the unknown. Value is stored in currency, and it is a medium of exchange. Bitcoin has survived so far. Rather than looking to ban it, there is a need to understand it, and how it could interact with the economy. It is a meandering road because it is still in development, but could win in the long term.
As regards the longevity of cryptocurrency or CBDC, Mr. Wong recalled a fitting Chinese proverb, 'Real gold doesn’t fear the test of fire'. So the question is, what is that fire?
The main attraction of a digital currency stems from the possibility that it allows the settling of international payments without involving the US dollar. While reservations about cryptocurrencies stand valid, a state-backed digital currency may go a long way in yielding good economic results.
Thanks to COVID-19, a decline in cash usage has taken place, and this may be the most opportune moment for cryptocurrencies to flourish. The need for cashless transactions was never felt more.
This is another area where China is the frontrunner. The Chinese CBDC is poised to play a major role in furthering China’s Belt and Road Initiative by implementing 21st century trade parameters to it. Payments, both from and to China, with other countries will become direct and controlled by the PBoC once it fully resorts to the e Rmb.