For a long time the orthodox way of investing in listed companies has been through buying shares on stock exchanges. This involved lengthy and bureaucratic registration processes which could take days. Even then, you could only access stock listed on that specific stock exchange. This presented a barrier to accessing financial markets and in other jurisdictions such as the US you would still be bound by some restrictions. The invent of digital assets, commonly known as cryptocurrencies has presented one of the easiest and most inclusive ways of enabling anyone interested to take part in markets which are open for 24 hrs and not limited by geographical location or the need for a common currency. It is now possible to access major cryptocurrencies through cryptocurrency exchanges which are modelled around the concept of stock exchanges and the price of each asset is determined by market forces of supply and demand. There are currently 100 exchanges which supply data to CoinMarketCap, which has become the most reliable source of data in this space. These exchanges are spread across all continents and one can make a choice of which one to use based on personal preference and security.
How cryptocurrencies work
Bitcoin has often been called many names- a scam, a ponzi scheme, a pyramid scheme and all the other names attributed to scandalous investment schemes. Forget everything anyone has ever said about cryptocurrencies, they are at the verge of becoming a key financial instrument if this is not already the case. According to CoinMarketCap, there are 2169 cryptocurrencies listed with its data service. The underlying technology for cryptocurrencies is Distributed Ledger Technology (DLT) also known as blockchain technology. Most cryptocurrencies use public blockchains whereby anyone can view transactions on the ledger without knowing the parties involved and they rely on cryptography. At the time of writing this article, the market capitalisation (money invested) in cryptocurrencies registered with CoinMarketCap totals $212 billion, making it an industry in its own right. Major financial institutions such as Nasdaq Stock Exchange, New York Stock Exchange and banks now have some involvement in this sector.
Most cryptocurrencies came into existence through a method of crowdfunding popularised as Initial Coin Offerings (ICOs), which mimics Initial Public Offerings (IPOs) but without the investor safeguards which come with IPOs. All that an entrepreneur is required to do is produce a whitepaper which provides details of their proposal and timescales for implementing the solution. A coin offering would then take place and investors who buy into the concept get issued with tokens in exchange for money or other valuable cryptocurrencies. The tokens are normally intended for use on a platform to be developed and made available in the future, which is how the phrase ‘utility tokens’ was coined. Millions have been raised in the past years using the ICO method of funding and according to a report commissioned by Earnest & Young USD15bn was raised through ICOs in 2018 alone. This vehicle of investment enabled people located all over the world to inject money into the token economy whilst enabling entrepreneurs to implement their ideas without the financial burden. However, the story of ICOs has not been without controversy, a lot of scams have emerged involving this funding method which has prompted some jurisdictions to intervene and regulate or ban coin offerings.
Reasons why Zimbabweans Should Care
The sad thing about ICOs is that most projects which took part in fundraising were based in Europe, the US and Asia and very few were from the African continent, with only one ICO from Zimbabwe conducted by Golix. As a consequence, adoption of this technology and policy making has massively lagged behind in Africa with few cases whereby outright bans on cryptocurrencies were attempted - Zimbabwe being an example through a circular by the Reserve Bank of Zimbabwe (RBZ) in 2018. Developments in the cryptocurrency sector are as volatile and fast moving as the price of the assets, a lot has happened since the ban by RBZ. Major economies are developing policies which recognise cryptocurrencies and the efficiencies which they can bring to the financial sector. Most countries are now in a race to come up with the most favourable policies to attract the best talent in the financial technology sector with Malta being an outstanding example. The implications of this could be damaging to most African economies as buying these tokens will be costly and implementing the technology will require a lot of investment in technology and technical knowledge if this is to occur in the future.
Disruptiveness of cryptocurrencies
Cryptocurrencies will upend the financial world and disrupt a lot of sectors. The automobile sector is facing disruption with projects such as IOTA partnering with Jaguar Landrover for rewarding drivers with cryptocurrencies for providing data on the roads. Consumers will in the future be able to sale their data and earn tokens. Other ambitious projects include Ripple, a company based in the US which at some point was signing up a bank every week for instant money remittances using blockchain technology and cryptocurrencies. Other banks such as JP Morgan have taken the leap to develop own cryptocurrency for use by corporate clients. Most significantly Facebook is at an advanced stage of developing a cryptocurrency for use on social media platforms including Whatsaap and Instagram through the secretive project code named ‘Libra’. Given the number of users on these platforms, cryptocurrencies will gain widespread usage and adoption.
This asset class is becoming more usable with each day which passes. Coinbase, one of the biggest and most reputable cryptocurrency exchange with a presence in Europe and US and other several countries recently issued visa debit cards which enable making payments with cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) anywhere where visa card is accepted. In essence, cryptocurrencies now play the same role which fiat currencies have played for years. This makes cryptocurrencies an asset class worth considering for inclusion in any investment portfolio whether for individuals or institutions. Ignoring this asset class is tantamount to recklessness as future generations are likely to rely on this technology. Zimbabwe might have missed the opportunity to attract external investment through ICOs, but the token economy is likely to grow and have the same impact as the discovery of the internet.
Benefits of cryptocurrencies to the economy and to Individuals
The key advantage of cryptocurrencies is that they are deflationary, unlike fiat currencies. RTGS and Bond notes are a classic example of how inflationary fiat currencies can be especially when coupled with bad economic policies. Cryptocurrencies normally have fixed supply, Bitcoin for example is fixed at only 21 million coins for use by the whole world - a reason why its value could soar with wider adoption.
One other advantage is that transaction fees are lower and funds can be moved faster than using traditional remittance methods. It takes about 3 seconds to move money with a cryptocurrency called XRP regardless of where you are located in the world. The low fees have also made it possible to send small amounts of money as low as $1 which would be uneconomic using existing systems. The cost of using XRP is a fraction of a cent whereas using the Swift system it can cost an estimated $7 taking 3 days or more to complete. Most importantly, cryptocurrencies can be described as universal in that it doesn’t matter which country one travels to, you can simply convert to the local currency when selling provided there is a facility to convert to cash thereby bypassing fees charged by bureau de changes.
One of the main use cases of cryptocurrencies in Zimbabwe could be for settling payments in the supply chain. If a business accepts payments in cryptocurrencies, it becomes easier to pay suppliers abroad. This is also the case for individuals who will be able access cash without needing to look for foreign currency on the black-market at extortionate conversion rates when travelling abroad. If local businesses start issuing their own tokens, a token based economy could emerge offering Zimbabweans an alternative to centrally issued fiat. It will create a competitive economy in which the public can determine the usefulness of company issued tokens based on utility. These tokens may be tradable on international cryptocurrency exchanges for other valuable cryptocurrencies or cash thereby bringing foreign currency into the system.
Another benefit of cryptocurrencies is that they can help the unbanked population to access affordable financial services and achieve economic independence. All one needs is a wallet on a mobile phone which can be downloaded for free. There are no charges for maintaining a wallet and there is only a low fee involved for moving funds on the blockchain. These fees are used to incentivise miners (computers confirming transactions on the network) as there are no intermediaries involved.
Lastly, cryptocurrencies are expected to gain value exponentially meaning that they could be a good investment in the long term. It is expected that cryptocurrencies will outperform traditional investments in 2019 due to high adoption levels. With the market capitalisation currently standing at a meagre $212 billion worldwide, it is suggested that this could swell to over $40 trillion in the next 10 years.
With the benefit of hindsight, Zimbabwe ought to have been one of the early adopters of cryptocurrencies due to the currency crisis and had this been the case, the country would have brought in foreign currency and at the same time exported tokens to the world. The value of cryptocurrencies is likely to soar in the near future due to institutional adoption. The price of Bitcoin recorded an all-time high value of $20,000 and the expectation is that with institutional investors such as insurers, pension funds and all other sectors coming on-board, this is likely to drive value to astronomical levels. Research indicates that an overwhelming majority of companies were either considering or were already invested in cryptocurrencies by the end of 2018 and this trend is likely to continue in the short to medium term.
The biggest advantage which Zimbabwe has is the widespread use of mobile phone based payment systems which the majority of people are already familiar with. Companies such as Samsung Mobile have already aligned themselves in this market with new models such as the new Samsung S10 coming with a pre-installed cryptocurrency wallet. HTC has also gone down the same route with its new product which will have the capability to connect to the blockchain (host a full bitcoin node). The choice is very clear - trust centrally issued fiat currencies, which have proven to be fallible time again and fund the extravagance of the political elite or embrace the decentralised token economy to achieve financial freedom.
Prosper Mwedzi, M.Law (Hons), Lawyer and blockchain enthusiast, Member of Government Blockchain Association (Global). For anyone interested in discussing this topic and regulation of cryptocurrencies, twitter handle @prosmoon, email firstname.lastname@example.org