Crypto currencies only as good as their underlying economic performance: MTI

• Developing countries should ask “Why?’’ before “How?”

Whilst welcoming Sri Lanka’s decision to evaluate the feasibility of Crypto currencies, MTI Consulting has cautioned that developing countries should ask “Why?’’ before “How?”.

“Crypto currencies are essentially efficient transaction tools. The greater focus needs to be on the underlying economic value creation – via responsible production and consumption. 

Most crypto currencies are decentralized networks based on blockchain technology and not issued by a centralized sovereign authority. 

Currently, the adoption motivation is based on speculative investment, less on enabling widespread financial inclusion. There is in lies the pitfall to guard against, whilst pursuing the benefits offered by crypto currencies,” said Hilmy Cader, CEO of MTI Consulting.

MTI highlights the benefits of crypto currencies as high transaction speed and low transaction costs due to disintermediation. It’s secured by cryptography and blockchain technology, making it difficult to counterfeit.

However, this can also provide a ‘safe heaven’ for illegal activities such as money laundering, tax evasion, and terrorism financing. It’s vulnerable to cyber threats and manipulations by  ‘Whales’, i.e., those that hold large amounts with the potential to manipulate currency valuation.

Resulting from their de-monetization drive, India was able to digitally transform its banking infrastructure.  India has set up the National Payments Corporation of India (NPCI), a consortium of state-backed and private banks, which created a complex network called the Unified Payments Interface (UPI). 

This permits peer-to-peer transactions in real-time between any bank account within the country. India also launched ‘RuPay’ - a financial transaction system designed to reduce reliance on the likes of Visa and MasterCard. 

All of these moves have improved financial inclusion, transaction speed, and lowering transaction costs. As a result, the Indian Government is not in hurry to adopt crypto currencies at a national level, despite growing adoption among the retail investors.

El Salvador’s recent attempt to recognize bitcoin as a legal tender provides developing countries an interesting case study, but it’s too small a sample and too short a time to be used as a prescriptive model. Despite the value tumbling 11 percent after adoption, after a month, 46 percent of the population has a bitcoin wallet while only 29 percent has traditional bank accounts. Many South American countries like Panama, Paraguay, Argentina, and Brazil are evaluating the feasibility, but unclear if it will be a sovereign offering or creating an enabling environment for established crypto currencies such as Bitcoin. Larger economies like China, Russia, and Turkey are experimenting with Central Bank Digital Currencies (CBDC) – as they offer better stability than other cryptocurrencies and better flexibility than fiat currencies.  Interestingly, what is driving Iran’s cryptocurrency adoption is sanctions by the USA, hence limited access to International Financial Markets.

 The early movers and shakers in the Crypto world are as follows:
-Starbucks, Yum Brands (Owner of KFC, Pizza Hut, etc.), Restaurant Brands International (Owner of Burger King, Popeyes, etc.), Coca Cola, Pay Pal, E-Bay, Microsoft, Tesla – have started accepting Bitcoin as an official payment option
- The ‘Big Boys’ in Banking have started investing, in total approx. US$ 2.5 billion.  The top investors are: Standard Chartered (US$ 360 million), BNY Mellon (US$ 321 million), Citi Bank (US$ 279 million), UBS (US$ 266 million), BNP Paribas (US$ 236 million), Morgan Stanley (US$ 234 million), JP Morgan Chase (US$ 206 million), Goldman Sachs (US$ 204 million), MUFG (US$ 185 million), ING (US$ 170 million)
 - Current crypto market capitalization is US$ 2.3 trillion (9th Oct) – 17X growth in 12 months. 
-Bitcoin contributes to 43 percent of the market cap, while in 2013 Bitcoin accounted for 94 percent.