Article by Scotcoin’s own Temple Melville published in City AM on 28/8/19
Cryptocurrencies are almost as old as money itself. Indeed, crypto simply means concealed or secret. So the first man (or woman) who tried to exchange some rocks for a sheep could be said to have been using a crypto currency. Up to that point a sheep had been worth 15 chickens. It’s simple, really. You attribute a symbolic sense to something you do not see.
Houses and liquidity
on to the 1600s when after the Thirty Years War belief in what then
passed for “money” was at a low. Something else had to be found,
and it was, in the shape of strong finance houses with robust links
to other similar houses. They issued their own currencies when the
State currencies could no longer be trusted. Move on again to the
American experience of the mid 1800s. There were over 8000
“currencies” – usually paper – being traded around the
country with a big business in accepting and exchanging them. There
had to be some form of currency to enable trade to take place as
America expanded. These of course were seriously open to abuse and
eventually the individuals and banks that had issued them had to bow
to the Federal Government creating its own, reliable currency.
created – WIR
the 1930s there was to all intents and purposes no liquidity in any
markets. Things were so bad that some of the good citizens of Zurich
created their own currency to enable them to trade. This was called
WIR and was, indeed, like those currencies before it, a crypto
currency. Over the years it has prospered (perhaps one would expect a
Swiss monetary instrument to do this) until today it is used by more
than half a million people, over 70,000 businesses and transacts
some CHF2.5billion annually – that’s around half a percent of
Swiss GDP. By doing so, it illustrates exactly what “Money” is –
a trusted medium of exchange that others will accept, and a stable
store of value.
present crop of crypto currencies rely on digital technology to give
them credibility. You can’t have a run on the “Bank” for
example – there isn’t one. Despite being relatively small in
terms of value (only some 0.1% of total world assets) they already
show what digital and crypto currencies can do to enhance people’s
lives. As an example, if you want to send £1million to anywhere in
the world, that will cost you between £20-30,000. Using a digital
currency, it can be done for 50p. In fact, the Philippines is looking
to create a Bitcoin transfer system for its overseas citizens. Using
this system would save their economy over USD1.5 Billion a year – a
significant sum in a poor country.
three cryptos no one talks about
are three interbank tools that are in effect digital currencies and
have been for years. These are:
Target2 – the ECB system, the old Bundesbank system which is
currently so politically in focus in respect of Italy
SDRs – Special Drawing rights
highly secret interbank settlement system at the BIS in Basle.
three were absolutely crucial in getting the world through the 2007
Song Shin of the BIS argued last year that cryptos (and he was
specifically talking about Bitcoin) had issues with scalability and
finality. At that time he was right as you would expect, but he was
talking about first generation blockchain. We have since had second
generation in Hyperledger, and now third generation called
Decentralised Blockchain. Facebook’s Libra will largely use this
system and there can be no doubt this will revolutionise the use of
digital and crypto currencies world-wide. We’ve gone from around 35
million wallets to a potential 2.7 BILLION. But Shin’s central
thesis holds good – you need people to USE these new currencies to
make them both trusted and useful, and having exchanged goods for the
currency, the person TAKING the currency needs to find someone else
to take it as well.
use of cash has been declining for years in most western countries,
and the Central Banks have realised that it will have to be replaced
with something. To this end both Sweden and Uruguay have run full
scale crypto trials which have largely been successful, though not
set for full implementation anytime soon.
use of crypto currencies can and should mean social inclusion. Whilst
Central Banks’ attitude remains “Bitcoin is not a good idea,”
the idea behind
it continues to fire imaginations all around the world.
remains a very positive initiative which is making a real difference
within Brixton. Arguably it’s as old as Bitcoin. People are
prepared to use it and pass it on – and the money stays in Brixton.
That is different from the likes of Bitcoin which is world-wide, but
it doesn’t detract from the social inclusiveness of it. We
look to history for lessons on the nature of money and the role of
central banks in building trust in the use of money in society. The
issue of trust has again come to the fore in debates on the
durability of cryptocurrencies such as Bitcoin, and how far private
money can supplant central bank money as a medium of exchange.
the future, physical cash or even bank transfers as we currently know
them are unlikely to be the main answer. Central banks are already
working on systems and digital currencies that will be trusted and
used. Existing crypto-assets
have exhibited a high degree of volatility and are considered an
immature asset class given the lack of standardisation and constant
evolution. They present a number of risks for banks, including
liquidity risk; credit risk; market risk; operational risk (including
fraud and cyber risks); money laundering and terrorist financing
risk; and legal and reputation risks. But new know your customer and
anti-money laundering rules will mitigate much of this.
the African sub-Saharan region has become a leader in mobile money
resulting in a radical change in the delivery of financial services
and significant gains in financial inclusion. Where there is a lack
of payment infrastructure, the use of crypto currencies immediately
enhances trade and social inclusion. You only have to think of
Eastern Europe which hardly had a fixed line telephone system before
1989, and suddenly every man and his dog had a mobile phone,
leapfrogging to a new world.
Lagarde in an excellent speech to the November 2018 Singapore Fintech
Conference, has posed the question – should
central banks issue a new digital form of money?
they already have.
As such, it can only be seen as a force for good.