“It is antiquated- a kludge of industrial technologies and paper-based processes dressed up in a digital wrapper.”
That is how Don Tapscott, the co-founder of the Blockchain Research Institute, describes the global financial system. And he is far from wrong. Today, we have financial systems that are barely keeping up with the revolutions that are happening in different technologies. These systems fall prey to hackers and financial terrorists. Crises afflict them with devastating and worldwide consequences. These failures have led many to search for ways and mechanisms that would revolutionize the whole world of finance. One example of such is Blockchain.
It is a decentralized, and continuously growing, list of records that are called blocks. It is a global ledger, available to anyone, on which transactions, money, assets, contracts and anything of value, can be stored. Blockchain is generally associated with cryptocurrencies, especially Bitcoin, which is the most known. However, the uses and potential of Blockchain are far greater.
While its primary users have mostly been developed countries, Blockchain presents an opportunity for emerging markets to not only reach, but also surpass, more developed economies. A country that is experiencing a transition from one economic system to another, and lacks the standards of developed markets, is generally called an emerging market. They have not reached a mature and stable point yet, and thus are very vulnerable to financial or economic shocks.
In this category, BICS, South Korea and Argentina can all be included. What makes these markets attractive is their incredible growth with respect to consolidated economies, low-cost labour and untapped capital. On the other hand, they also have very high risks. Usually, there are large political uncertainties, with unstable governments and weak legal systems due to the fragile nature or even the lack of democracy. Moreover, currency and economic risks are also present. Blockchain is seen as a potential solution to all these uncertainties.
In emerging markets, the market structures are less defined and have high transaction costs. The financial infrastructure in these countries is underdeveloped. So, instead of trying to improve these existing systems and copying the models of their developed counterparts, they could leapfrog and adopt the Blockchain technology. This analysis will focus on several areas upon which Blockchain technology can greatly improve on, facilitating the lives of citizens, the ease of doing business and the overall economy of these countries.
How It Can Help Developing Economies
Firstly, it will help decrease corruption. Since every transaction leaves a unique digital footprint, it is easier to track it down. On this technology, it is possible to store contracts, property deeds and other valuable documents, thus increasing transparency. As the International Finance Corporation reports, these are called smart contracts and can take actions based on predefined rules. This solves the problem of property grabbing and ownership meddling through falsification of documents or contracts. Records cannot be changed retroactively, so any attempts at manipulation will be noticed immediately. A country that mitigates the problem of corruption is more attractive in the eyes of investors.
In these countries, remittances – which are transfers of money made by individuals who work abroad – are one of the largest inflows of capital. However, a considerable proportion of the sums of money is taken by banks or other financial institutions that charge a fee for the facilitation of the transfer. According to the Overseas Development Institute, in 2015 12% of every $200 sent was lost in fees. Blockchain can help by allowing these individuals to transform their money into a virtual currency and transfer it online, with very small fees. Not only is this instantaneous, but it is also straightforward. In Africa, this is currently being implemented. BitPesa, the online payment platform, facilitates the flow of money with very little cost.
Moreover, Bitcoin makes it easier for everyone to access the financial system. Since it is a decentralized structure, anyone can use it. Currently, most – if not all – financial transactions are carried out by banks or other similar institutions. Blockchain changes this radically. It has the capability of replicating the functions of commercial and investment banks or asset management firms. Many financial organizations decide to stay away from certain countries due to the regulations in place, or difficult political situations, thus leaving these countries without proper financial access. But if respectable banks abandon emerging economies, then there will be a lack of banking competition- potentially creating black market dealings and unsafe financial firms. This can lead to instability in these countries, criminal money and corruption.
Through ensuring financial inclusion, Blockchain tries to avoid this, thus improving the lives of the citizens in these countries. Therefore, banks can use this technology to remove the entry barriers in emerging markets, easily move assets across countries and verify each transaction made. This helps to lower the risks and uncertainties for them and their counterparties in these economies. The private sector can benefit as well, by receiving the financial support they need and making it easier for them to transact with foreign customers and suppliers.
Furthermore, according to the American Banker, Blockchain technology automates the matchmaking between the investors and those seeking the money. This is generally the work of venture capital firms, investment banking and other financial institutions that serve as intermediaries. Through Blockchain, this matchmaking is more transparent, accurate and efficient, also actualizing the payment of coupons and dividends. Using the same logic, other activities such as loans, insurance, accounting and risk management can be performed through this technology.
Financial institutions that see an attractive opportunity in emerging markets should seriously begin considering the use of Blockchain technology, which would result in the mitigation, or even the elimination, of the main threats that come from these countries. On the other hand, countries themselves should start applying this technology, which could ensure a remarkable decrease in corruption, increase in growth and further progress.
Nevertheless, Blockchain is still in its early phases of development, little known to many emerging countries; similar to the Internet in its very early beginnings. As such, it has its drawbacks and risks.
Potential Costs and Drawbacks
Undoubtedly, there will be high costs in its implementation, which will predominantly be financial and organisational. For some companies, it may be a gamble to implement this technology. Since it is relatively new, it has an uncertain future. Its potential is huge, and one needs to believe that this potential will be tapped into, much like the Internet. If that is not the case, it will be a big waste of time and money. There are costs of testing the technology, but also training people. Currently, there is a limited qualified human capital.
Secondly, there can also be security breaches. In its report, the International Finance Corporation correctly mentions the 2016 cyber-attacks on the Distributed Autonomous Organization as a result of the vulnerability of smart contracts. The amount stolen was worth $50 million. Evidently, cybersecurity is an issue. As technology gets more sophisticated, so too do the thieves and hackers.
Lastly, the issue of regulation needs to be addressed too. These countries do not have stable and trustworthy legal systems. Their regulatory frameworks leave a lot to be desired. As such, the question arises as to how they will regulate this technology. Regulation is a tricky subject even with the current systems in developed countries.
Blockchain, as part of the Fourth Industrial Revolution, represents a drastic change in the way we perceive finance today. For the emerging economies, it would revolutionize their whole way of life. Of course, there is the need for more thorough research in order to accurately assess the benefits and setbacks of implementing this technology. Only time will tell if it is “a mathematical framework, free of politics and human error” or an over-valued technological experiment.
Crypto Carnage: Blood on the Dance Floor
It is said that ‘Blue Monday’, typically the third Monday of January, is the most depressing day of the year. This has, undoubtedly, been the case for cryptocurrency owners worldwide; from Monday onwards, almost all of the world’s major cryptocurrencies have seen a drastic slump in their prices.
Having reached the $14,000 mark last week, Monday onwards marked a severe fall in Bitcoin’s value. On Wednesday, the dubbed ‘king of cryptocurrencies’ dropped to below $10,000 for the first time since the end of November, before making a small recovery on Thursday. It stands at $11,500 at the time of writing, but the day is still young.
And Bitcoin has only been leading the way. At this point last week, the price of Ethereum, the second most valuable cryptocurrency, was approximately $1,200; a slump on Monday saw it fall to a low of $800 on Wednesday before pushing through the $1,000 threshold again, and reaching $1,030 a day later.
Ripple’s XRP also followed suit; the cryptocurrency has almost halved in value over the past week – from around the $2 mark to a low of $1.20 on Tuesday. Since then, it has marginally recovered in price, to $1.48 at the time of writing.
Monero, IOTA and Cardano were also impacted – since Monday, they have declined in price by 35%, 22% and 21%, respectively. Litecoin now sits at $195, down from $240 at the beginning of the week.
The crash occurred at a time of optimism and hope for cryptocurrency owners. Just earlier this week, US money transfer company MoneyGram announced a partnership with Ripple in the aim of streamlining money transfers. Yesterday also marked the expiration of the first Bitcoin futures contract that had been listed by the CBOE.
Still, China’s offensive rhetoric against Bitcoin and other cryptocurrencies in the last seven days is likely to have stoked fears amongst investors, causing a major sell-off. The country confirmed earlier this week that it was seeking to further clamp down on its restrictions against virtual currencies by eliminating cryptocurrency trading.
It has also recently announced plans to further restrict Bitcoin mining within the country. Recent statements coming from Chinese governmental circles could go as far as to suggest that China wants to eliminate cryptocurrencies outright: the People’s Bank of China (PBoC) vice governor, Pan Gongsheng, purportedly encouraged the state to introduce a total ban on cryptocurrencies.
China is by no means the only country to have espoused hostility toward cryptocurrencies. Russia also partially echoed China’s scepticism – President Vladimir Putin noted this week that “in broad terms, legislative regulation will be definitely required in future”.
South Korea’s unreceptive stance toward digital coins – it was reported earlier this week that its finance minister, Kim Dong-yeon, had stated that the government would be introducing measures to clamp down on the “irrational” cryptocurrency investment rage – may have also played a part in driving prices down.
Still, for every bear, there seems to be a bull. Time shall tell whether increasing restrictions on cryptocurrencies from different governments will further impinge on their price, or if they will find a way to adapt to the new obstacles and prove all those championing them (and making millions in the process) right.
UK Banks Shun Bitcoin
No UK banks have partnered with cryptocurrency exchanges.
Editor’s Remarks: The lack of any relationships between UK banks and cryptocurrency exchanges means that UK investors currently have to move their money through a series of foreign exchange transactions and services before they can cash out their profits. As a result, they incur high fees and often the suspicion of their banks. This is contrary to many European banks, which have partnered with such exchanges. To an extent, this is because the UK retail banking sector is highly concentrated, whereas in Europe and the US the consumer has more options. The UK government is also due to release guidance on how cryptocurrency gains are to be taxed in the next few days.
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Hacks on Cryptocurrency Exchanges Linked to North Korea
A report has linked a hacker group, responsible for targeting crypto-investors and exchanges, to the North Korean state.
The attacks took place against South-Korean crypto-exchanges and included attempts to harvest users’ passwords. The report does not say if the attacks were successful.
The report, by internet technology company, Recorded Future, has identified the attackers as the group Lazarus, known to be associated with the hermit kingdom. The malware was similar to that used against Sony Pictures in 2015, the WannaCry ransomware attack in 2017 as well as the Bangladeshi bank heist in 2016.
Attacks began when cryptocurrencies started to rapidly increase in value. It is believed North Korea favours attacks on cryptocurrency because they are not linked to any bank or government, making attempted heists less politically incendiary.
North Korea has shown a great interest in crypto-currency, potentially as a means for funding itself. In 2017, the elite Pyongyang university started to run courses on the virtual tender.
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