Central Banking and the Cryptocurrency Challenge

Sunday, February 07, 2021 / 11:37AM / By Tope Fasua / Header Image
Credit: 9to5Mac/CBN

“The traditional financial system is deeply rooted, organized, and
backed by government. Cryptos are not… At least not for now!”

First,
a bit of history. A supposed Japanese named Satoshi Nakamoto
started the first bitcoin 
sometime in 2007. Indeed, nothing is known about whoever started the concept
apart from what they claim to be. No pictures. The name has been indicated as a
pseudonym (fake), and so also may be the nationality and the current age of
forty-five (45). What is not in question though, is the bitcoin net worth of
Satoshi, who could be a man or a woman. $8.8 billion is the figure, at 2020
prices. The fuzziness around founder-ship presents the first contradiction in
the crypto saga, for a system which seeks to achieve total transparency in
transactions was birthed on anonymity.

NB: Satoshi Nakamoto is the name used by the
presumed pseudonymous person or persons who developed bitcoin, authored the
bitcoin white paper, and created and deployed bitcoin’s original reference
implementation. As part of the implementation, Nakamoto also devised the first blockchain
database.

The
idea was to create a different currency system – and if you like, entire
financial system – that short-circuits the current traditional one. This was
borne out of a need to rebel against current fiat currencies.

Now, in
Economics, we call today’s currencies ‘fiat currencies’ because they are
created by fiat and command the value on their faces, because governments say
they should. Fiat is force or command. Before the global adoption of fiat
currencies, money was backed by other assets such as gold. 

The
proponents of cryptocurrency believed that there is a need to push back and do
something different, that will mimic the attributes of a gold-backed currency
in view of durability and scarcity but do better than the current system by
being smart, secure and not possible for central banks to issue at will.
  There are also other known failures of the current financial and
currency systems, notably bank failures and bailouts, lack of transparency,
inefficiencies, and excess charges which make a number of the bank executives
and even regulators exceedingly rich. Nakamoto and co believe that there is a
need to stop the exploitation of the masses (that is an irony today though,
given Nakamoto’s net worth).

So,
from get-go we have to understand that cryptocurrencies declared a war on the
traditional banking and financial system. And the uptake has been frightening
even if the road is laden with booby traps which we may be able to discuss
shortly.

A
friend, Nnamdi Nwizu, informed me that one of the first known bitcoin
transactions was for the purchase of a pizza. 10,000 bitcoins was exchanged for
a pizza. Today, 10,000 bitcoins are worth $300 million or anything like N14
billion. See the meteoric jump. This kind of phenomenon has attracted a lot of
people to acquire and keep cryptocurrencies. But we have also seen much
volatility in the prices of these cryptocurrencies, a number of which are said
to be scams. Imagine an asset whose price could fall overnight by 60%?
Nigerians who are investing in it should be clear about something; they are
merely riding the waves. Nothing underpins these cryptocurrencies.

As a
fact, far more cryptocurrencies have failed than have succeeded. There are
about 4,000 cryptocurrencies around today with just a handful of them being
real or successful.  This article states that 1,000 cryptocurrencies have
failed, making away with billions of dollars from people who wanted to play the
market. The purpose is almost defeated because the focus in now
simply on probable gains that people can make from getting in on the
action. In 2019, a Canadian cryptocurrency Quadriga went down with $250 million
of investor money when…