Daily Times

The recent push for ‘cryptocurrencies’ is fascinating. It’s hard to go through a day of YouTube viewing without running into pre-roll advertising that promotes Bitcoin — the current cryptocurrency flagship — as the best thing since sliced bread. That said, I wonder if our fascination with cryptocurrencies is real or artificially inflated? And what will be the consequences of designating digital currencies as legal tender to developing countries like Pakistan?

For the uninitiated, Bitcoin uses complex computer code over the Internet to exchange value between individuals or organisations. It is the digital equivalent of money we use every day but without the patronage of a central bank. Also, it is different from online payment methods using intermediaries like Visa and MasterCard that link cash payment or receipt to your bank account.

Creating new Bitcoins and authenticating individual transactions requires high-end computing power to crunch the math. The owners of these machines, called ‘miners,’ are rewarded with new Bitcoins and receive processing fees. All cryptocurrencies operate atop the peer-to-peer ‘Blockchain’ technology that verifies and secures transactions using near military-grade cryptography. It also stores them in a ‘public ledger’ on multiple computers across the network that all transacting parties have access to.

Infinitely more interesting for me are the sociological forces driving this phenomenon. To fans, the key attraction of cryptocurrencies is decentralisation. Meaning central banks controlled by tyrannical governments that represent the elite can no longer interfere with what individuals want to buy or sell. Or how much something is worth. It is akin to barter for the 21st century.

All transactions in this realm are anonymous, barring digital signatures that are authenticated by computers on the network. These computers also safeguard and gate-keep the system. The theory goes that a society can truly exercise free choice only when the government is removed from the process of exchanging value. Unsurprisingly then, the financial crisis of 2007-2008 that sparked a global recession is often identified as the trigger for the modern cryptocurrency gold rush.

To fans, the key attraction of cryptocurrencies is decentralisation. Meaning central banks controlled by tyrannical governments that represent the elite can no longer interfere in what individuals want to buy or sell

The impact of this crisis was especially dire on credit-based economies like the US and much of Western Europe. The vanguards of the cryptocurrency movement blame government hypocrisy for perpetuating a crisis that, to a degree, still grips the world. In the US, they accuse former president Barack Obama of bailing out fat-cat bankers through massive cash injections, while failing to prosecute them for sham loaning practices that both created and then burst the US housing market bubble.

Meanwhile, individuals and families who had availed the subprime loans were rendered homeless after the government repossessed their properties for nonpayment. This tragic series of events collapsed housing prices and many lost their entire life savings. This subsequently had a ripple effect through global markets.

Cryptocurrencies like Bitcoin, as many financial experts point out, have characteristics that make them untenable as legal tender. First, their volatility is similar to a bucking stallion. The price of one Bitcoin hit a record high of USD 20,000 in mid-December before sliding sharply by 30 percent the following week. A cursory glance at its price history over the past year shows the kind of jagged edges and steep falls that have more in common with novelty assets like rare stamps than money. It is hence unlikely to gain mass acceptance until people have confidence in the stability of its purchasing power.

Next, and perhaps most important, is the moral dimension of cryptocurrencies. Thus far, they have been a godsend for criminals. The Islamic State (IS) was reportedly an early adopter and used them to raise funds and bankroll its terrorist network around the world. It is also believed that North Korea uses the Bitcoin network to bypass the crippling economic sanctions imposed by the UN. In fact, the regime’s hackers allegedly plundered a Seoul-based cryptocurrency exchange in late December, consequently debunking the self-touted robustness of Block chain’s security design.

Additionally, Bitcoin in its present iteration offers huge potential for white-collar crime. Once financial transactions take place outside regulatory oversight, tax evasion and money laundering are easy to perpetrate. Cryptocurrencies, ironically, end up helping the very elites their champions so loathe, as hiding ill-gotten wealth has become exponentially easier with anonymous transfers. Consumer protection is also a major concern. Whereas credit card fraud has multiple angles of redress, decentralisation means no one is policing the cryptocurrency system and crooks can fleece innocents with impunity.

The biggest worry though is how certain spokespersons for cryptocurrency are positioning it as the savior of developing countries chafing under the yoke of neocolonialism by way of U.S controlled lending institutions like the World Bank and IMF. Outside that oppressive system, they claim, lies total control of national assets and sovereignty. These spokespersons also happen to be major investors in the system and profit from added volume to the cryptocurrency market, which makes their motives anything but altruistic.

Bitcoin is not the cure-all for such countries. If anything, it will transfer wealth from a national pool that democratic societies can hold their elected representatives accountable for, to a cartel of private corporations that monopolises the system without consumer protection. If credit facility in a society is taking over by for-profit entities without regulatory oversight, retail loan sharking will become commonplace.

Put another way, you will end up swapping one yoke for another. This is why China and Israel have banned cryptocurrencies, and others like Japan and South Korea insist on a more transparent framework before Bitcoin and its ilk can be mainstreamed as legal tender.

Proponents often cite the fear of new ideas as the reason behind public resistance to cryptocurrencies. Their warrant predictably is the Internet and how it too was initially dismissed as a gimmick. Nevertheless, the lure of the Internet was based on access to free, albeit illegal, content. In Bitcoin’s case, you could possibly lose everything with a mouse click.

The writer is an Islamabad-based freelance journalist

Published in Daily Times, December 28^th 2017.