Cryptocurrency has become the new buzzword of 2021. It has increasingly gained legitimacy and popularity, while corporations such as Tesla and KFC either bought or made mainstream the use of crypto. Facebook even made an attempt at introducing its own cryptocurrency Libra, which was later changed to Diem.
Regarding investment vehicles, the gains and popularity in crypto have forced traditional investment institutions and hedge funds to also engage with crypto. This is to ensure competitiveness, with the exorbitant gains of sometimes 5,000% in comparison to the stable 7% per annum that previously was the norm.
The current monetary system is based on a system where the central bank has control over the distribution and regulation of money, and the government is responsible for allocating that money.
The earliest form of cryptocurrency was in the form of Digicash 1989, where founder David Chaum created a system where individuals would use software to withdraw digital notes from the bank.
Modern-day cryptocurrency is slightly different. Bitcoin is the first modern cryptocurrency, which was founded by 'Satoshi Nakamoto' - a presumed pseudonym or an organisation.
Most cryptocurrencies such as Bitcoin operate on a technology called a blockchain. According to the Bitcoin Foundation, Blockchain is 'triple-entry' bookkeeping system. Every time there's a new transaction, the sender, receiver, and a third-party must confirm and agree on the transaction.
Any Bitcoin transaction can be located on that digital record. You can trace every transaction in this blockchain but you can't trace the individual that made the transaction.
Cryptocurrency has also posed a threat to central and retail banks around the world, which have since started making moves to create their own digitised currencies. Thus far China has been the only successful state that has achieved this. But the real question is whether currencies such as the Dollar, Euro, and the Rand can stay competitive and relevant within this monetary revolution.
During periods of economic crisis people tend to withdraw their money and investments, out of fear that monetary systems would collapse. At the start of the 2020 pandemic people opted for cryptocurrencies as it is autonomous and cannot be influenced by state or central bank policies, in the same way, that the Dollar can. This was the wake-up call for many central banks.
Despite the consumer-centred winnings (a democratic financial system), cryptocurrency is a threat to the domestic and global monetary system; 90% of the world's central banks have started exploring means to digitise their currencies.
If South Africa decided to opt for a digitised currency, it would operate just like the normal Rand. Rands would be issued by the central bank and held directly in the citizen's wallet. Alongside printing money, the central bank would issue coins and notes to the accounts of citizens. The digital wallet would be accessible through smartphones. Governments could also decide whether they want their citizens to create a direct account with their central banks or operate the digital currency through existing financial institutions. When making payments for grants, tenders, this could eliminate the middlemen that facilitate payments.
The digital divide could make full appreciation of these gains challenging, however there would need to be provision for cheaper mobile data providers to provide packages to consumers.
On a domestic level, cryptocurrencies actively undermine the function of the central and commercial banks. The central bank has three key functions:
Print, distribute money or destroy money;
Set interests rates to either stimulate the economy or restrict spending;
The creation of reserve requirements and ratios.
According to Investopedia, many people prefer using cryptocurrency because it is decentralised. This is based on a few factors: users have full control over their money, nor interact with the government or banks when using their money. There are no banking fees in the form of account maintenance or minimum balance fees, no overdraft charges and no returned deposit fees.
This guarantees access to financial institutions to people that would traditionally be excluded, considering that over 30% (27 million people) of South Africans are unbanked. And on a global level, over 1.7 billion people are unbacked, thus have no access to the monetary system.
Crypto users can bank anywhere as long as they have internet access, the same can be said for retail banks. However, these commercial banks require users to provide data and already have bank accounts with these institutions. In South Africa, 27 million people are still unbanked and commercial banks aren’t useful for these individuals.
For all countries the inability to control a domestic currency threatens the powers of state, especially the creation of monetary, fiscal and overall state policy, hence the new move to create a digitised currency.
What does the disruptive nature of crypto mean for South Africa? And could it potentially have socio-economic and political issues?
It should be noted that South Africa has an unemployment rate of over 32%. Load shedding has persisted since 2008. South Africa barely survived State Capture, and the country was also downgraded to junk status. To say the least, there is some domestic friction that exists.
Creating a digitised currency network would require a lot of electricity to maintain the network, and to prevent harm to the monetary system in the event of a blackout. This is a potential security threat, as this means that South Africans would be susceptible to hacks. This could potentially collapse the monetary system, given that Eskom is not a reliable source of power.
A digitised currency requires massive infrastructure-building. A currency is only successful when it can establish widespread use. This is one of the reasons why Venezuela's petrodollar failed. Firstly South Africa would have to possess the technology required to create a digitised Rand, and there would need to be a network across legal, political, and social life to ensure that it is used.
Another potential concern is what bookkeeping system South Africa would use. Within the current system, the central bank issues money to commercial banks, who then distribute that to the public. Within a digitised economy would South Africa make use of the Blockchain?
Or would we opt for the China route? The Chinese model for cryptocurrency consists of a digital wallet, they do not make use of Blockchain. This allows the government direct insight regarding the direct transaction history of citizens, and this allows for socio-economic sanctions if a particular citizen is not behaving 'correctly'. Further, the Chinese government can make money 'expire' by forcing citizens to spend money - this is a combination of fiscal and monetary policy. This is an ideal model in an autocratic state, but is questionable for a constitutional democracy.
A key feature within digitised currencies that are issued by the central bank, is that they are a honey pot of extremely sensitive data. And this raises questions about whether citizens would be allowed to access their personal data; the relationship with the state is different in comparison to the relationship with a private entity. Thus, how would this data be handled and who would be allowed to access it? Would it be ethical and in tune with the standards of a constitutional democracy?
Digitised currencies also have the potential to be used as a state apparatus to access the information of its citizens, and precisely track the habits and the movements of citizens. To ensure a full understanding of cryptocurrency, one would need to understand what it is.
Lastly, there is a potential risk in central bank issued digitised currencies being used as a means of furthering a hegemony. The biggest concern with the digitised Chinese Yuan is that it could be used as a diplomatic tool for countries attempting to secure loans from China. Like the USA, this new currency would create an alternative dependency network. The only difference here is that this new currency can be accessed beyond other states.
However, a digitised currency would be extremely beneficial on an international level. A digitised currency network threatens the Dollar hegemony, and has the potential to create new standards of engagement with international organisations such as the World Bank and the International Monetary Fund (IMF).
In terms of international loan repayments, many developing countries have higher interest rates from international institutions such as the IMF. Prime interest rates for South Africa are currently 7%, whereas for countries such as America it is usually 2-3%.
Personally, I am in favour of a decentralised cryptocurrency, a currency where the value can be truly determined and structured by the actual people that use it. The overall appeal of decentralised currency actively challenges our perceptions of statehood and the expected homogeneity within this system. A system that disallows divergence from the imposed standards.
A central bank digitised currency is an attempt at attempting to maintain power within a system where more people are demanding transparency and meaningful engagement from their countries. Despite cryptocurrency challenging the global standards of statehood and state power, this reveals the cracks within the current model. Rather than attempt to cover up the cracks, perhaps there is a need, as a broader society, to redraw what statehood means. Failure to do so will result in irrelevance especially given that technology has made the state a decentered part of our lives.