A pathway to creating a global and trusted digital coin
Ideas from World Economic Forum's recent conversation on how we can create a trusted digital coin for worldwide commerce.
As countries and corporations come to terms with the massive financial loss resulting from COVID-19, governments around the world are announcing bailout packages for their citizens and companies. This got me thinking about the role a global and trusted crypto coin could play to provide a way for citizens of the weaker world especially frontier and emerging markets to receive grants through crypto-coins and the ability to use those coins as a medium of exchange for transactions.
Countries like Venezuela, Zimbabwe, Sudan, Syria, Afghanistan and many others operate a currency nobody trusts. Why shouldn’t their people have an option to not depend on their broken paper currency instead of a digital one, perhaps the bitcoin.
World Economic Forum recently organized an event to discuss the possibilities of creating a global crypto-currency. The discussion had the participation of Elizabeth Rossiello, Founder and CEO at AZA Finance, and Catherine Mulligan, Co-Director, Centre for Cryptocurrency Research and Engineering, Imperial College London. They spoke about the current fragmented systems that exist in the crypto-currency market, practical use-cases of the currency currently in operation around the world and how could all of this be regulated in a way that ‘rules do not come in the way of innovation.’
Key takeaways
Crypto-currencies could largely be segregated into 3-buckets with multiple variations within each of those.
Japan is one of the first advanced economies to allow the use of bitcoin as a medium of exchange and transaction in their economy.
Consumers in many frontier and emerging markets actually benefit from having a digital coin instead of banking upon their devalued local currency.
It creates options to innovate how money is created and distributed within a system.
The three crypto types
Crypto currencies are largely differentiated on the basis of their governance make-up. Conditions of issuance, in-charge of decision making on creation and distribution of coins, and the common rules governing the ownership of coins are all factors determining the category of the coin.
In essence, there are three primary categories:
Decentralized or permission-less
Government backed
Corporate backed or Non-government
The first one is the most popular. Think of Bitcoin or Ethereum, it’s open source, people can download the code and start contributing and have rights into the system based on its governance system e.g. equal rights to participate, based on computing power, proof of work etc.
Government issued coins are still nascent and no real example exists but China is working on a digital currency that will be governed by the same monetary framework issuing the paper currency.
The third set includes corporate coins. This includes a private corporation issuing their own coins to the market and hoping people will adopt it and start using it for trade, transactions and store of value, think Libra from Facebook.
Real world opportunities of these different currencies?
Crypto gives a real opportunity to create innovative interactions with money e.g. create an API to provide access to finance in some form. Another example comes from Africa where a lot of their local banks have lost their correspondent bank status resulting from the global de-risking event.
So, imagine you’re in Nairobi and you go to your local bank trying to make an international transaction. Here’s how it goes, you take your Kenyan Shilling, purchase the US dollar through an intermediary, the US dollar then goes through a Deutsche or Citibank and then go somewhere else. The result, transactions cost rises up to 20% in many of these frontier markets.
Crypto-currencies allows the consumer to navigate the current USD denominated SWIFT global money transfer system and instead send the payment directly through a peer to peer (P2P) or business to business (B2B) setup. This saves both dollars and time for consumers and businesses.
Companies like Coins in the Philippines, Bitso in Mexico, Bitpagos in Argentina, initially Circle when they first started and many others started as a way to create not only P2P mediums of exchange but also B2B. So, essentially trade those coins business to business as opposed to going through the SWIFT system.
Regulating the system: The need for a global effort
The arrival of Libra brought the discussion on Crypto currency for the first time on the table at the G7. A system overhaul like this will need participation of government, non-government, think tanks, technology companies and financial regulators all at one place.
The key questions to address include:
Is the system safe for consumers from the standpoint of stability?
What are the cyber-security concerns around a crypto-currency system?
What will be the role of monetary policy managers like the central bankers?
Arrival of private coins could open a Pandora box of opportunities and challenges for the society. On the one hand, we could have a company like Facebook takeover the role of the government in the sense that it will be the one who decides the issue, distribution and control of currency. This has always been the domain of the government. So, it’s unclear how it will unfold yet.
Conclusion
Japan is one of the first major economy to show how a large economy can start pressing forward complex yet manageable regulatory systems to allow the use and growth of decentralized crypto-currencies. Tokyo has large signs across the city explaining how to buy, trade and hold bitcoins. You can use it to buy grocery or even shop online. Despite Mt Gox, a major crypto-currency failure in the Island nation, the country didn’t fold and went ahead assessing and analyzing the outcomes of that crash to write complex but clear regulations to allow the growth of crypto as a mode of transaction in the nation.
The future of the coin needs global correspondence, discussions and trying out new things. Bitcoin, Libra and others are all examples of this and the only thing that needs to be done is to bring enough people to the seat and have an open and transparent conversation on every sticking issue.