Governments are understandably suspicious of bitcoin, which has shown itself relatively immune to censorship and even outright banning.
A new report by US banking giant Citibank says despite their most ardent wishes “it might prove to be almost impossible for a government to shut down access to bitcoin and other cryptocurrencies or prevent its ownership or usage without what would effectively amount to a shutdown of the global Internet”.
That’s a huge tick in favour of bitcoin as a new form of international money.
Another is its ability to protect purchasing power, something that has been adequately demonstrated by its almost 200% compound annual increase in price over 12 years.
It took some years, but a large and growing corps of businesses now accept bitcoin as payment. According to the Citi report, entitled Bitcoin: At the Tipping Point, “a 2020 survey by HSB reveals that 36% of small-medium businesses in the US accept bitcoin”.
In October last year, PayPal announced that it would allow US account holders to buy, sell and hold cryptocurrencies, and to shop with cryptos at more than 26 million merchants.
There are now about 12 000 bitcoin ATMs around the world, allowing customers to buy bitcoin using cash or a debit card, and to sell bitcoin for cash.
Boom in Africa
There’s also a quiet bitcoin boom unfolding in Africa, says Citi, driven by payments from small businesses as well as remittances sent home from migrant workers.
Monthly cryptocurrency transfers to and from Africa of under $10 000 – typically made by individuals and small businesses – jumped more than 55% to reach $316 million in June 2020 according to Chainalysis. Facilitating all of this was a more than 55% jump in monthly bitcoin trading volumes of all market participants in South Africa and Nigeria to more than $536 million in August 2020.
“Many case studies have been done illustrating how Africa has leapfrogged in the build-out of its financial ecosystem, foregoing the establishment of a robust banking industry and instead jumping quickly to mobile digital wallets,” says the report.
“Tech-savvy residents are used to digital cash, making the region particularly well-positioned to consider bitcoin and other cryptocurrencies.
Difficulties obtaining US dollars, the de facto currency of global trade, are exacerbated in the region due to weak local currencies and complex bureaucracy that complicates money transfers. These issues helped accelerate the push to explore bitcoin.”
African merchants highlight how bitcoin is helping to make their businesses more nimble and profitable and allowing African natives working in places like Europe and North America to hang on to more of the earnings they send home. Small cryptocurrency transfers in June 2020 alone rose to 120 000 in June 2020 (+55% year-over-year) worth nearly $56 million (+50% year-over year).
As Nigeria was hit by Covid-19 and falling oil revenues, its central bank shut crypto companies’ access to banking services. The naira was twice devalued in 2020, forcing importers to pay more for increasingly scarce US dollars.
“All of these developments highlight how Bitcoin as a payment option is beginning to move toward the mainstream,” says Citi.
“Growing use from both developed nations and emerging economies are working to cement bitcoin’s reputation as a store of value and making its censorship-resistant attributes increasingly important.”
Bitcoin is turning out to be a global levelling opportunity, says James Stickland of Elwood Asset Management, and emerging countries have been driving adoption of digital currency out of necessity as a way of cleaning historical challenges with cash.
Another development is the migration by crypto exchanges into bank-like services, such as lending and borrowing, using cryptos as collateral. Unlike stock exchanges where trading equities requires an intermediary, these crypto exchanges offer consumers direct access to the market, 24/7. Institutions and fund managers faced with low or negative interest yields on bonds are eyeing the crypto market as a potential source of returns, says Citi.
What makes the bitcoin network unique is that it is the first truly global payment system, says Citi.
“It knows no borders, never closes, is not owned by anyone, and is accessible to everyone,” it adds.
“Unlike traditional payment systems that exist on private severs, the bitcoin blockchain is distributed across thousands of machines all over the world. Anyone can maintain their own copy of the shared ledger.”
Part of bitcoin’s appeal is its censorship resistance: the idea that nobody can be denied access for any reason. This feature makes the bitcoin payment network the most universally accessible one on earth – for better and for worse.
Traditional payment systems such as e-money, credit cards or automated clearing houses (ACH) are built on the commercial banking system and are only available to people who can pass the financial industry’s stringent Know Your Client (KYC) requirements. Such systems lock out significant portions of the global population, particularly in developing countries. This lack of financial inclusion is increasingly seen as a social problem, especially now that digitisation is diminishing the role of cash everywhere.
“The bitcoin payment system is uniquely resilient. Distribution makes it difficult for any one corporation or government to interfere with its operation, and censorship resistance makes it practically impossible to lock out any one group of people.
“The network is also uniquely accurate.
“Put together, all of these properties make the bitcoin network a true offspring of the digital era. There is no scheduled down time, no ‘opens’ or ‘closes’, and no painstaking reconciliation. A transaction across the globe happens as seamlessly as one across the room, for the simple reason that as far as the blockchain is concerned, each is just a ledger entry: a debit and a credit.”
The bitcoin ledger has already been used to quickly solve large-scale crimes and identify criminal activity – one explanation as to why illicit activity is currently believed to make up less than 1% of transaction activity, a stark contrast to the 2% to 5% of global GDP caught up in money laundering alone, says the report.
Some governments did react as bitcoin rose to ever higher highs in 2017/18. Several governments currently have an outright ban on bitcoin, including Algeria, Ecuador, Egypt, Nepal, and Pakistan. Others, including Saudi Arabia and Taiwan, have introduced a partial ban, typically blocking financial institutions from dealing in the cryptocurrency or facilitating bitcoin transactions.
The next evolution of the global ecommerce trend
Fifteen years ago, ecommerce was a happy promise of things to come, but few retailers paid much attention. Now it has come to dominate certain segments of the market such as book sales and software.
The same theme is playing out in in the crypto sphere. “We will be living in a hybrid world of centralised and decentralised systems in the next five to 10 years,” says Bin Ren of Elwood Asset Management.
Nathaniel Luz, head of crypto company Dash Nigeria, says we are entering an era where potentially hundreds of thousands of cryptocurrencies exist alongside state-issued currencies like the naira and rand. This is why central banks are advancing plans to introduce digital versions of their currencies called Central Bank Digital Currencies, or CBDCs.
“In the developing world, digital currencies are a springboard to financial inclusion,” says Michael Sonnenshein, CEO at Grayscale Investments, the world’s largest digital currency asset manager.
“Look at the advent of cell phones as a technology that leapfrogged traditional landlines. It’s similar to digital currencies since half of the world’s adult population don’t have access to financial services. Digital currencies like bitcoin could help leapfrog traditional banking systems.”