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Flying kites in a storm

The link between the public protector and cryptocurrencies.
Public Protector Busisiwe Mkhwebane

SWELLENDAM – When a politically-inspired lawyer, Public Protector Busisiwe Mkhwebane, makes a ruling (see here) that can punch nearly 1.5% off the value of the rand, one can only have a wide-eyed “what the…” response. It’s like flying a kite in gale force winds and on a very thin string.

It was out of line on so many levels (including legally according to the Sarb), that the word “bizarre” used by Corruption Watch’s David Lewis was putting it mildly. Which points to just one of the worrying factors – the country’s biggest anti-corruption activist group being at odds with the head of the state’s anti-graft institution. In turn that’s a reflection of rapidly and validly waning trust in the new public protector. There’s more than a good chance that her directives on the Reserve Bank’s independence and on Absa will be turned down on review, and as a seasoned lawyer she must know that losing cases will destroy her reputation much faster than public opinion can.

The role of a central bank in protecting the integrity of a nation’s currency cannot be facilely diluted by the need for economic growth. It’s a complex issue on which Nobel economic laureates don’t even agree. Kowtowing to populism by a powerful constitutional player is reckless at best. What should be clear to someone with even a remote understanding of economics is that the value of a nation’s means of exchange is perhaps the most important price in the system; that economic growth itself is threatened by an unstable currency and a weak one boosts inflation.

Ultimately, the very people the public protector is supposed to champion – the poor and disadvantaged – may suffer the most. At a more sophisticated level, any reliance on monetary policy to encourage growth, gives it a warped status and detracts from the real essence of the need to create tangible value through the production of competitive goods and services; in response to the needs and wants of others. That is what creates jobs. The over-reliance on monetary policy to drive domestic economies has led to the global mess we are in. Those sceptics who champion growth through monetary machinations seem to ignore the dismal performances of even developed economies, such as Japan, under low interest rate regimes.

It is small wonder that most people in the world today, apart from speculators and financial predators, want to experience what I did as a young adult – a stable means of exchange and fixed interest rates. Those days are long gone, and for the very reason we now witness courtesy of the PP: incoherence in government interference. On the other hand, despite all the arguments at a macro level for free moving exchange rates, speculation and derivatives, they play havoc at a microlevel. It is that insecurity that inspired the creation of bitcoin about eight years ago, and not so obscurely connects the dots between Mkhwebane’s moment of monetary madness and cryptocurrencies.

Two primary forces that impact on investment markets are fear and greed. In one sense at least, all investments are underpinned by fear – a desire to preserve wealth, or “keep it safe”. Greed, on the other hand, implies a greater active force related to an assessment of rapid growth and substantial gain.

One could unpack this a lot further, but an important implication of fear as a driver of a market price, is that it is an escape from other similar assets and likely to be more considered and stable. Greed has no such restraints, and will blindly chase a price until short-term gains, or the prospect of more, dissipates. It will then most likely jump to another with more promising prospects.

Paradoxically, a greed-driven market detracts from the primary motive of stability. It’s an issue that has plagued the visionaries within the bitcoin community who want to see the cryptocurrency become more widely used as a means of exchange, rather than as a speculative instrument. A steady growth in value would be assured with wider use in transactions, and the slowing down of mining new coins until a cap of 21 million is reached some decades ahead.

The speculative price surge and volatility we saw these past few weeks, must have caused some anguish among them, and the valid concerns raised by Moneyweb’s Patrick Cairns in this article that cryptocurrencies have become a scammer’s paradise. While it is still a long way off from being used to buy a sandwich, the cryptocurrency is maturing, according to this article in the reputable bitcoin website, Coindesk. An important point made by a clearly informed comment on my first and perhaps satirical look at gold and bitcoin a year ago (see here) was: “what people overlook about bitcoin is that they get caught up in the currency instead of the underlying blockchain. Like thinking of a website instead of the internet.”

The real revolutionary breakthrough has been blockchain technology, whose use in bitcoin mitigates against the currency being a Ponzi scheme. (Note: It could be argued that the biggest Ponzi scheme in the world is debt created by Fiat currencies.) But the bitcoin security may not apply to the plethora of emerging alternatives and tokens that are a “scammer’s paradise”. Fortunately, there are many reliable websites, experts and published articles that can be consulted. Apart from Coindesk linked earlier, a seasoned cryptocurrency investor/friend referred me to this site which lists and ranks cryptocurrencies.  Another that gives some insights into the visionary dimension of bitcoin is this one of Andreas M. Antonopoulos.

One certainly has to do some research to be comfortable in exchanging a Fiat currency for a cryptocurrency. But can one afford not to when an ill-informed lawyer can play havoc with what you have?

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A discussion about the value of currencies and the price of debt is the ultimate financial debate one can have, as it determines the price, or value of everything else. The value of the currency even determines the value of a human life, as described by Bernd Widdig in “Culture and Inflation in Weimar Germany”.

The attack on our Reserve Bank by the Zupta faction is to be expected because, as the commentator “RichardtheGreat” so eloquently put it, “When the African nationalist government has destroyed the economy in an attempt to buy votes, they will in the end revert to stealing the value of the currency.”

We have seen this movie many times, but cryptocurrencies are a new phenomenon. My question is this – although the value of bitcoin is determined by the regulated process of mining, what stops opposition cryptocurrencies from mining, to create an oversupply of cryptocurrencies? What is the “barrier to entry” to mine cryptocurrencies? The value of gold is determined by the value of a human life, as it has to be physically mined by a person who puts his life on the line. The value of a cryptocurrency is determined by a formula created in the comfort of a living-room.

The difficulty of mining can be adjusted to help maintain price stability. This is both good and bad.

The biggest danger is from those who don’t understand what they don’t understand … The PP has just joined a long line of those in this country to whom this applies.

Indeed, she has been promoted above her level of competence.

Thanks, Jerry, great article. As an early adopter and being fairly well read on crypto assets like bitcoin, I found your commentary a breath of fresh air. Most commentators assume they understand it, when they really don’t, and take too strong a position wrt this new asset class (somewhere between cash and gold, but not quite like either). Uptake in everyday spending with bitcoin is actually much higher than many realize (I buy things with BTC often on e.g. Takealot.com and other sites). Once SegWit2x activates later this year, the so-called Lightening, or layer-2 payment network (already built and tested on the bitcoin network) will come online, making coffee shop payments a reality by end 2017. Instant payment capacity will then rival Visa’s by nearly double. Growing global liquidity, and trading volume, continues to reduce relative volatility in the price relative to sovereign currencies. I’m cautiously optimistic.

Looking at my youngsters “kit” for mining bit coins their biggest cost is for electricity and fans. At least with their mining there is not influence of Zwane’s interferences and no BEEEE compositions lol

I wonder if one can claim all the deductions and tax breaks allowed to mining for their mining “kit”.

So, it is accepted that the Public Protector is now a “de facto” political party?

Hence, what gives such a political party the mandate to handle public investigations on behalf of govt?

Confused(?)

(…or perhaps a convenient sowing of chaos, in which the current regime strives to survive in…copying ZANU-PF tactics…to take the focus off corruption and other pressing issues of poor leadership,etc. The country can suffer, but the political elite has proven to survive. Look directly north.)

Does the Z-team care?

Does the Z-team understand English?

Does the Z-team understand Economics?

Not at all it seems.

Does the Public prosecutor have any intention to address the corruption and mismanagement that has been ongoing in municipalities for the past twenty years?

Does the Public prosecutor have any intention to address SAA?

Does the Public prosecutor have any intention to address Eskom?

Does the Public prosecutor have any intention to address the SABC?

Does the Public prosecutor have any intention to address the activities of the No.1?

Billions of Tax payer money unaccounted for?

There seems to be room for ten more Public prosecutors.

Mkhwebane’s answers to questions 1 to 5 – Hell no! Of course not.
Mkhwebane’s response to statement in 6 – So! What’s that got to do with me?
Mkhwebane’s response to statement in 7 – I don’t comment on the staffing and functioning of other state departments.

Public Protector? Please, don’t make me laugh!

End of comments.

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