Bitcoin would serve better within the law

Bitcoin. Many like to think of it as a digital currency that operates without a central bank. FILE PHOTO

What you need to know:

  • Bitcoin’s greatest claim to fame must be in its ability to conduct a global transaction at a fraction of the traditional cost.
  • Bitcoin faces some significant hurdles not least being the fact that it operates outside the realms of the law.

The story of Anthony Mburu, the young Kenyan who attracted global attention by choosing to pay dowry using bitcoin at a ceremony in Naivasha, has become the stuff of legend.

That it happened at a time when the global price of the cryptocurrency was skyrocketing to an all-time high only serves to sweeten the story.

It is these human stories that are often forgotten when technocrats evaluate the merits and demerits of the bitcoin phenomenon.

So what exactly is bitcoin and what are its implications, especially in Kenya?

ELECTRONIC CASH

In its simplest form, many like to think of it as a digital currency that operates without a central bank.

The single fact that it operates outside the realms of a central bank has been the primary reason that it has attracted so much love and hate in equal measure.

Nearly a decade ago, the earliest proponents of bitcoin conceptualised an electronic cash system where online payment could go from one party to another without going through a financial institution.

Since this was also the same time that the global financial crisis was beginning to unfold, there emerged a perception of distrust against the banking elite and for once many began to question the sustainability of mainstream fractional-reserve banking.

CRITICISM

This generated huge momentum for the bitcoin fraternity and witnessed the sprouting of enthusiastic communities of bitcoin miners and traders in every corner of the world. 

It has been reported that the island nation of Iceland is said to spend more electricity mining cryptocurrencies than on all its households combined.

It was never expected that the financial establishment would take such a technological disruption lying down.

Naturally, the banks have come out with guns blazing.

Central Banks have expressed their displeasure with bitcoin adding to the growing concern that the cryptocurrency might be used for money laundering, financing terrorism and drug dealing.

It also didn’t help when the two largest online brands, Google and Facebook, announced plans to ban cryptocurrency advertising.

TRANSACTION COST
When the opportunity to conduct some independent research on bitcoin knocked on our door, we knew we had to adopt an objective and holistic approach that would consider the strengths and weaknesses of this technology.

Bitcoin’s greatest claim to fame must be in its ability to conduct a global transaction at a fraction of the traditional cost.

Consider a businessman who wants to import a car from Japan.

He will most likely approach his local bank and convert his shillings into dollars at an uncompetitive exchange rate before wiring it to Japan at an additional cost.

If the Japanese car dealership was a fraudulent company, he would have no further recourse and his fate would be sealed.

REGULATIONS

Had he been presented with a bitcoin payment system, he would have cut back on time and cost as well as being reassured that if he confirms the transaction it will transact using a trusted, verifiable protocol. The difference is night and day.

Having said this, bitcoin faces some significant hurdles not least being the fact that it operates outside the realms of the law.

Indeed, at the high point of Greek thought, it was Aristotle who said “money has become by convention a sort of representative of demand; and this is why it has the name nomisma – because it exists not by nature, but by law”.

Typically, central banks play a key role in regulating money supply.

When the economy is overheating, they raise interest rates to lower money supply.

CURRENCY

Conversely, when the economy is slow and lethargic, the regulator can stimulate the economy by increasing money supply.

It is hard to imagine how bitcoin can ever self-regulate itself without such structures.

Furthermore, bitcoin has a finite maximum of 21 million coins.

What will happen when we hit that limit and still need more currency given our growing population and thus more economic needs?

It will be almost identical to that period in history when the world decided to get off the gold standard because gold mines were becoming depleted.

PUBLIC DEBATE
In the final analysis, its not really about who is right or wrong about bitcoin, but the quality of the discussion.

In the recent past the debate between the proponents and opponents of bitcoin has been conducted in technical language that is inaccessible and lacking in texture.

There is precious little discussion about the young and vibrant Kenyan men who are part of an emerging subculture that is excited to be part of a global conversation on what money is and what money can be.

These voices should not be suppressed but rather encouraged to create sustainable solutions

Ken Gichinga is Chief Economist at Mentoria Consulting ;  [email protected]