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The Developmental Potential of Cryptocurrencies

On 12 May 2018, Zimbabwe’s central bank banned local banks from either trading in or processing payments linked to cryptocurrencies such as Bitcoin. When the ban was affected, Bitcoin was trading at $12,400.

The banks were given 60 days to comply to the ban. However, the central bank’s governor, John Mangudya, did stop short of outright banning local cryptocurrency trading exchanges. The ban in the trading of cryptocurrencies was largely the result of the currencies’ unregulated status in the southern African country.

Bitcoin Price Doubles in Troubled Zimbabwe: cointelegraph, November 2017

In a statement, Mangudya emphasised that “the nature of cryptocurrency transactions make them the currency of choice for money launderers and other criminals”.

On 24 May 2018, the Zimbabwe High Court in Harare reversed the reserve banks ban against cryptocurrency activities in the court. Golix, Zimbabwe’s local digital currency, decided to take the case to the High Court stating that the reserve bank had no right to enforce the ban as only Zimbabwe’s parliament has the necessary powers to enforce any financial bans.

Those who trade in Bitcoin in Zimbabwe argue that it offers them rare protection as their bank deposits lose value almost daily. Others use cryptocurrencies to fund family members studying abroad or make online purchases.

Waiting for dollars. (Reuters/Philimon Bulawayo)

The attractiveness of Bitcoin in Zimbabwe has occurred in a context of the local currency- the Zimbabwean dollar- being abandoned in 2009 and the banking system relying on scarce US dollar banknotes. This has left ordinary Zimbabweans queuing for hours outside banks, unable to make daily cash withdrawals. This recent saga brings to the fore questions around the developmental potential of cryptocurrencies.

Bitcoin and other cryptocurrencies have become increasingly popular in the last few years. However, their popularity has often been accompanied by virulent criticism from many experts. One of cryptocurrencies’ most fervent critics are the economists Nouriel Roubini and Preston Byrne who has stated that the inevitable failure of cryptocurrencies will be the result of the overhyped blockchain technology. The decentralised nature of blockchain technologies make them less efficient than other technologies.

Cryptocurrencies are run on a slow and energy-inefficient blockchain technologies that require greater storage space than other centralised applications.

To further emphasise this point, both Roubini and Byrne compare Bitcoin Core (Bitcoin’s software client)’s processing rate of five to seven transactions per second to Visa’s processing rate of 25,000 transactions per second. What this mean in layman’s terms is that, on a wider scale, Bitcoin does not have the capacity to efficiently complete large-scale financial transactions.

In a context of great financial uncertainty, such that exists in Zimbabwe, Bitcoin would not be the most efficient medium for the financial transactions required to increase market activity in order to enable economic growth (a somewhat miraculous scenario in Zimbabwe’s chronically beleaguered economy). In that regard, it seems that we ought to be sceptical about the developmental potential of cryptocurrencies. Besides the inefficiency of the Blockchain technologies which facilitate cryptocurrency trade, another major problem with cryptocurrencies is their lack of regulation.

Bitcoin is growing in Zimbabwe:

The former governor of the Reserve Bank of India (RBI), Raghuram Rajan, has joined other leading economists, among them Nobel laureate Paul Krugman, in expressing concern over the unregulated nature over the measurement of the currency’s value. The academics George Danezis and Sarah Meiklejohn from UCL’s Centre for Blockchain Technologies (CBT) have argued that there may be a way around this limitation.

Both Danezis and Meiklejohn argue that the decentralised nature of cryptocurrencies enable independence from political on the national scale. Like Roubini and Byrne, they do acknowledge that decentralisation does present challenges in terms of computational costs and the scalability of cryptocurrency transactions. Danezis and Meiklejohn do propose a solution to these limitations: the RSCoin cryptocurrency framework. This framework will enable central banks to maintain complete control over the monetary supply but will rely on a distributed set of authorities to prevent double-spending.

The framework provides a modest degree of centralisation that would provide transparency and auditability guarantees. But would this work in a context of great developmental needs? The Professors Ferdinando Ametrano (from Università Milano Bicocca) and David Yermack (from New York University Stern School of Business) argue that cryptocurrencies can bring about positive changes within society.

However, they seem to be making this argument in the context of developed and emerging economies with strong formal economic institutions/infrastructure. More needs to be done to consider the effects of cryptocurrencies on informal economic agents within informal economies. From a feminist perspective, there also needs to be a greater investigation into how the proliferation of cryptocurrencies may impact upon the value placed on womxn’s labour in service-sector industries, particularly in care-labour industries.

There are many considerations that need to be made when considering the developmental potential of cryptocurrencies. A lot of the debate around the potential value, or hindrances of cryptocurrencies has largely taken place within the Global North.

Although Zimbabwe’s recent banning (and subsequent unbanning) of cryptocurrency trade has demonstrated that African economies are engaging with questions around the potential value of adopting cryptocurrency trade on a macro-level, it was still a largely reactive engagement. More proactive engagement needs to occur and this will only occur through our taking seriously the urgency of facilitating more widespread financial literacy amongst Africans, particularly for womxn and other vulnerable populations.

The Zimbabwe Mail: November 2017

Cryptocurrencies are here to stay; for once, let us as Africans do all that we can to ensure that everyone gets to enjoy the potential benefits of cryptocurrency trade.

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