It is not a secret that both monetary authorities and fiscal authorities globally have been uncomfortable with cryptocurrencies, the most prominent of which is bitcoin. Recently, the vice president of Nigeria and the governor of the central bank of Nigeria sparred for and against the increasing use of cryptocurrencies in the country. This was sequel to the directive from the central banks to deposit money banks instructing a clampdown on accounts used for cryptocurrency trading. While the vice president felt cryptocurrencies are products of innovation, are progressive and a source of job creation for youths, the CBN Governor argued against its value as alternative money i.e. store of value and its intrinsic value. He also emphasised the fact that it has recently been a means of facilitating illegal activities and the fact that the source and control of cryptocurrencies are unknown.
From 2009 when Bitcoin was created till date, there has been an avalanche of cryptocurrencies including Bitcoin, Ethereum, Litecoin etc. Some of these cryptocurrencies have been listed on cryptocurrency exchanges including Binance, HBTC, Hydax exchange, DSDAQ etc.
Bitcoin, the most popular and most traded cryptocurrency in Nigeria, was formed by Satoshi Nakamoto, a pseudonym, with the release of a white paper, which contained the protocols for the creation, and security of the currency. It limits the creation/mining of bitcoins at 21 million units and this is expected to be achieved by the year 2040. Assuming its acceptability for 15% of global trade, it is expected to reach a value of $514,000 each. Each bitcoin can be broken down to up to eight decimal places called a ‘satoshi.’ The price/value of the bitcoin has risen consistently though showing great volatility while ranging from $0.08 in 2010 to $315 in 2015 and $60,000 in 2021.
Economic management include the use of both fiscal policies and monetary policies. The fiscal policies, which are hinged on the annual budgets are managed by the executive arm of governments while the monetary policy hinged on the management of the money supply is managed by the central bank. The central banks are typically tasked with the management of the value of the currency and protection of the integrity of the currency.
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In order to maintain the value of the currency, the central bank uses various measures to control the money supply in the economy. Controlling the supply/amount of money in the economy helps the central bank to control economic variables such as inflation, interest rates, foreign exchange rates and to support the fiscal policy. An aspect of this duty is the control of money creation. Money creation happens when banks give out loans from deposits collected and the central bank controls this process by the use of cash reserve ratios, liquidity ratios etc. Controlling the amount of money circulating in the economy is a core mechanism of the central banks. Cryptocurrencies are diving into the realm of money creation and this competition has created dissension and contention from central banks globally.
The negative effects of the advent of cryptocurrencies on global economies are myriad, from the mundane to the crucial.
· Money supply is increased by the creation of cryptocurrencies, outside the control of the central monetary authorities thereby leading to higher inflation.
· Creates inaccuracies in accounting for the gross domestic product (GDP). Some transactions may not be accounted for because they were carried out in cryptocurrencies thereby reducing the figure of GDP.
· It distorts economic output. Youths involved in crypto trading work on a daily basis and actually contribute to payment systems and income generation. However, their efforts are not boosting the country’s GDP. If directed alternatively, their brilliance and hard work could be used to improve the economy in different other ways.
· Cryptocurrencies have created parallel economies and, in many cases, illegal and crime-related economies.
· The associated money laundering. These parallel flows make it difficult for the proceeds of these crimes to be detected and perpetrators brought to book.
· Losses have abounded from trading bitcoin based on its high volatility. By ‘investing’ or trading in these currencies ‘investors’ lose the traditional protection provided by central banks and the securities authorities.
In conclusion, cryptocurrencies are a product of innovation and blockchain technology and have come to stay. Blockchain technology has proved to be very useful in diverse industries from production to supply chain management. The technology should be embraced.
For the monetary authorities, the advice is to embrace cryptocurrencies and blockchain technology because of their advantages, mostly efficiency in transaction and trade processing. They should create their own cryptocurrencies, which are tied to their fiat currency. This will help them manage the money supply, foreign exchange conversion, ensure taxes are paid on all transactions and ensure proper GDP accounting. A middle of the road strategy will be most effective.
Olutoyin Ayoade FCIB, FCS is Managing Director/CEO of MBC Securities Limited (Member of the Nigerian Stock Exchange)
