Ready for a digital currency?

They have proven to be hugely volatile so far (bitcoin, for example, fell from more than ZAR255 000 in December 2017 to less than ZAR55 000 in December 2018), but Paul Fenwick, CFA: Digital Markets at Absa, says that’s to be expected from such a new commodity.

“As it’s a new asset, people will naturally be excited about it but also scared of it,” he says. “It trades like any other risky asset. Having a percentage of your investment portfolio exposed to it may not be such a bad thing as a diversification play, but you wouldn’t bet your house – or, more to the point, your retirement savings – on a crypto position at this stage.”

Digital currencies are still seen as trading stocks rather than forms of exchange for buying and selling goods. “When central banks start to impose regulations and even create their own digital cryptos (like a digital rand or a digital euro) to offer more protection to consumers, we’ll really start to see the market evolve,” says Fenwick.

And, as he points out, decentralised finance (DeFi) is already starting to happen. Many cryptocurrency exchanges can be traded from everywhere in the world, and don’t have a central bank or ruling body. “I think we’ll reach a hybrid solution, where there will be some form of regulation, but with blockchain enabling a lot more efficiency. Europe’s open banking model is already moving in that direction, opening the market for more sharing and efficiency rather than having everyone working in their silos and trying to protect their turf.”

The European Central Bank entered 2021 with discussions around the European Union moving towards approving the eventual creation of an entirely digital euro. The Eurozone already has a single currency, which makes the adoption of a single digital currency easier than it might be in a region like sub-Saharan Africa, which has as many currencies as it has countries.

“Working off a single currency has massive benefits in that it creates standardisation across the markets,” says Fenwick, “so there’s no discrepancy between, for example, the value of ZAR1 in South Africa and BWP1 in Botswana. But while it’s a more seamless integration, we’ve also seen Eurozone economies struggle under the single currency framework. If a regional digital currency were to be adopted across Africa it could drive us, if not to a single African currency, then to much better inter-Africa trade.”

For Fenwick and his colleagues in Absa’s International Banking team, the big discussion around digital currencies is less around the cryptocurrencies themselves and more around the underlying blockchain technology. “We’re not so interested in the currency trading aspect of crypto,” says Fenwick. “We’re looking at the general ledger infrastructure, and the ease and speed with which one can exchange. We’ve already started to dabble in it, where we’ve had some trade finance products that have been settled via a general ledger architecture. It’s been significantly more efficient and has reduced settlement times to a fraction of what they are with the traditional paper-based routes. As a bank we’re quite excited by that.”

That underlying blockchain technology is transparent and fast, and by having it out in the public domain one can validate its authenticity. Fenwick believes that a lot of the evolution in the digital currency space will happen here, around the blockchain.

“Blockchain – and the general ledger-type infrastructure in general – has so many features that can be applied to the establishment of contracts and agreements,” he says. “That’s where a lot of investment is going to go in the coming years. Cryptocurrency has been the leading newsmaker, but blockchain technology has so many more applications than just trading currencies. Its evolution is going to create a very competitive space for traditional international payment channels like SWIFT and other payment mechanisms. Blockchain will become a legitimate competitor to that as it gains traction over time.”

The conversation is clearly shifting from debate around the legitimacy of cryptocurrencies to a deeper understanding of the possibilities in the digital currency space. In December 2015 one bitcoin cost just less than ZAR7 000. By December 2020 the digital currency was trading at more than ZAR300 000. That sharp spike in its value suggests that, no matter what the doubters will tell you, digital currencies are far more than a passing fad.

“Digital currency is here to stay,” says Fenwick. “If we look another five years into the future, we’ll be living in a very different world. The digital currency space is going to evolve massively. I’m excited about the possibilities.”