Digital commerce – Evening Report

Simon Angelo Analysis – The Future of Money: Bitcoin, Banks, BRICS, and CBDCs

Evening Report — Mon, 20 Nov 2023 21:26:40 +0000

Simon Angelo worked for the world’s first regulated Bitcoin fund in 2016. He currently works at a trading desk for Wholesale Investors. His work in offshore finance and global banking gives him some insights on the future of money.

Bitcoin Fund office, circa 2016. Source: Supplied / Simon Angelo

When Bitcoin was a special opportunity

In October 2016, when I started working with the Bitcoin fund, a Bitcoin cost around NZD $900. Today it sits at around NZD $62,000.

Back then, the principals of the fund saw Bitcoin rather like the oil futures they had traded in the 1980s.

These were the early days of deregulation in the oil industry. Oil reserves were depleted. Demand from China was coming on stream. More oil production would be needed. The price could only go up.

It was a market with plenty of volatility, illiquidity, and scant regulation. It was all pretty chaotic. Yet there were global forces at play. These would give rise to an oil and commodity bull market, bursting a dam of money.

In 2016, they saw similar potential for Bitcoin, just as they’d seen for oil back in 1987.

There was a long runway ahead. A destination where the technology becomes widely adopted. And the potential for Bitcoin to change money as we know it.

Were they right?

Yes, there’s been an overall Bitcoin bull market. The price has grown almost 7,000% since 2016 — though there’s been plenty of volatility.

Yet much of the wider mainstream adoption they predicted hasn’t happened. Like other cryptocurrencies, Bitcoin remains a mainly speculative instrument.

Does this mean Bitcoin and other cryptocurrencies still have a bigger part to play in the future of money? What about the alternatives?

Banking and currency

Modern banking has come a long way.

With the click of a mouse and a confirmation on your phone, you can send funds around the world. This can be to other bank accounts, to brokerage accounts, or even to global smart-card services and digital wallets.

But for those seeking privacy or protection of their wealth, banking alone can fall short.

On the privacy front, okay, the ordinary punter doesn’t typically expect Swiss-style bank secrecy. Though even that is limited these days for requests made under CRS and FATCA rules.

Most alarming was the freezing of accounts for protest groups during the Canadian trucker convoy protests in 2022. This crossed the line from tax-related access to access for political purposes.

To my way of thinking, this tarnished the reputation of both the Canadian dollar and the Canadian banking system.

Increasing and invasive bureaucracy can actually limit trust in the banking system. It risks driving more people into ‘offgrid’ instruments like cryptocurrency.

A robust financial system should retain strong property rights separate from the state. Where access is limited only to tax enforcement via transparent court orders.

Unfortunately, the creep of bureaucracy has been a theme of our time.

What about CBDCs or other digital currencies?

According to a 2021 survey, central bank digital currencies were currently being looked at by 86% of central banks around the world.

60% were experimenting with the technology.

14% were deploying pilot projects.

The RBNZ has embarked on a 4-stage process and is currently at stage 2: ‘exploring high level design options for the CBDC, and their costs and benefits.’

The primary objectives of CBDCs are to help maintain trust in local currency, maintain price stability, and ensure safe and resilient payment systems.

Some analysts have pointed out that CBDCs could actually reduce trust in currencies, since they could be open to more government manipulation.

The Canadian trucker convoy protests saw about 280 bank accounts frozen without court orders under the Emergencies Act.

For people using CBDCs, the question is then what checks and balances would be in place to prevent bureaucrats simply turning them off?

Perhaps, for instance, you’ve been found mobilising a protest they deem political wrongthink. Even dangerous. Could your CBDCs be frozen or penalised at the click of a bureaucrat’s mouse?

Again, we come back to the most crucial aspect of money: It needs to be trusted.

If people have doubts about their government, or their public service, they might be unlikely to trust a CBDC. Willingness to embrace and accept it may be low.

It’s the same situation with the plethora of digital currencies out there. Who backs them? How can you trust them?

That’s the beauty a cryptocurrency like Bitcoin has (as opposed to a digital currency). It is backed by the incontrovertible verification system of the blockchain.

Which brings us to the other essential quality of money…

Will it hold its value?

In Argentina, lack of trust in the government’s fiat currency — the peso — is entwined with another key problem.

Last week, inflation topped 140%. That means much of what you go to buy now costs more than double compared to just a year ago.

People give up buying new things and head to the second-hand or thrift market for items as simple as a pair of jeans.

An Argentinean friend of mine told me about his local hardware store with no pricing on the shelves. ‘You have to take everything up to the cashier to get the latest price.’

Well, trust is so low in the peso it may now face its demise.

The country’s presidential front-runner, former financial analyst Javier Milei, has pledged to scrap the central bank and dollarise the economy.

As we were going to press, it was announced that Milei had won the presidential elections in provisional results.

If he goes ahead with his pledge on the currency, this could be a game changer. No country Argentina’s size has previously shed their currency for the US dollar and conceded their monetary policy to Washington.

A switch to the US dollar would be a radical step, no doubt. Yet already locals try to get their hands on as much USD as they can buy.

Property prices are listed in USD to protect against inflation.

Clearly, if a currency is to be trusted and accepted, it also needs to be stable.

This is the flipside with cryptocurrency. Values are volatile. If you were to settle on a house purchase with Bitcoin — then Bitcoin suddenly drops 10% — you’d find that house now costs 10% more when paying that way.

Which is why these cryptocurrencies have upside for trading and investment, as opposed to being a reliable medium of exchange.

Furthermore, there are thousands of cryptocurrencies. Most need significant processing power and some time to transact. So they have intrinsic limitations when it comes to becoming the real future of money.

Inflation and the future

Today, although interest rates are higher on savings, after tax, the greasy pole of inflation makes it hard to keep pace.

By definition, protecting your wealth means you may want to put longer-term funds into productive assets like stocks or property. The lesson from crises throughout history, including the Second World War, is that quality businesses can still produce, sell, and grow their value over time.

Bitcoin and cryptocurrencies do not fit into the category of productive assets. This is because their main use today is as a speculative investment and alternative store of value.

That store of value, like gold, is based on limited supply. But unlike gold, the cryptocurrencies themselves could be subject to competition and regulation. Not to mention the inherent volatility.

So, would Bitcoin interest me as much today as it did in 2016?

Well, back then, at $900, a 7,000% return was possible in five years.

But at ~$62,000, it is hard to even see $100,000 over the next five years. Holding coins over this time would also carry risk and, unless lent out, usually no yield.

Meanwhile, trust in fiat currency comes down to its ability to store value and act as a reliable medium of exchange around the world.

This is the reason why the US dollar continues to reign supreme as the world’s reserve currency. Some say it is under threat by a potential BRICS dollar that could be backed by gold.

It is hard to see the reality of this threat. The BRICS countries have divergent interests. The US dollar is backed by the world’s largest single base of taxpayers.

Thus far, the Federal Reserve has been amongst the more successful in tackling inflation. It is currently down to 3.2% in the US, gradually nearing the target of 2%.

Yes, the proportion of US dollar reserves held globally has reduced. The main reason for this appears to be the emergence of another large and reliable currency in the euro.

If our local currency weakened or looked to be threatened by out-of-control inflation, unfair manipulations of a potential CBDC, or a manifestly corrupt government, I would probably be looking for a more reliable currency such as the US dollar or euro to transact and hold wealth.

Further, holding listed assets in these currencies can help investors to diversify.

The future of money comes down to faith and trust. Like so much else does in life.

We cannot prove that our close family members love us absolutely. But we have faith that they do. Spouses promise as much at the wedding altar.

As the US dollar declares: ‘In God We Trust’. Adopted as the official motto of the United States in 1956, it denotes that ‘the political and economic prosperity of the nation is in God’s hands.’

Long may that remain, for when too much is placed in the hands of man and bureaucracy, all trust can soon erode.

For now, the real future for money is likely in the expansion of financial products that offer access to quality currencies and quality assets denominated in them.

For example, smart cards that allow you to transact offshore currencies in a cost-effective way. Brokerage accounts that allow you to hold offshore assets for growth and income. And the ability to access various currencies via lending margin on the assets you hold.

Of course, many of these sort of products will be suitable for more sophisticated investors only. Any leverage adds risk. And most people should always have a suitable level of emergency funds available at all times.

Perhaps the future for Bitcoin and oil will intersect again.

Supply of both appears limited. Appetite is strong yet uncertain. But prices are currently high, making it hard to foresee the sort of breakout we saw in 1987 or 2016.

Simon Angelo, Editor, Wealth Morning – www.WealthMorning.com

(This article is the author’s personal opinion and commentary. It is general in nature and should not be construed as any financial or investment advice. Readers should seek independent advice from a licensed Financial Advice Provider for their own situation.)

Bryce Edwards’ Political Roundup: Is Labour yielding too much to business?

Bryce Edwards — Thu, 30 Aug 2018 04:03:53 +0000

Bryce Edwards’ Political Roundup: Is Labour yielding too much to business?

[caption id="attachment_13635" align="alignright" width="150"] Dr Bryce Edwards.[/caption] It might traditionally be the “workers party”, but at the moment Labour is making a serious play of inviting business into the tent, in order to stop their traditional foe lobbing bombs from the outside. That’s the upshot of this week’s major charm offensive from Prime Minister Jacinda Ardern to the business community. Her speech to business leaders in Auckland on Tuesday came with the announcement of a new Business Advisory Council, which is supposed to allow business interests more influence at the highest levels of Government. [caption id="attachment_15386" align="aligncenter" width="1600"] New Zealand Prime Minister, Jacinda Ardern, at the APEC leaders’ summit, November 2017 (Image courtesy of APEC.org).[/caption] Obviously, the Labour-led Government is attempting to mollify business with this announcement, along with other concessions spelt out in Ardern’s speech. The objective is to turn around the so-called plummeting business confidence surveys that Labour is embarrassed by. But isn’t this going too far? Does it mean Labour has capitulated to vested interests? Certainly, some are worried that the Government is placing the demands of business interests too high in the policy-making process. Herald business journalist Fran O’Sullivan points out just how influential the new business group will be: “Ardern says the council’s role will be to build closer relationships between Government and business, provide high-level free and frank advice to the Prime Minister on key economic issues, and to create a vehicle to harness expertise from the private sector to inform the development of the Government’s economic policies” – see: Anointing Christopher Luxon a smart move by Jacinda Ardern. Ardern herself has said “I want to work closely with, and be advised by, senior business leaders who take a helicopter view of our economy”, and she has invited business leaders to “join us in taking the lead on some of the important areas of reform the Government is undertaking”. Writing in the NBR, Brent Edwards reports how the head of Business New Zealand, Kirk Hope, is impressed with the new initiative, saying “the new body is important because it gives business a direct line to the prime minister” – see: Prime Minister urged to slow the pace of employment law changes. Hope is quoted saying, “As another conduit to government and as a formal mechanism for engagement with the prime minister over policy I think … it’s probably a smart idea and a really critical channel for business.” But Edwards notes that “Business New Zealand is already represented on five government-initiated working groups, including reviewing the tax system, the future of work and pay equity.” Business journalist Rob Stock points out that, in general, business interests are already incredibly dominant in the policy making process, and it is therefore absurd to give them even more power: “I can think of many interest groups who lack a political voice. Business is not one of them. Business has money. It is well organised. Its opinion on anything is easily gauged. It has a powerful voice. It has its business membership groups – a bewildering number of them” – see: The Business Advisory Council is a waste of time; or is it a belated masterstroke? After listing a large number of powerful business interest groups, Stock then explains their current political power: “Each has a staff of experts, policy officers, lobbyists, and communications people. On literally no topic is it possible for the government not to know what business thinks and wants.” And, says Stock, these groups have a big impact on legislation: “I hear the voice of business echoing in all government discussion papers. It works like this. A minister announces a review. A few policy options are flagged. Business lobbyists go about their work. When the discussion paper comes out, much of the watering down has already happened… And then comes the whole consultation, and law-making process.” The same article also includes the analysis of Stuff’s new national business editor Rebecca Stevenson, who is much more enthusiastic about integrating business more into government’s decision-making. She says: “This announcement is a smart one in my view. It makes business feel included, which has been sorely lacking”. Stevenson lists various ways in which the current Government has apparently sidelined business interests, including when “the prime minister failed to turn up for the Deloitte Top 200 awards in November” and when “business failed to gain even one single mention” in the Budget (“That had to sting”). Therefore, for her, the new advisory council is “the least the Government could do for business. Literally.” Like Stock, The Spinoff’s Toby Manhire also sees the absurdity of the Government attempting to give business even more power: “There is of course something fairly hilarious about the creation of an advisory group for big business. If you’re searching for underrepresented voices who go unheard in the corridors of power, who lack the resource and networks to put their case in policy making, big business is probably not going top of the list. But that just underscores the symbolism in all of this” – see: Jacinda Ardern takes on the elephants and albatrosses in the business zoo. Nonetheless, Manhire believes Ardern’s charm offensive has probably worked. He says that her main message to business is “We promise you we are listening”, and he thinks “she’s probably done enough to shake something of that albatross” of low business confidence from around Labour’s neck. Business journalist Jason Walls has also reacted with surprise, saying there are already ample opportunities for business interests to have input into the workings of this government. He questions whether another is needed: “what about the Treasury? What about the Ministry of Business, Innovation and Employment (MBIE)? The Reserve Bank? BusinessNZ? Surely they should be doing this type of work already. On top of that, we have a Minister of Finance who has not one, not two but three Associate Ministers as well as a Minister of Revenue and Small Business. And already this year, the Government has already established two other business-led groups to help advise the Government – the Tripartite Future Work Forum and the Small Business Council” – see: Jacinda Ardern’s latest pitch to woo business won’t work – here’s why. Does business even deserve to have more influence? That’s the question asked by University of Auckland professor of economics Tim Hazledine, who hopes “that the talking at the Council’s meetings is not all in one direction” – see: Business Advisory Council could prick ‘lack of confidence’ bubble. He thinks that the Prime Minister should be using the new council to tell business to get its act together. Hazledine agrees that New Zealand has a business confidence problem, but of a different sort: “there is indeed a substantive ‘business confidence’ issue in New Zealand: it is about our, the people’s, lack of confidence in them – specifically, in the big business corporate sector. Overall, the corporate sector in New Zealand has been a conspicuous poor performer over the past thirty years.” Possibly the most interesting and challenging criticism of the Government’s new business working group comes from former Reserve Bank economist Michael Reddell, who has two big problems with the new approach – see his blog post, A country is not a company. First, “such councils can be a path towards cronyism. On the one hand, attracting sycophants who like to be able to tell their mates they have the ear of the Prime Minister. And on the other, more concerningly, enabling selected business heads to bend the ear of ministers and put pressure on them to make decisions favourable to the specific economic interests of those involved and their employers.” Second, he challenges the very notion that businesspeople have expertise in running economies: “what do chief executives of businesses know about overall economic management, and the challenges of New Zealand’s longstanding productivity underperformance?”. Reddell argues that “Expertise on economic management, and the particular confounding challenges the New Zealand economy faces, just aren’t the sort of thing that tends to be fostered in the course of a corporate career.” There were other aspects of the Prime Minister’s speech to business that the audience should have been appreciative of, according to the New Zealand Herald – see its editorial: Two small words from PM should lift business confidence. In particular, they should be thankful to the PM for saying “We won’t” on the issue of relaxing the conservative fiscal policies contained in their Budget Responsibility Rules. And the editorial points out that Ardern reiterated that planned industrial relations reform will not “fundamentally disrupt the employment relations landscape” established by the National Government. According to Stuff political editor Tracy Watkins, such statements about industrial relations reform show that this government is now shifting away from a more radical and transformative approach, and towards a moderate and incrementalist approach – in the same way that Helen Clark and John Key pragmatically ran their governments – see: Prime Minister Jacinda Ardern’s plan to bring the boardroom into the Beehive. Could it be that this Government has rolled over too easily in the face of business grumpiness? Pattrick Smellie writes today that “The degree of political attention paid to the decline in business confidence… is overblown”, and the “Government has let itself be spooked, which may say something about its internal confidence about the cohesion of the economic plan it says it’s pursuing” – see: Magnifying the elephant in the boardroom. Finally, the capitulation of the Government to business might actually be the opposite of how it looks. Mike Hosking argues that Labour is simply co-opting business leaders in order to blunt their opposition, because “what you are achieving is getting buy-in from them. They are signing up for the plan. They are on board with the government because they are in the pay if not debt of the government… once you’re on a government board you work for the government” – see: Jacinda Ardern’s Business Advisory Council is political genius.]]>

Torokina – a cryptocurrency with a dream to ‘rescue’ Papua New Guinea

Pacific Media Centre — Fri, 10 Aug 2018 12:01:17 +0000

Cryptocurrencies are a controversial phenomenon that have risen from a technical experiment, with zero monetary value, to an industry with a combined market capitalisation of US$225 billion – after shedding more than $30 billion this week. Their future is uncertain, with analysts ranging from enthusiasts to sceptics, but James Halpin of Asia Pacific Journalism profiles a bold scheme for Papua New Guinea.

Cryptocurrencies give developing nations the ability to bring payment systems to people in remote locations, bypassing commercial banks. Torokina, a cryptocurrency in development out of Papua New Guinea, will do just that, says creator David Eri.

Eri, an employee at Oilsearch Limited, is in the process of securing funding to launch Torokina.

After attending the Kumul Game Changers incubator, which brought together startups from Papua New Guinea, Fiji, Tonga and Samoa, and learning how to start a start-up with little to no capital, Eri was selected out of that cohort.

Sponsored by Oilsearch Limited to attend Draper University through its Citizen Development Programme, which aims to give high-performing Papua New Guinean citizens pathways into leadership roles within the company, Eri was able to present Torokina to Silicon Valley entrepreneurs.

He says he received positive feedback.

“I got excellent feedback and have a ways to proceed so I have been working on my project since then,” he says.

-Partners-

Now back in Papua New Guinea, Eri faces the daunting challenge of getting his dream off the ground.

Kina weakness
One of the big issues Eri wants to solve is the weakness in the kina’s value overseas.

“When Papua New Guineans take K1000 overseas they usually get US$250 or A$350. Our kina loses 75 percent of its value as soon as it leaves our shores.”

One way to ensure the stability and attractiveness of Torokina is to take advantage of Papua New Guinean’s natural endowment and peg Torokina to the price of gold.

“One thing we are abundantly blessed with is our natural resources, particularly gold. PNG accounts for 0.7 percent of the world’s gold. Relatively minor but this adds up to US$2.1 billion extracted a year,” he says.

“The aim of Torokina was to combine our natural resources and combine it with current technology to create a gold backed cryptocurrency that performs on par with major currencies like the USD, AUD, JPY, GBP etc in trade and commerce.

“And by pegging the cryptocurrency with a valuable commodity hedges the volatility of the cryptomarket.”

A gold-backed cryptocurrency would work by x amount of the cyrptocurrency representing one unit of gold. If the cryptocurrency increases in price, then more currency is needed to buy the same amount of gold. If the cryptocurrency doesn’t increase in value, then it is unlikely to go below the price of gold.

Gold buying reserves
However, backing the cryptocurrency to gold does force Torokina into actually having to buy or have reserves to buy the gold, forcing purchasers to put their faith in Torokina’s ability to be able to survive a run on selling Torokina.

Gold-backed cryptocurrency has precedents though, and has been done before with the cryptocurrency E-gold emerging as the forerunner in 1995.

Remittances are a minor part of PNG’s GDP at just under US$3million, according to the World Bank. One reason for this is the 10 percent fee that the government takes from remittances.

Using blockchain technology, Torokina would be able to remove the fee barrier for Papua New Guinean nationals sending money back to PNG. This would also remove the remittance firm’s cut and increase income received by families in PNG, of which 75 percent live on subsistence.

Cryptocurrencies give criminals another avenue with which they can move money. However, because of the blockchain they are completely anonymous.

Eri recognises this negative view of a cryptocurrency in a developing country that is prone to money laundering.

Cryptocurrency dangers
A 2014 US Department of Homeland Security report outlined the dangers of cryptocurrencies.

“Cryptocurrencies offer cyber-criminals, corrupt officials, transnational criminal organisations, and foreign terrorist organisations the ability to conduct pseudonymous financial transactions outside of traditional banking channels.”

The report adds that cryptocurrency can be used for “laundering money, fraudulently investing, and buying prohibited goods and services on the Deep Web”.

Torokina’s way of solving this issue would be to have large scale buyers being forced into signing up onto a secure database. While this would limit large scale crime, small transactions would still go unnoticed.

Bank of PNG cautious
The Central Bank of Papua New Guinea is cautious about cryptocurrencies and recently released an advertisement to warn people of investing in them.

Authorised by the Governor, Loi M. Bakani, the advertisement states that cryptocurrencies do not hold any legal standing as they are not regulated by the bank.

The Central Bank has also been looking into blockchain as a technology platform. At a conference in 2017 it was announced the central bank was setting up a PNG Digital Commerce and Cryptocurrency Association.

“This will allow PNG to join the global blockchain forum… there is no reason why PNG can’t be a leader for emerging markets,” Bakani said.

Currently 85 percent of Papua New Guineans live outside the conventional banking system, being able to access cryptocurrencies and blockchain technology would allow remote Papua New Guineans to catapult over having to deal with commercial banks.

Without having to pay fees for commercial banks, remote Papua New Guineans would be more willing to keep their savings as currency rather than as material items, building wealth.

Eri recognises these hurdles to solve before the launch of Torokina.

“It’s an idealistic dream but one I intend on seeing through,” he says.

“Whether it succeeds or fails will be dependent on factors I have looked at and hopefully took into careful consideration and mitigating the risks as best I can.”

James Halpin is a student journalist on the Postgraduate Diploma in Communication Studies (journalism) reporting on the Asia-Pacific Journalism course at AUT University.

Article by AsiaPacificReport.nz

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