Cryptocurrency: What’s all the fuss about?
Sri Lanka’s stance on the new wave of digital transactions
By Zahida Rizvi
Investopedia defines cryptocurrency to be a digital or virtual currency that is secured by cryptography, which acts as a technological platform to facilitate different financial transactions. Many cryptocurrencies are decentralised networks based on blockchain technology – a medium of transaction that exists outside the control parameters of governments and central banks.
Implemented in 2008, Bitcoin is the first coin-based cryptocurrency and is highly used in comparison to other available cryptocurrencies. It aims to simplify and increase the speed of transactions without much government restrictions.
Apart from Bitcoin, there are more than 1,600 cryptocurrencies out there, and some of the recognised ones are Litecoin, Etheruem, Ripple, Stellar, Cardano, Internet of Things Application (IOTA), and NEO .
Cryptocurrency in Sri Lanka
The Central Bank of Sri Lanka (CBSL) stands firm in not issuing a license or authorisation to any entity to mine cryptocurrency due to the decentralised nature of it. Nevertheless, some individuals and entities are involved in the buying and selling of cryptocurrencies in Sri Lanka, which remains legal.
The CBSL addressed the risks associated with investing in virtual currencies in a statement that read: “Virtual currencies (VCs) are not issued by central banks and are also not backed by underlying assets, therefore exposing the users and investors with no regulatory or specific legal recourse in the event of any user or transaction-related issues or disputes.”
The statement further read: “There is high volatility of the value of the VCs, as it is dependent on speculation, exposing the investment of VCs to a risk of making large losses.
“(There is a) high likelihood of VCs being associated in financing terrorist activities and used by criminals to launder criminal proceeds,” it stated.
The CBSL further claims that virtual currencies expose investors to the risk of the violation of foreign exchange regulations; since VCs are traded as assets in exchanges, purchasing VCs from abroad would lead to a violation of foreign exchange regulations.
Additionally, in terms of the foreign exchange regulations in Sri Lanka, VCs are not identified as a permitted investment category in terms of the Foreign Exchange Act No. 12 of 2017 (FEA). Electronic Fund Transfer Cards (EFTCs) such as debit cards and credit cards are also not permitted to be used for payments in foreign currencies in relation to virtual currency transactions.
However, globally, cryptocurrency is trending with the adaption of the Central Bank Digital Currency (CBDC). China piloted digital currency last year while Britain has taken the initiative to launch the CBDC.
According to the International Monetary Fund (IMF), digital currency presents a cost-effective alternative to managing and transferring cash as the cost for the latter is high and this technology can reduce expenses.
The IMF further claims that under the grounds of financial inclusion, entities which are unbanked can get easier and safer access to money on their phone, which bodes well since competition amongst private companies is high. Cryptocurrency also meets transparency standards and limits illicit activity, which results in enhancing the monetary policy to operate more quickly and seamlessly through CBDCs.
Impact on foreign investors and start-ups
Start-ups struggle in the initial stage of the business whilst developing adequate fundraising and investment strategies. Cryptocurrency acts as a challenge to traditional funding vehicles such as angel or venture capital investments.
The blockchain system which drives cryptocurrency enables the use of crowdfunding through initial coin offerings (ICOs) for start-up companies. Since there is the ability to unlock capital from a wide range of individual investors on a global scale, it creates more funding opportunities in terms of project range and scale, without the limitations and costs imposed by a traditional crowdfunding platform.
Therefore, the implementation of blockchain technology smoothens the transition of start-ups from that of a small-time investment to a substantial enterprise.
Speaking to The Sunday Morning Business, serial entrepreneur and Silicon Valley investor Inshaaf Mohideen said that the uncertain environment surrounding cryptocurrency discourages investors that may want to come into Sri Lanka.
“Foreign direct investments (FDIs) are the main way in which Sri Lanka can strengthen its dollar reserves and if Sri Lanka introduces an innovative approach such as a crypto exchange which directly enhances FDI to be stored in country to sit in its depositary system, it will be advantageous,” he stated.
Mohideen further pointed out that regardless of the unpredictable environment for digital currency, there are a lot of people owning cryptocurrency in the country.
“The best initiative for Sri Lanka is to adapt the use of digital currency in to a mainstream culture so that the country is better off governing and placing tax structures in place instead of waiving it off as a potential threat to the business environment,” he stated.
The crucial role of cryptocurrency is to act as a medium of exchange that particularly uses cryptographic functions as a whole in order to secure financial transactions. Thereby, it enables start-ups to use cryptocurrency for any transaction, blockchain platform, develop a product of cryptocurrency, join a well-known consortium or project, and to launch new tokens or raise capital through ICOs.
Speaking to us, Sri Lanka’s Bitcoin Mining Centre Chairman Shashimal Vishwage pointed out that one of the main reasons for the country’s lack of progress is because it has not yet adapted to cryptocurrency. It can strengthen the rupee value, he stated.
“The Bitcoin Mining Centre carried out discussions to start dealing in cryptocurrency in Sri Lanka, although all the discussions proved to be futile. In addition, there is no facility to accommodate bank withdrawals via a digital currency,” he stated.
Vishwage further added that a crucial reason Bitcoin is not implemented in Sri Lanka yet is due to the exposure it would get in terms of drug money and also black bitcoin is harder to trade.
Negative impact of using cryptocurrency
Cryptocurrency acts a bedrock for digital transactions by easing the process. However, cryptocurrencies pose several drawbacks due to its ecosystem, which is inclusive of exchanges and wallets, that is exposed to a greater risk of being hacked.
Bitcoin, the most popular cryptocurrency with a 10-year history, which was subjected to several online exchanges, has also often been the subject of hacking and theft, sometimes with millions of dollars’ worth of “coins” stolen.
Critical concerns surrounding cryptocurrency would be cybersecurity issues, price volatility, and lack of inherent value.
Additionally, white-collar criminals are on the hunt to commit entirely secure acts of fraud which can be untraceable. Moreover, Bitcoin cybersecurity is harder to maintain unlike wire transfers and card transactions, which can be stopped pending finalisation if a wrongdoing is quickly detected.
Cryptocurrencies involve low levels of regulation, which enables cybercriminals to buy or sell virtual currencies without a trace.
Furthermore, Bitcoin’s value has been historically quite volatile. In a three-month span from October of 2017 to January of 2018, for instance, the volatility of the price of bitcoin reached nearly 8%. This is more than twice the volatility of Bitcoin in the 30-day period ending 15 January 2020.
However, the cryptocurrency Bitcoin now has a global presence as a result of its highly secure nature, which stems from the use of information transmission and encryption to form a blockchain.
Blockchain technology is the foundation for the implementation of cryptocurrency and is utilised via an online ledger which is maintained for all the transactions that have ever been conducted. This provides a data structure for this ledger that is quite secure and that is shared and agreed upon by the entire network with an individual node or computer maintaining a copy of the ledger. The blockchain technology is foreseen to have potential for uses like online voting and crowdfunding. Additionally, there is no central authority, government, or corporation that has access to your funds or your personal information.
However, cryptocurrencies are a virtual currency which are not stored on a central database, and as such there are risks that a digital cryptocurrency balance can be wiped out by the loss or destruction of a hard drive if a backup copy of the private key does not exist. Moreover, cryptocurrency poses a considerable amount of threat to digital transactions, which can be countered with strong cybersecurity measures.
Nevertheless, the world is constantly evolving in the field of digital transformation, to which most sectors in an economy will have to adapt. Digital currency, in this backdrop, will play a crucial role. Developing countries still lagging in embracing the digital wave will have to drive its regulations and protocols with strong safety measures when the time comes.