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Sri Lanka going BigCoin

By Jonathan Benedict

A few years ago, if you had mentioned the term “cryptocurrency”, people would have imagined a currency involving an illicit finance system, with hooded traders punching numbers behind some shady computers.

Today however, we read about it not only in the business sections of daily websites or financial publications, but on their front pages with global billionaires joining in on the trend. Entire sections of written scripts are now devoted to this new and emerging trend.

As cryptocurrency’s transformation from speculative investment to a balanced portfolio stablemate continues to gather pace, jurisdictions around the globe are scrambling to regulate this trend via legislation and regulations to allow or make it easier for companies to carry out initial coin offerings (ICO’s) or token issuances. Is “cryptocurrency” even the correct vernacular? Should it be “digital currency”? Or perhaps “virtual currency”?

The more poignant question however is, does this newfound, global fad deserve this level of attention? Should we even care this much? While it has remained something of an enigma to the Sri Lankan market, the fact is, following the fallout of the effects of a global pandemic, other means of income generation have become somewhat of a desperate need. For decades, the nation has relied on the “old faithfuls” of foreign employment, tourism, and exports. However, with the shutting down of borders, the closure of tourist destinations and the subsequent repatriation of Sri Lankan nationals, the hit back on Sri Lankan forex earnings is virtually crippled.

The country still needs to go on. The foreign exchange reserves have steadily bled to keep the country afloat, limiting purchases to only essential commodities to feed 21 million people. Investment opportunities however reflect a hope. Call it dividends, interest, payback, or repayments; practically anything you want to, but in layman’s terms, hope! With the latest decision taken by the Government of Sri Lanka (GoSL), hope seems to have been renewed to small-time players and those who have been brave enough to enter the world of the crypto. A Cabinet decision to establish a committee who will compose policy and regulations to approve crypto transactions has caught the finance market by storm. So first, a few things to consider.

What is it again?

Cryptocurrency is secure as it has been digitally confirmed by a process called “mining”. It is the process of creating new crypto coins by solving complex mathematical equations. When a person invests in a cryptocurrency, the details of the investment are entered on a distributed ledger, called the blockchain. But the process is complete only when a “miner” verifies the transaction as legitimate. Once that is done, the transaction is locked into the blockchain for everyone to see and the transaction is complete.

This verification process requires miners to solve complex equations. They are in a race against each other to solve the problem. Those who do that first are paid a fraction of the transaction as a fee for their effort. Every successful transaction translates into new coins entering circulation.

Mining requires a working computer with an active telephone line for data transmission. The more computers you have, the more your capacity to mine. In short, electricity and data band up to translate into cryptocurrency.

Cryptocurrency – as blockchain-constructed programmes are meant to be – is completely decentralised. It is an economic-based blockchain, that translates to complete autonomy from any central bank or monetary authority. Maintained by a peer-to-peer community computer network made up of users’ machines or “nodes”, it remains free of bureaucracy, red tape, and human intervention.

A blockchain is in essence, a digital database, a distributed public ledger if you will, run via cryptography.

Note that while it is fundamentally anonymous, the mathematics behind it makes it a global public transaction ledger, so every transaction can ultimately be traced through cryptography.

Why is it so important?

There are various types of cryptocurrencies, but for the purposes of this piece, I’ll focus on easily the most popular and used; Bitcoin (BTC) and Ethereum (ETH).

Created by an entity called Satoshi Nakamoto in 2008, Bitcoin was the very first blockchain. (To this day we have no clue if Satoshi is a person, a group, or even an artificial intelligence!) Since inception, its value has exponentially soared to ridiculous levels. An increasing number of vendors and e-commerce merchants are adopting Bitcoin as an accepted mode of payment.

Ethereum is more like a Swiss Army knife which serves a provision of services on its own particular blockchain. These include built-in software programming languages which can be used to write things like smart contracts for many purposes, including the transfer and mining of its own tradeable digital token, Ether (which is even more complex than Bitcoin).

Transactions are fast, digital, secure, and worldwide, which in essence allow the maintenance of records without risk of data being pirated. Fraud is by all accounts, actually minimised.

Now to the “dodgy” element of cryptocurrency. 

Why does it need regulation? 

Simple. Similar to stock trading or foreign exchange margin trading, crypto is bought or sold depending on its performance. Just like stock exchange commissions the world-over regulate market activity and provide a sense of leadership to its practices, cryptocurrencies, once regulated, will prescribe the pathway for crypto companies, outlining the requirements for obtaining and maintaining a financial licence from the regulator. Compliance naturally boosts investor confidence and protection. In short, regulating it ensures global legitimacy and user confidence.

Prior to 25 December 2017, the cryptocurrency space went through a process called “mooning”. The crypto market crashed, losing approximately 20% of its entire global market cap. Just after Christmas however, prices ballooned. It became absolutely the worst time to buy crypto.

In mid-January 2017, crypto exchanges crashed again, with prices, in Ethereum for instance, falling approximately 25%.

Subsequent headlines had regulators issuing “buyer beware” notices because of the volatility of the market combined with no checks and balances in the form of a regulator.

Investing in ICO’s and in cryptocurrencies is highly speculative and you stand to lose all your money, similar to the stock exchange. The sticking point is how cryptocurrency exchanges are unquestionably far more volatile than the stock markets.

Should I really care?

JPMorgan Chase & Co., one of the largest investment banks in the world collaborating with a cryptocurrency called ZCash is one of the latest examples of the progressive nature of this venture. In order for JPMorgan to retain its standing in the Securities Exchange Commission of America, stringent anti money-laundering checks need to be placed.

The US Marshals Service is tasked with periodically auctioning off Bitcoins owned by none other than the US Government itself. Mined currency is auctioned off for profit. As of 7 September 2021, El Salvador has recognised Bitcoin as a legal tender that can be used in transactions.

With the GoSL taking lead on this, the market now opens up for financial transactions that affect the Government including the option to earn. In a country with 365 days of sun and surrounded by ocean translating to solar and real estate conducive to wind power generation, Sri Lanka is primed to be positioned as a mega miner of cryptocurrency on godlike-levels compared to regional counterparts. GoSL will in essence be able to manufacture its own money without passing it through a printing press. Citizens will be able to transact locally and internationally, thereby opening the floodgates of foreign exchange into the local money markets.

This creates a paradigm shift in the thought process that maybe the Sri Lankan economy can survive past foreign employment, tourism, and export – all of which are a national treasure, until the next pandemic hits. This is cutting-edge innovation and technology which has already illustrated its ability to fundamentally disrupt the global financial system. Sri Lanka being no stranger to that notion will not be left behind. Through the latest Cabinet decision on this development, President Gotabaya Rajapaksa has made sure of that.

(The writer is an LLB qualified professional serving in the corporate sector)

The views and opinions expressed in this column are those of the author, and do not necessarily reflect those of this publication.