Banking on Cryptocurrency & Blockchain Technology

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With the rising popularity of cryptocurrency and rising adoption, the conversation around cryptocurrency is quickly getting louder with new voices piping up with their own take on the future of arguably the most disruptive fintech development of our times.

As per a report made on 13 May on Coin Desk – the trading volume originating from Sri Lanka on Paxful – a popular cryptocurrency exchange in 2021 has already exceeded the total trade volume recorded from Sri Lanka in the past year. 

This stat is supported by the large number of social media community groups centered on the topic, which are mushrooming on all popular platforms, as well as the call-out made by Microsoft in their Security Endpoint Report of 2019, connecting Sri Lanka with the highest number of cryptocurrency encounters in the Asia Pacific region at the time.    

Dilshan Senaratne (MBA-UK) is the Head of Marketing (SL) and Communication (APAC & EME) for a global technology bluechip as well as the Founder and former CEO of Cyaniq Global LLC. His interest in cryptocurrency and Blockchain technology is an extension of his past involvement in a number of projects in the domain. His outlook on the present situation and projected future of the domain in Sri Lanka is among business leaders looking towards the potential of the financial and technological applications for Sri Lanka. The Sunday Morning Business caught up with him for a quick conversation. 

Banking on Cryptocurrency & Blockchain Technology -LankaTalks Sri Lanka News

Can you provide a general preface to blockchain technology and cryptocurrency?

Very simply, blockchain technology is a way to maintain a ledger of transactions in a secure and highly accurate way. The transactions can be as simple as the credit and debit entries in a bank account or as complex as entries in a supply chain network with multiple SKUs and distribution channels. The most unique aspect of a blockchain network is that it undermines the need for a central point of validation. In the example of the bank account, imagine a bank account that isn’t maintained by a bank. Instead, the account holder and the network of transactors are somehow able to maintain a secure and accurate record of the credits and debits of each account.

At a very high level, this is the premise of the blockchain and very particularly, the premise of Bitcoin and cryptocurrency.

Naturally, the details of how this decentralised, but accurate record of transactions is maintained deepens the technology significantly. A typical blockchain achieves this secure, distributed transactional possibility by maintaining records in blocks which are publicly transmitted, received and updated by all the participatory nodes in a given network chain. In turn, these nodes transmit their records and verify them against each other to assure accuracy and avoid discrepancies in transactions.  

This technology is quickly gaining adoption in a number of use cases, only one of which is currency. While cryptocurrency is challenging banks and financial institutions on their necessity to assure transactional integrity, blockchain solutions are also revolutionising many large industries including education, governance, healthcare and logistics. 

Is cryptocurrency an unregulated stock market, or worse; a casino?

Before answering that question, cryptocurrencies should be defined and understood better. As of January 2021, there are over 400 cryptocurrencies (coins) in existence. Each of these coins is an individual blockchain project initiated by a development team with a defined use case and underlying technological protocols.

 In my view, any cryptocurrency should be assessed in three very distinct perspectives.

The first is the future value of the cryptocurrency project based on the adoption potential. I think this is a very pragmatic way of assessing value but may require some technical familiarity with blockchain technology. Each cryptocurrency project typically releases a whitepaper document which is a great starting point for this type of analysis. An example of this type of analysis is basing the value of Ethereum on its potential for introducing self-executing smart contracts. It doesn’t require a lot of technical understanding to know that this type of use case will provide a lot of value once realised in real world applications. 

The second method of analysis is the technical analysis of the cryptocurrency by viewing the performance of these coins in trading exchanges. This type of analysis requires some understanding of financial markets and interpretation of trading charts. This type of analysis is preferred by short to medium term traders who are looking to profit quickly for themselves and their clients. 

The third and perhaps least reliable method for analysis is speculation. Speculative price discovery is the factor that drove popular coins like Dogecoin to reach their all time high trading price this year with contributions from Elon Musk and other high profile figures. As we saw with Dogecoin reaching its highest price and then crashing very quickly, this type of analysis is not only unreliable but also extremely risky. 

When you consider these three approaches to evaluating a cryptocurrency, some might argue that there is an element of gambling in trading cryptocurrencies, but this is only based on the speculative aspects of this asset class. Others might argue that this is a highly volatile stock exchange setup, but that is only if we take speculative and technical aspects into consideration. 

At the core of it, cryptocurrency in my personal view is an emerging asset class with extremely high growth potential. But, to fully appreciate the future value of this asset class, we need to take into account the technological, technical and speculative elements holistically and not in isolation. 

How should the underlying value of cryptocurrency be assessed in quantitative terms?

This is probably one of the most important questions that can be asked about cryptocurrency. Depending on who you ask, the answers will also be wildly different. I like to think I have a reasonably justifiable opinion on this.

Any asset class that is traded in a marketplace achieves value through a process we know as price discovery. This mechanism is referred to as the “invisible hand” in free market economic theory. If the process of price discovery is adhered to, it can be argued that the market will determine what is fair value for cryptocurrency as with any other asset class.

However, the volatility of the cryptocurrency market is so wildly high, leading many thought leaders in this domain to argue that this asset class is a bubble, where the fair value for an asset is much lower than its trading price. Many experts including Warren Buffet and Charlie Munger subscribe to this idea, arguing that cryptocurrency is a classic instance of the “greater fool” concept, where the buying price of an asset is only based on how much higher it can be re-sold at.   

In this context, and with convincing arguments on both sides, we have to think about why these assets have value in the first place. In the case of Bitcoin, which is referred to as digital gold, it is believed that Bitcoin is a substitute for gold. Intrinsically both Gold and Bitcoin are asset classes with limited supply and limited productivity that are valued on the basis of their liquidity and wide acceptance. On this basis, Bitcoin potentially can be valued in comparison with the $ 9 trillion market cap of Gold. 

What is to be expected from Governments in terms of regulation of cryptocurrency?

The global adoption of cryptocurrency is averaged at 2.8%, with the US leading the charge with a reported adoption of 8%-14%, and countries like Sri Lanka with adoption as low as 1.5%.

At this stage, it’s probably too early to determine how governments will evolve their regulations to deal with the growing adoption of cryptocurrencies. But, even at this stage, we can observe some early responses, especially from larger economic powers. 

Economies like Qatar, Egypt, Bolivia, Nigeria, and Bangladesh have opposed cryptocurrency in varying capacities, with some completely banning cryptocurrency adoption and others establishing a criteria for their bans. 

Other countries like Japan, the US, Germany, France, Malta, Singapore, and Canada have recognized cryptocurrencies as an emerging asset class with varying degrees of regulation in terms of taxation. 

Furthermore, Russia, China, and most recently the US, as well as some Scandinavian countries, are exploring the potential of government-backed cryptocurrencies. Of course, in my view, a central government issuing a digital currency doesn’t truly qualify that currency as a cryptocurrency. However, there are interesting steps being taken and notably, these coins referred to as “Govcoins” may be the most widely adopted digital currencies in the medium term future. 

What is the future for blockchain technology and cryptocurrency in Sri Lanka?

Being engaged in the technology industry, I’m personally highly excited by the potential blockchain technology is showing as an entry point for Sri Lankans to the global marketplace. 

We have seen a number of such entry points in the past that have at this point defined our economy. The Tea and Apparel industries are arguably the two early success points for Sri Lanka, where we succeeded in creating jobs and industrial infrastructure, as well as nurturing a world-class talent pool with managerial competencies. 

Towards the turn of the millennium, we had another such opportunity in the offshore IT services industry, which birthed some of the large tech success stories in Sri Lanka including Virtusa, Millennium IT, 99X and IFS. 

Blockchain is arguably our next entry point to the global marketplace. We have every ingredient to explore this domain of technology and come out on top in the world stage.

There are some extremely interesting applications of blockchain technology in education for examination results, in healthcare for medical record management, in governance for identity management, in finance as an inflationary hedge, in supply chain for asset tracking and even in the art industry. 

Commendably, there are some early entrants to the space from Sri Lanka. The large tech players are certainly leveraging the technology to develop solutions for their global clientele and will begin to create demand for skills in this domain in the local talent market. 

A number of startups are also showing some early signs of promise to enter the market and I can only hope that the authorities will take note and create the right infrastructure to make full use of this opportunity. 

With any luck, blockchain technology might be the cure for our ailing economy and remedy for our deteriorating balance of trade and depreciating currency. 

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