Money Journey: A transient stop at Block Chain 2.0.

CONTINUED FROM LAST WEEK

SINCE everyone is aware of all the transactions by every other person in all market places, it is practically impossible for anyone in such a system to cheat by double spending. However, in real-life, it would be impossible to consummate any deal without effective and efficient automation of this Frankenstein. This chaotic scenario is what the “block chain” simplistically represents.

Every time a transaction occurs between participants on the block chain platform, it is verified and validated by every present member on the network before it is appended to the centralized ledger. The point here is that “we all agree that the transaction is genuine and should be appended to the current page on the ledger”. If anyone doubted the transaction for any reason, it would be rejected by all. This process of consensus verification and validation of transaction is called “mining”. And the individuals actively engaged in this process are called the miners. In reality however, not everyone mines. Some people simply appear on the network to transact. Others appear to besiege it – the attackers.

Once a data page on the ledger is full, it is tied cryptographically to the page before it. This provides the final lock that prohibits and prevents any modification to that page. Since this page is technically referred to as “a block”, and it is chained to the previous block before it, the technology is christened “Block Chain”. The freedom to accept or reject transactions is based on some complex mathematical computations rather than willful choices.

In this sense therefore, the block chain does not sound simply like another platform for monetary transfers alone. Rather, this unique technological innovation is a public ledger that functions more as a decentralized system for recording ownership and value transfers. There is a fundamental drift from the age-long understanding of money and the infrastructures that peddle it. Do keep in mind that current payment systems were designed in the 1950’s and it is about time they changed.
The comparison with mobile money:
There is an ongoing confusion, especially amongst non-technologists, that there are little or no differences between cryptocurrencies like the bitcoin and the prevalent mobile money scheme that originated from Kenya. They argue mainly that the eventual purpose of both is the finality of settlement. Convenience and rising acceleration of money being only fringe benefits. As much as this is wholesomely true for mobile money, it is not for cryptocurrencies and the block chain. As mentioned earlier, money, being bitcoin, is incidentally the first application on the block chain technology. It is not everything. It is only a part – the incidental start-point – in the eventual long chain of tremendous values.
Before we highlight the marked differences between the mobile money scheme and cryptocurrencies, let us quickly examine the basic similarities between them.

The Similarities – Mobile Money &Bitcoin:
The first simple resemblance between mobile money and bitcoin is that they are both forms of money. Today, they are both accepted by different human and business ecologies as standards of payments. They have values; and they can be traded in exchange for goods, commodities and services.
They both exist in electronic forms. This implies that they are stored and transmitted electronically. In fact, their online stores of value are referred to by a common term – wallet. Beyond this point, every other issue that might crop up would express their differences rather than similarities.

The Differences – Mobile Money vsBitcoin:
In their intrinsic forms, although the bitcoin and the mobile money are electronic forms of money, they are marked with obvious differences, some of which are stated in the following areas:
1. Issuer: The mobile money is issued by legally established institutions. The bitcoin on the hand, is issued by a virtual community of real people and miners;
2. Production: While mobile money is always digitally issued against fiat currency of a central authority, bitcoins are mathematically generated through the mining process. For every block created and appended successfully to the block chain, a miner is rewarded with 25 units of bitcoins;
3. Regulation: As in production, mobile money, especially as it is issued against fiat currency, is regulated by a central authority that issued the currency. In contrast, bitcoin is decentralized and there is no single or central institution controlling the bitcoin network like central banks do with fiat currencies.
4. Mediation: In the settlement of transactions, the mediating third-party is still fully entrenched in mobile money. This role is played by mobile money operators and their settlement agents. For bitcoin however, one of the major reasons for its creation is, in fact, the elimination of mediating third-parties.
5. Unit of Account:The unit of account in mobile money is always determined by its fiat currency of issuance. Since there are no underlying fiat currencies, bitcoins are issued against nothing. In there fine forms, they are simply digital private encryption keys or secret codes needed to carry out bitcoin transactions.
Stemming from these similarities and differences, the economic objectives of these forms of money are also markedly different. And so, are their risk elements and implications.

Risks Elements – The reasons we should embrace; not flee:
The greatest risk of adopting cryptocurrencies, especially by developing countries, is regulation. Due to their abstract nature, they are defiant to the economic and monetary policy rules since they are pegged against nothing.

For example, in Nigeria, how will the CBN monitor and curtail the volume of bitcoins or any other cryptocurrency in the economy without running a platform of its own.

Even if it does, the proliferation of variant cryptocurrency systems, does not guarantee that market participants will sign-up to a national block chain. A plethora of choice will ensure that participants in the financial sector can always avoid CBN’s regulation at will.

Actually, isn’t this what the block chain is all about? Freedom!
While it is easy to assume that there are currently little or no such practices in Nigeria, the adoption of cryptocurrencies by a considerable percentage of the population will eventually have significant impact on money supply, whenever it hits certain threshold. Taking a cue from the United States, I believe it is time we looked at this technology.

After several years of doubts about the future of bitcoin, activities of the SilkRoad, an online, yet underground marketplace for exclusive trading of unlawful goods and services, had processed about $1.2 billion worth of transactions in bitcoins within the first two years of its existence. On this platform, payments were made for every abominable goods and services, including murder.
Although eventually clamped by the Federal Bureau of Investigation, the menace would, probably, have been curtailed had US government blazed the trail in accepting cryptocurrency as the de facto future of money.

Another economic and financial menace that ensued from a weak regulatory framework for virtual currency was the Mt. Gox. Before its eventual shutdown on 24th February 2014, it was processing approximately 70% of all bitcoins transactions.

At the last count, this Tokyo-based company, led by twenty-eight years old Mark Karpeles, wound down with over $460 million of customers’ funds and deposits.

This young genius, who reportedly made over $250 million in personal fortune, filed for bankruptcy. With no succor from any form of insurance, many of the affected customers lost everything.

These scary scenarios, mongered by antagonists of cryptocurrencies, are the exact reasons they should be embraced now. Due to its borderless operations, it is impossible to prevent citizens from transferring certain financial transactions to the platform. This is especially because some billion dollar companies like Microsoft, Dell, Reddit, and PayPal accept bitcoin as a form of payment. And as multinational banking and financial services giant like Citigroup and Standard Chartered continue to embrace the block chain technology, it is only wise that regulators join this bandwagon of financial revolution.

At this juncture, it is important to state some of the imminent benefits of the technology to all and sundry.

More reasons to embrace; not flee:
As stated earlier, the block chain is a unique technological innovation with a public ledger that functions more as a decentralized system for recording ownership and value transfers than simply making financial payments. The pertinent phrase here is “Ownership and value transfers”.
Let us consider two innovations to buttress this point.

Smart Properties:
A smart property is a property that has access to the block chain, and can take actions based on information published on the network. Take for example, a biometric-enabled car, whose ownership is digitized on the block chain. Enabled by the Internet-of-things (IoT), it is possible that, upon a transfer of ownership on the block chain, this car, which is connected to the internet, reconfigures itself to accept only the biometric credentials of its new owner. Necessary documentations, such as the proof of ownership are also instantaneously updated.

DigitalAssets:
These are assets, whose ownership are represented on the block chain and are not necessarily physically available. An example is the Federal Government bond – Digital bond. A physical piece of land, whose title is documented on the block chain, is also a digital asset. In the case of the former, it is possible that paid coupons and principals could be deposited in the address of its digital owner. As overly expressed, the role of brokers and custodians in security transactions could be totally eliminated. This, inadvertently, providing more yield to investors.

Conclusion:
With all of these possibilities and more, should everything be digitized and enabled by the IoT, the greatest assets of all would be DIGITAL IDENTITIES. Because the representations of participants on the block chain are pseudonyms, the theft of same would mean the acquisition of the wealth portfolios of their original owners. Therefore, security will become the greatest success factor determining the future of the technology; second only to control.

And contrary to the opinion that the block chain will not serve the unbanked as much as mobile money, I believe strongly that following the creation and proliferation of Identity management firms that are capable of transparently protecting mobile users, the need of the unbanked would be eventually met. It would also be possible for telecommunication operators to pick up the challenges of creating parallel block chains and side chains specifically for this purpose.

Finally, regulators of the banking and financial institutions must not try to ignore or abolish these technology because of its current setbacks. The moment these challenges are surmounted, cryptocurrencies would become the new money. By then, chasing the ship that had sailed might prove too dangerous for their economies.

References:
Nakamoto, Satoshi (2008). Bitcoin: A peer-to-peer electronic cash system.
Marian,Omri.A Conceptual Framework for the Regulation of Cryptocurrencies
Bheemaiah,Kariappa (2014).Block Chain 2.0: The Renaissance of Money
Rotman, Sarah (January 2014). Bitcoin versus Electronic Money (CGAP)

“AyodejiOdusote is a Solution Analyst with the Central Bank of Nigeria. He is a blogger and a social commentator, focused majorly on Technology and its Economic Impact; using Nigeria as a Case Study. He can be reached via email: aareago@gmail.com. His social media handles are as follows: twitter: @aareago, facebook: Aare Ago, and aareago.blogspot.com.”