A Sovereign Future – Part I

Earlier this month, DMCC launched the fourth edition of its Future of Trade Report, a thoroughly researched document that carefully assesses the impact of geopolitics, technology and global economic trends and how they are likely to affect trade in the short, medium and long term. For those of you who are yet to read it, I urge you to download your free copy today. For those who have, you will know that global trade is likely to continue its rebound in 2021, that the relationship between the US and China will play a central role in trade outlook and that sustainability remains at the top of the political and corporate agenda, despite the global pandemic. It also illustrated that Dubai’s preparedness and agility yielded some highly positive data including a 6% year-on-year increase in trade volumes in H2 2020 and an overall jump in export values to 8% in 2020.

Certainly, the most compelling and perhaps significant research illustrated the growing adoption of digital tech, particularly blockchain and cryptocurrencies, and how their application will not only cut the cost of trade and finance but systemically replace them. Having recently attended Bitcoin 2021, it is clear that the pandemic’s effect of accelerating the decentralisation process has helped spur blockchain and crypto out of the fringe of speculation and into a new era of critical mass where an ever-growing community of entrepreneurs, businesses and governments are making the move to either bullishly embrace or cautiously hedge against what many consider to be our shared future. Capitalizing on its role as host-city, Miami made its play to become a centre for disruptive digital finance through what TechXplore described as the ‘move-to-Miami movement’, a strategy that has so far succeeded in luring well-established businesses such as blockchain.com, a top-15 cryptocurrency exchange to quit the Big Apple for the Magic City while creating 300, six-figure-paying jobs in the process. Additional incentives announced during the two-day event included the launch of a $25 million start-up investment fund and city-specific crypto coins. Commenting on the news, Miami Mayor Francis Suarez commented, "There have been some that have doubted the impact that crypto can have in transforming our economy into a tech-forward economy. To them, I would say this: How many companies like Blockchain.com are coming into this market hiring hundreds of people at this salary range? That's happening because of this crypto movement." And the movement doesn’t stop in Miami. According to research by CB Insights, as published in Bloomberg, blockchain technology raised $2.6bn in Q1 2021, exceeding the $2.3bn secured in all of 2020 with similarly impressive investment flows for some of the world’s biggest cryptocurrencies such as Bitcoin, whose value leapt by 400% in the year leading to Q1 2021 and Tether which traded a 24-hour volume of $109bn in February. It would make sense then that according to Binance Research, “Institutional and retail interest in Ethereum and Bitcoin by investors dramatically rose in Q4 of 2020. In a 2021 survey of over 60,000 users worldwide, 97% of them confessed their faith in digital assets.”

The question then remains, with so much positive sentiment supported by solid investment flows, why the slow uptake of blockchain and cryptocurrencies, what are the high-level concerns and what are the core benefits?

To answer the first question, it is human nature to be cautious of significant disruptive change. To put in context how conceptually new both blockchain and cryptocurrencies are, a 2017 census conducted by HSBC that polled two thousand people from the UK, and a thousand from Canada, China, France, Germany, Hong Kong, India, Mexico, Singapore, UAE and US, showed that 59 per cent of consumers had never heard of blockchain technology and that of those who had, 80 per cent didn't understand what it was. In knowing this, it is easier to see why wider society would struggle to accept such a revolutionary concept as a potential replacement for such a globally embedded system, however inefficient it might be, and while studies have shown that incremental gains in tech are widely sought-after and celebrated, such as new phones, cars or computers, systemic change often faces far more resistance out of fear for the unknown, particularly when the fundamentals of trade and finance haven’t evolved a great deal since the introduction of representative money under the ancient empires of Egypt and Babylon. As stated by Marcus Treacher, Board Member, Clear Bank and RTGS Global during our Future of Trade webinar, “We’re going into a very exciting time in the financial tech world. Taking 19th-century business practices and bringing them into the digital era. Completely rethinking the trade route, rather than simplifying the paper trade.”

It is therefore understandable that a decentralised system with no physical currency might be a difficult concept for many people to feel comfortable with, even though the U.S Dollar is no different to any cryptocurrency in the sense that since President Nixon’s decision to decouple it from gold in 1971, it is only worth what we as a society say it is. It is backed by nothing other than a common understanding that it has a certain value. As a likely solution, Yanislav Malahov, "Godfather of Ethereum" and founder of æternity commented, “There will likely be a transition period between paper and digital where we’ll have to have the two in parallel. Blockchain is still emerging, so we’ll need to see much more adoption.”

As one of the practical steps that have been seen to bridge the old and the new, the launch of (semi) centralised stable coins such as Tether (USDT), USD Coin (USDC) and Gemini USD (GUSD) offer businesses and investors the opportunity to buy cryptocurrencies that are backed at a ratio of 1:1 by fiat currencies whose collateral should be physically stored (in banks), however in keeping with the full range of benefits that blockchain has to offer, cryptocurrencies such as Maker DAO’s Dai has gained a lot of popularity since its launch as the "world's first unbiased currency and leading decentralized stable coin." While remaining pegged to the U.S dollar, the Dai is effectively a self-regulated currency that has no attachment to either government or central bank, making it one of the key players in the DeFi (decentralized finance) movement, alongside similar decentralized projects such as Uniswap (a decentralized exchange) and Chainlink (a decentralized oracle network). As of June 2021, the DeFi market cap was valued at just under $80bn.

So, what are the challenges of blockchain and cryptocurrencies and are they problems that can be overcome? The first point to understand is the misnomer of ‘currencies’ in cryptocurrencies. The reality is they behave more like commodities, which has caused them to be likened to more stable, long-term, finite assets such as gold. As summarised in Mining Journal, “Bitcoin and other cryptocurrencies may appear at face value to be similar to gold, due to their limited supply and perceived role as alternatives to fiat currency. However, the truth is that cryptos and gold are fundamentally different asset types that play starkly different roles in any risk-adjusted portfolio. Cryptos are new, volatile, and highly speculative. Gold is long-established, delivers returns in line with other major asset classes, and plays a critical role in hedging against the type of high-risk assets that cryptos represent.” While this doesn’t represent a sector-specific challenge, it is a good reminder that as with all investments, research should be conducted thoroughly before following through.  

Another challenge is that while gaining in sophistication, both blockchain and cryptocurrencies are still in their infancy meaning a lot more work needs to be done in terms of regulation. As an output from the Future of Trade webinar, it was suggested that a collaborative approach between government and the private sector would be most effective in terms of finding a solution that protects both trade markets and consumers, however, during a recent interview with CNBC, Bridgewater Associates LP founder, Ray Dalio suggested that Bitcoin’s “greatest risk is its success.” Citing the historic action of the U.S government when it banned gold in the 1930s to avoid it becoming a competitive threat to Treasury Bonds, Dalio stated that "I suspect that Bitcoin's biggest risk is being successful, because if it's successful, the government will try to kill it and they have a lot of power to succeed," a thought opposed by CNBC contributor, James Ledbetter who commented, "I don't think even a concerted effort among different countries and different central banks could actually shut down Bitcoin. I don’t think that’s technologically possible,” a sentiment shared by Yanislav Malahov during the recent webinar.

Another widespread objection to blockchain and crypto has been its tenuous relationship with criminality, both in terms of exposure for investors, as well as being used for illicit means. As a burgeoning market, there will always be teething problems where opportunists such as Ponzi Scheme operators and or hackers will try their luck at defrauding investors, however as the systems become more mainstream, both regulation and online safeguards are ramping up significantly, with new rules and regulations being proposed by FinCEN, supported by new protocols for transactions of cryptocurrency that must be followed by banks and VASPs (virtual asset service providers). With regards to its association with the criminal underworld, “Crypto Dad” Christopher Giancarlo, the former chair of the U.S Commodity Futures Trading Commission, summarized a fair rebuttal while on stage at Bitcoin 2021:

“Financial markets from the dawn of history till the end of time will always be a game of cops and robbers. Wherever there’s value being transferred, there will be bad guys and before bad guys have used things like diamonds, have used cash and now they’re using crypto. Big whoop. What does that prove or not prove? Is DeBeers to blame if they use diamonds? Is the Federal Reserve to blame if they use dollars? Is Crypto to blame if the bad guys use crypto? It’s almost a non-sequitur, so bad guys are using a tool to do bad things, that’s why we have cops on the beat, that’s why we have a justice department, that’s why we have regulatory agencies. The fact that there’s criminality wherever there are things of value should not surprise anybody, I think it’s just an easy attack line, yet we don’t use the same attack line when talking about dollars. Why not? It’s really just a false narrative.”

While many investors typically buy their cryptocurrencies through an intermediary platform, remuneration is also possible by crypto mining, a process by which private individuals can use their hardware to validate cryptocurrency transactions on the blockchain in exchange for a small amount of compensation. As an essential part of the proof-of-work required to make blockchain technology possible, it is an unavoidable part of the process, however, the processing power required also consumes a large amount of energy raising the issue of long-term sustainability. “The consumption of electricity isn’t the problem, but the production,” stated Malahov, a thought echoed and furthered by Brock Pierce, creator of Tether and Chairman of the Bitcoin Foundation, who stated during the recent Future Blockchain Summit that energy demand from crypto mining could act as a driver for the transition into renewable energy. And the benefits of blockchain and crypto don’t stop there.

Continuing during his appearance on the webinar, Pierce affirmed, “When you strip out cost and you’re allowed to connect the lender and borrower, everything becomes efficient. We will bring a billion people out of poverty with this.”  In addition to cost, the digital economy will also help to increase the speed of transactions, particularly for the services trade where digital technologies stand to add the most value. As a more immediate advantage, the wider impact of using blockchain and crypto will counteract the risks of inflation as the global economies begin to open up, while additionally, neither technologies require the same level of management as our current financial and trading systems, meaning that while certain forms of trade either ceased or slowed their activities making their deliveries unreliable, (the gold refining industry and oil glut spring to mind), digital trade continued uninterrupted.

So, what does this all mean in terms of overall benefits for our global society? Find out in Part II, which will be published shortly.