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Is the Future of Money Digital?

Digital currencies like bitcoin have been around since 2009 but their use remains limited, a leading Pakistani exchange company trades around 400 bitcoins per month.
by Mahrukh Sarwar

Imagine a currency which could threaten to render the fiat monetary system redundant and end governments’ monopolies on issuance of money. Such a currency is no longer an abstract, futuristic idea. In fact, this digital currency is now eight-years old and, since January 2017, has been valued consistently at more than $1,000 per coin. We are talking about Bitcoin – the world’s first decentralized digital currency.

In Brief

  • A bitcoin is a digital asset invented in 2009 by a programmer or a group of programmers known as Satoshi Nakamoto. The number of bitcoins to be issued by 2040 to 21 million. Currently, there are approximately 12.5 bitcoins per block which will be produced every ten minutes until 2020.
  • The purchasing power of bitcoins fluctuates wildly and unless this currency becomes more widely accepted in future, it is unlikely that this would stabilize anytime soon. In May 2017, a bitcoin was selling for nearly $2,000.
  • Some disadvantages associated with the use of bitcoins are fears related to its use for illegal transactions in dark net markets. These transactions often involve drugs, weapons, forged documents, and cyber-arms among others.

Many people have heard of this digital payment system but few understand how it works and what its potential may be. Technological innovations of the 21st century ushered in Facebook, 4G connectivity, Bluetooth and even the Google Driverless Car; the new century also brought with it technological innovation in the financial sector. With the advent of financial technologies came cryptocurrencies like bitcoins which are becoming popular across the world.

Read more: The Dawn of Pakistan’s Fintech Boom

A bitcoin is a digital asset invented in 2009 by a programmer or a group of programmers known as Satoshi Nakamoto. It uses a peer-to-peer (P2P) network and does not require middlemen for transactions that can now be conducted directly. Bitcoin is used as a unit of account and all bitcoin transactions are recorded in a shared public ledger known as the ‘blockchain’ which authenticates each transaction.

Instead of having a sum (in rupees, dollars etc) in an account with a bank, you could have the amount in bitcoins. It is held in an account that can be tracked by a loose network of individuals with a public record of where (in cyberspace) all the sums reside. The mechanics of being able to transfer an entry from one bitcoin account to another are based on advances in cryptology that use open-architecture algorithms to convert one string of data into another.

In Pakistan, bitcoin is understood as a combination of currency, commodity and technology. Hassan Siddiqui, a bitcoin trader, says, “In Pakistan, it is used under the same category as gold, which is a commodity. Strictly speaking, this is not the best understanding of bitcoin because the currency exists for real and can be spent to purchase goods and services.”

Simply put, bitcoin is a decentralized currency without a central bank or a federal reserve. “It is a bit like gold, if you think about it,” says Siddique. “Gold can be used as a medium of exchange for goods and services but it is not necessarily easy to buy weekly groceries with gold coins, is it?”

Bitcoins are ‘mined’ just like gold. However, unlike real gold which requires manual extraction, mining bitcoins requires powerful computers to solve complex algorithms in order to create the currency. These bitcoins are created at a steady pace and the entire process is designed so that it remains unaffected by inflation. The monetary policy set by Satoshi Nakamoto limits the number of bitcoins to be issued by 2040 to 21 million. Currently, there are approximately 12.5 bitcoins per block which will be produced every ten minutes until 2020. As more and more bitcoins are issued, the rate of production will slow down so that only 21 million bitcoins will be issued till 2040.

Use and value

Despite the bitcoin technology being available for citizens of the world for eight years, it is still not a widely-accepted mode of payment. Most businesses across the globe do not accept bitcoins for retail transactions. China banned buying or selling goods and services with e-money in 2009. Bitcoins are also illegal in some countries including Bangladesh, Ecuador, and Bolivia.

The purchasing power of bitcoins fluctuates wildly and unless this currency becomes more widely accepted in future, it is unlikely that this would stabilize anytime soon. In May 2017, a bitcoin was selling for nearly $2,000. However, its rate of exchange may fall to $1,000 or rise to $4,000 in the coming days.

The recent exponential rise in the price is also related to developments in the technology of litecoin, a bitcoin competitor. These developments have given hope to users that technology allowing higher speed of transactions may soon be available for bitcoins as well.

Bitcoins can be stored in an online wallet that is accessible through a private key. Theft can occur if a third party gets access to either the wallet or the private key. Bitcoin machines also exist but since they are not like traditional ATMs, they charge exorbitant fees.

Bitcoin has a potential edge over credit cards for providing such liquidity services. The supporting network only needs to verify that the private code is valid, which is less costly than verifying that you are indeed the rightful owner of a credit card and are ultimately going to deliver funds. With a conventional credit card, the merchant needs to pay the card company a significant fee for the transaction which in an economic sense results from that high cost of verifying everybody’s compliance.

Read more: Is the Future of Money Digital?

Some disadvantages associated with the use of bitcoins are fears related to its use for illegal transactions in dark net markets. These transactions often involve drugs, weapons, forged documents, and cyber-arms. In May 2017, a global ransomware attack infected over 200,000 computers in more than 150 countries across the world in a matter of days. The hackers demanded that ransom be paid in the form of bitcoins. The digital currency was selected because of the difficulty in tracking the transaction as compared to traditional bank payments. This incident highlighted yet again the negative connotations associated  with the digital currency. Another disadvantage associated with bitcoins is that since cyberspace has no borders, it is difficult to regulate the currency. There are no safeguards for financial institutions and no transparency for users. There is also talk of bitcoin-related malware.

Bitcoins in Pakistan

“Bitcoins run on the internet and use state-of-the-art cryptography to ensure secure and instantaneous transactions, opening up hundreds of new avenues thanks to the blockchain technology,” says Siddique. Since bitcoin is a currency without borders, it is a much more viable option for making payments, because it is fast and cuts down on the number of user fees.

“This is why bitcoins are a good option for freelancers in Pakistan,” he adds. In recent years, Pakistan has become the third highest user of freelancer.com, a global crowdsourcing marketplace website with more than 20 million users, trailing behind only the United States and India. Freelancing currently makes for a multi-billion dollar industry in the world.

However, there are high costs associated with freelancing since the business model of popular freelancing platforms is based on fees. Both the freelancer and the client are charged separately after a project is completed. The freelancer ends up paying a significant chunk of the income earned during the project. The process of converting the international payment into spendable Pakistani rupees is tedious and involves a number of disbursements such as bank fees, activation fees, exchange rate fees, escrow fees, withdrawal fees, freelancer fees and so on. The costs are endless.

Siddique claims that use of bitcoins would not only lower the cost of bringing freelance earnings back home, but it could also raise the income by two to five percent.

In 2013, several mainstream websites such as WordPress, TigerDirect, Overstock.com, Expedia, Newegg, Dell, and Microsoft began accepting bitcoins as payment. Barclays became the first bank in the United Kingdom to accept bitcoins, and even allowed customers to make charitable donations using the digital currency.

“The blockchain technology can also be used to make tamper-proof records of university degrees, medical records, and even land records. At some point, banks can also use it.” ΩSyed Salim Raza, former governor of the State Bank of Pakistan.

However, the question remains: How does one spend their hard-earned money using bitcoins in Pakistan? One option is to buy or sell bitcoins from online traders such as LocalBitcoins. LocalBitcoins is a website which facilitates trade between buyers and sellers by providing a virtual meeting place, including an escrow and feedback system. There are many active traders in Pakistan who support local payment methods like bank deposit, Easypaisa and even hand-to-hand cash trades.

Read more: Making Digital Lending Work

Blockchain technology

The banking sector has shown interest in bitcoin but their focus has been on the blockchain technology behind the currency rather than the e-money itself. Danyal Manzar, CEO of UrduBit, another leading bitcoin exchange company in Pakistan, says, “We have to open our minds and imagine the bitcoin revolution. I think all countries, including Pakistan, should be open to this idea as it [the blockchain technology] can bring about endless possibilities in real-time gross settlements, cross-border settlements, clearing on a distributed verifiable ledger, and a clearing switch. And this is just the tip of the iceberg.”

Non-banking sector startups are also using the blockchain technology. An American startup called Blockstack that has drawn the attention of Microsoft and Tim Berners-Lee, the inventor of the World Wide Web, is using the blockchain technology to create a new decentralized internet that remains “open, neutral, and free.” The startup is creating an open source software which is being maintained by a Blockstack community of more than 4,000 members.

The company, which has raised $5.3 million in funding, is creating a new web infrastructure which takes power away from monopolies like Google and Facebook and gives users control over their data again. Blockstack is doing this by using blockchain to make a secure and independent identity system for everyone and potentially bypassing the need to make accounts at every website. If you use a website which has been built using Blockstack’s technology, you can grant them permission to use a profile which only you control and whose access you can take away at any time.

Blockchain can also be used to store and manage valuable information other than the transactions of digital currency. Muneeb Ali, co-founder of Blockstack, says that decentralized apps secured by the blockchain have many uses in countries like Pakistan. Ali adds that although the tamper-resistant nature of blockchains can have many applications in fighting corruption in governments, individual apps need to be carefully thought out. Syed Salim Raza, former governor of the State Bank of Pakistan, says, “The blockchain technology can also be used to make tamper-proof records of university degrees, medical records, and even land records. At some point, banks can also use it.”

Does bitcoin have a future in Pakistan?

Regardless of the interest in the blockchain technology behind digital currencies, bitcoin itself might not become an attractive medium of exchange in Pakistan very soon.

Though statistics are not available for overall volume of trade occurring in bitcoins, figures maintained by individual bitcoin exchanges show that the trade volume in Pakistan is low as compared to other developing countries, like India and Kenya. “It’s a bit hard to determine the trade volume in the country as there are also transactions happening on Facebook and other social media channels. Urdubit.com does about 400 btc per month but this accounts for 20 percent of all bitcoin users in Pakistan,” says Manzar.

Localbitcoin maintains weekly figures over a three-year period. In the week ending on May 20, the volume of trade recorded in Pakistan was around PKR 12.72 million or 63.5 bitcoins.

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