The emerging Digital Economy, a new Financial (Banking) System and an Asset Class – The Cryptos
I was introduced to Cryptos five years ago by my then 20 year old Nephew who was just out of school but like most of his peers was reasonably tech savvy. Since that introduction I have discovered the fascinating emerging World of Web3 based on Blockchain technology/backbone on which cryptos/projects are built and traded. From the authorities/regulators all over the world, the attitude towards this emerging technological breakthrough with practical, real world applications specially in the financial arena has been one of ambivalence and indifference. Some governments/regulators have initially tried to ban it outright. Others were lukewarm towards it at best. Most financial experts were warning people/investors of the inherent volatility/riskiness of cryptos and to invest only the funds “one can afford to lose”. In this Article, I do not advocate, encourage or explore investing or trading in this asset but wish to highlight the emerging phenomenon and the possibilities/opportunities arising from this new technology.
Still oblivious to millions of people (in the World and in SL), a new, digital asset class is evolving since around 2010 or so and gradually getting traction worldwide as well as acceptance by an increasing number of people around the world (currently estimated market size to be over 400 mn) and institutions (Banks, those involved in Fund transfers and Payments etc. ) not to mention policy makers/regulators around the world. Target audience of this article is Sri Lankan policy makers/regulators and finance/banking professionals and CEOs who are involved in fund/asset management, payments, fund transfers etc. We all have heard of the name/term Bitcoin but not much else about this emerging technology is known or understood. Though I don’t come from an IT or technical background (in fact my IT knowledge is very limited and that’s one reason many in my generation understand little or nothing about the subject and are reluctant to dabble in this arena) since early 2020, I have been following and studying this market, technological developments/innovations and this truly global, easily accessible and disposable, emerging asset class. In this article, I wish to briefly share some of my observations/insights.
The Platform on which Cryptos are built on and traded – Blockchain (Web 3)
All the projects/business ideas represented by Cryptos or Tokens are built and operated on Blockchain which apparently had been around since 2000 or so. This technology is like a Chain-link where each Block is linked to the previous one. A key feature is no central authority (a Treasury, a Central Bank etc.) controls the issuance, price/rates, rules and practices or in other words Decentralized/Community driven. Once a record is made, no one person/authority can erase it without everyone’s (in the Chain) consent which makes it virtually an impossible task. With that community driven approach, it is fully transparent and secure to that extent. Some of the Cryptos (so called Layer 1s) have since emerged with a feature called Smart Contracts (electronic contracts). This allows two unknown Parties from anywhere in the world to exchange value (money or payments in exchange for goods/products and services) in a secure and transparent manner directly without an intermediary. This is a revolutionary idea as this potentially allows anything (a piece of art, a gemstone, land, vehicle, financial product, commodity, any currency in the world etc) to be tokenized (represented by a Digital Token) and exchanged on the Blockchain with an unknown counterparty from anywhere in the world using a smart electronic contract which is permanently recorded (Of course delivery of the physical goods etc. need to be streamlined). Unique assets such as Art, Gem Stones etc can be represented by a Non Fungible Token (NFT) or indivisible token and other homogenous products/goods such as currency, shares of a company, Gold, Silver etc. etc. can be represented by a token that is fungible (can be divided into even one millionth of a fraction allowing widespread participation by billions of people in terms of investment and trade, fund transfers/payments etc). The Bitcoin which has emerged (mainly due to its limited/fixed supply) more as a store of value coin or “Digital Gold” and the dominant token (representing more than half of market capitalization and daily turnover) in the last 15 years or so is a classic and the best example of the latter.
Another key feature or an economic advantage of these Blockchain based developments (includes so called Crypto but more broadly tokenization) is elimination of the middlemen or intermediaries/facilitators such as Banks, Stockbrokers, Lawyers, Consultants, etc etc. thus reducing transaction costs and increasing the speed of transactions. The decentralization and transparency (permanent, unalterable electronic records/Smart Contracts) allow Peer to Peer (P2P) transactions between any two unknown counterparties across the world. What’s more, no paperwork involved and can be accessed through your smartphone or laptop (24/7) without having to go to a physical location like a Bank, a Lawyer etc which can make the transaction instantaneous and at a much lower transaction cost. For example, even today millions use these platforms and token created on them to transfer funds across borders for a fraction of the cost Banks (and Money Transfer Companies) charge and instantaneously without any paperwork and having to go to a Bank (or Western Union office etc.)
Blockchain technology or platform has many real world applications in terms of transparent and efficient delivery of public services not to mention endless commercial applications/possibilities (Web3 is nothing short of an upgrade of the internet itself which enables secure exchange of Value). For example, the land registry or the vehicle registry (or any other Registry for that matter) can be on Blockchain allowing easy public access, swift and low cost transactions, transparency etc. etc.
Cryptos (AltCoins) – Tokens
Cryptos can be mined using high powered computers (a process which consumes vast amounts of electricity and to that extent environmentally unfriendly) or simply bought at the primary market from the Issuer at the Initial Coin Offering (ICO) and bought/sold in the secondary market in either centralized Exchanges (24/7 trading) or decentralized ones. Unlike Shares, they can also be swapped or exchanged for each other quite easily based on current market prices. They are stored in Wallets and every Wallet (the name used for equivalent to a bank account with a unique address/identification) is (or can be) linked to an Exchange. Just like share and commodity markets, all derivative/hedging instruments (futures contracts, short selling etc.) as well as margin trading facilities (a market based or constantly changing rate of interest charged on an hourly basis) are available at your fingertips (without any paperwork, approvals, phone calls or having to go to a physical location).
Other than Bitcoin, all other coins or tokens can be called Alt Coins. There are currently over 30,000 of them and 100s of new ones representing new business ideas (solving an existing problem in the sphere or catering to a market/commercial need) or new projects are added to the sphere everyday (no different to the real world of business). Almost 99% of them may fail or not gain traction and eventually disappear or go bankrupt not to mention the Scams and Frauds that are out there deliberately trying to cheat people out of their funds in a lightly regulated environment. Each one will have a White Paper explaining their project objectives/strategy, mission/vision etc and lay out the details of the team behind it.
I believe Crypto Coins or Tokens have baffled many experts, academics, regulators, and regular people alike mainly for the reason they carry or represent features of Securities, Commodities, and Currencies all rolled into one. They (Coins/Tokens) are issued (like Shares of a Company) at an Initial Coin Offering (ICO) and funds raised so to that extent it is a Security representing ownership of a set of assets/ idea/project/business. Some have limited (by algorithm which can’t be changed and forever be limited) issue of tokens and others are open to issue additional tokens at a later date (Dilution). They trade and fluctuate heavily in price (upto 30% within 24 hours) in the secondary market based on market supply and demand for the Coin (not necessarily based on earnings or assets of the Project/Business). To that extent they are like Commodities (Gold, Silver etc). The owner does not get any dividends in cash but may get additional coins/tokens like bonus shares. They trade in the secondary market (on many Centralized Exchanges as well as decentralized exchanges or DAX around the clock (24/7) like currencies and used like currencies for payments and money transfers. Most coins can be divided like currencies to make payment/transfer of any particular amount. Most coins, other than Stablecoins which are pegged to a real world fiat currency (1 for 1), fluctuate in price measured in terms of USD.
Stable Coins are digitized or tokenized real world currencies or fiat money (different to proposed Central Bank Digital Currencies). The dominant Stable Coin in the Crypto sphere is the USDT (T represents the issuing Company Tether which has a current market Capitalization of over $130 Billion as the 4th largest Cryptocurrency/Coin). There are many other USD pegged Stable Coins (USDC etc) and other Stable Coins pegged (1 for 1) to other Currencies such as Euro, AUD, UAE Dirham etc. Remember Euro pegged Stable Coin can fluctuate in Price in terms of USD but stable (do not fluctuate) in terms of Euro.
As a result there is debate in the US and elsewhere as to which government agency (the Central Bank, the SEC, the Commodities Regulator or an entirely new Regulator like in UAE) should or better suited/placed to regulate the digital/virtual assets sphere.
The difference between Cryptos and proposed Central Bank Digital Currencies (CBDC)
Most Central Banks around the World are developing or contemplating issuing a Government backed Digital Currency of their own to facilitate easier/faster digital payments/transactions. However, they represent each countries’ fiat currency and will remain under central authorities and still subject to decisions made by bureaucrats/politicians especially in terms of money printing/expansion of money supply. And CBDC transactions by the users can be monitored by the Government which will most likely make them unpopular. BitCoin and many other Cryptos are on the other hand limited in their issue by an algorithm which can not be changed and cross border use/transfers can not be restricted by Governments. Cryptos that are limited/restricted in issue (ie BitCoin) by definition can be truly a solid hedge or protection against inflation/debasing of value of many fiat currencies in the World (including the USD). This remains one of the main attractions of Bitcoin as a store of value. Stable Coins are almost identical to CBDCs and used by the Crypto users as the interface between Virtual Assets and the real world.
The Macro Picture/Issues for the Authorities/Policy Makers/Regulators
Philosophically, the entire Crypto industry in general and BitCoin (the Creator is unknown) in particular was born and had taken root as a Libertarian concept/idea where those who generally distrust/despise governments/politicians/policy makers and who want to break free from their control and from the ill effects of their misguided decisions (particularly endless printing of fiat money all over the world and resultant inflation) seeking a decentralized (Community driven) alternative where wealth is preserved and trust in the currency/medium of exchange/store of value is restored. This technology/concept is favored by or popular with those who are opposed to centralized (few People) decision making in a Country. Therefore, all Governments may not welcome such technological innovations and its use by their citizens. The well known historian and author Yual Noah Hariri called BitCoin the currency of distrust.
From the developments I have observed in the last five years I can say Cryptos as a concept is here to stay as they and the underlying Blockchain technology have many useful real world, commercial applications. And the decentralized nature of the technology or the applications make them attractive to many consumers, buyers, sellers and also make it impossible for authorities to ban or eliminate them. So many policy makers/regulators around the world have gradually come to terms with these realities and now increasingly inclined to allow and encourage developments within this sphere while regulating the markets to prevent fraud, scams, hacking of accounts/wallets etc and protect the unsophisticated, retail participants. The industry which is community driven is self regulating (they regularly come up with remedies/solutions etc) as without the public trust and confidence it can’t prosper and grow.
And of course the Governments/ the Tax Authorities are interested in their fair share of the economic activity and profits/wealth that is generated. In fact the recent developments in the US (specifically after the election of Crypto friendly Donald Trump as President) will profoundly and favorably change the Regulatory environment for Cryptos all over the world as others take their cue from the developments in financial markets/regulations in the USA. For example, after years of deliberating, the US SEC authorized BitCoin Exchange Traded Funds (ETFs) in January 2024. This opens up a much larger pool of investors, savers, traders to participate or get exposure to this new Asset Class without directly buying them. Since then titans of the fund management industry (Fidelity, BlackRock etc.) have started BitCoin ETFs which have grown to over $33 Billion in Value in less than a year (Growth had been much faster than Gold ETFs ever was which after many decades currently stand at $32 Billion). I suspect, 2025 will be a watershed year for Crypto Industry once Donald Trump and his Team take office on January 20th.
In 2023, right after Sri Lanka’s economic/currency collapse, an American Venture Capitalist/BitCoin enthusiast called Tim Draper visited Sri Lanka and gave a proposal to the Central Bank/Government which was swiftly (and understandably) rejected by them (reported in many Newspapers and Websites). The Price of Bitcoin was around $20000 in the market at the time (Today it is $100000). With the benefit of hindsight, imagine the positive impact on the economy, inflation (prices), forex reserves, national debt etc., had SL accepted or adopted the proposal!! Some Countries and Companies in the US and elsewhere have already made BitCoin a part of their Reserves and I suspect more will join in the coming years. Much will depend on what the US policy makers (both State and Federal levels) and large Corporations would decide in the next few years. The year 2025 will see important developments for the industry coming from the US Government/Regulators.
Having said all this, it must be pointed out many prominent Academics, Economists, Financiers/Asset Managers (ie Warren Buffet, Christian La Guard, Ray Dalio, Paul Krugman, Jim Rogers etc) are still not in favor of or negative about Cryptocurrencies. The number of Naysayers though have gradually reduced in number over the last 10 years. The most prominent among the converts is Larry Fink (CEO/Chairman of BlackRock – the largest Asset Manager in the World with $11 Trillion under Management) who was initially opposed but now in favour of Digital Assets, Tokenization etc.
Some Statistics and Facts to illustrate the current global status/size, developments and benefits of the Technology/Industry/Markets
- Total Market Cap of Cryptos today (10 Dec 2024) is around $ 4 Trillion out of which $2 Trillion is BitCoin (Gold market cap is around $17 Trillion and Silver stands at around $1.4 Trillion.
- Daily total Turnover/Volume of trades of all Cryptos in all Centralized and Decentralized Exchanges ranges from $100 billion to $350 billion.
- In 2023, BitCoin processed $36.6 Trillion transactions (Visa and MasterCard together $24 Trillion) More interesting to find out the fees involved in both these Categories. BitCoin fees would be a fraction of Visa/Master Card transaction fees.
- This year Dubai legalized payments in Crypto for Real Estate transactions, allowed Bank accounts to directly deal/convert to Crypto, and licensed a Crypto Exchange (OKX). All Crypto transactions in Dubai are tax free. Dubai already has a Virtual Assets Regulator in place.
- Many jurisdictions exempt capital gains taxes (CGT) from Crypto transactions but in some countries they can go upto 40%. This obviously could change with time.
- As an interim step or development to facilitate greater use many Crypto Wallets are now linked to Visa or MasterCard (with over 100 mn Vender acceptance) so that the owner/holder of Crypto can freely use their Crypto funds via a Debit Card.
- El Salvadore, which heavily depends on remittances from Salvadorians working abroad, apparently pays annually $300mn to $400 mn to money transfer companies and Banks as commission and fees. Shifting to Cryptos as a method of fund transfers can save 90% of these costs which is beneficial to the individuals involved and the Country. Sri Lanka can do the same.
- Statistics show BitCoin is being adopted by People at a faster pace than the Internet itself. Currently there are 400 mn active Crypto Wallets (Accounts). This adoption is the most critical factor for the development/growth of the Industry and markets.
- Bills are being introduced in some US States (Pennsylvania, Florida etc) and Countries such as Brazil allowing the holding of BitCoin as a Strategic Reserve Asset (like Gold).
- The Company behind Ripple or XRP Token which specializes in facilitating global fund transfers (far cheaper, secure and speedier alternative to SWIFT) just became the number three Token in terms of Market Capitalization ($150 Billion) reflecting confidence in its business model/project. They already work closely with large global Banks and Financial Institutions.
- Bhutan with a $4 billion Economy holds $1 bn in BitCoin and El Salvadore holds $600 mn in BitCoin as a Reserve Asset. Many more Countries (including some developed countries) are expected to join in accepting/holding BitCoin as a Reserve Asset in the coming years.( As of now, both the US and the Chinese governments each hold approximately 200,000 BitCoins.)
- Over 60 Countries already have BitCoin ATMs installed at various public places where People can buy, sell or send/transfer BitCoins and other Tokens. Fees at ATM’s remain high though.
The challenge for all countries and regulators is to come up with measures to prevent, trace and interdict funds (accounts/wallets) involved in drugs, crime, corruption, money laundering, tax evasion, terrorist activities etc. from getting into the Crypto platforms in the first place by having proper KYC protocols etc. The problem is no different to the one faced and tackled by the Banking system. It is speculated some of the “dirty money” may already be in the system. The good news is the Blockchain enables all transactions to be traced and monitored and beneficiaries of all Wallets (Accounts) to be identified.
The economic possibilities available in the industry/markets in this arena are endless and the jobs and wealth creation that will come with it. It’s high time the Sri Lankan authorities/regulators take a serious look at this emerging digital economy/industry and its economic possibilities/opportunities for our youth initially at least within the Port City Colombo given that the Port City Colombo is already earmarked/gazetted as a dollarized zone.
For Sri Lankan Portfolio Managers, this new/global asset class though volatile and risky represent new possibilities/opportunities for diversification of risk across currencies or hedge against Rupee depreciation (after obtaining the necessary permission/approvals from the regulator etc.). For Bankers (and others involved in fund transfers and payments), it is worth taking note of the new developments taking place in terms of shifts in the current payments and fund transfer platforms/models or risk losing business. New technological shifts have created a Kodak (which went bankrupt because of not adopting the digital revolution in photography that made them obsolete) moment.
In Conclusion, like it or not Cryptos as a concept/idea are here to stay but will evolve over time. The number of people actively using the platforms to transfer funds etc and have more confidence in a Digital Asset as an investment vehicle than on a real asset are growing. Since my introduction to this sphere in 2020, I was surprised to find out how many youths (hundreds of thousands) from rural areas in Sri Lanka are already involved in the sector even without much regulatory clarity coming from the authorities (other than the Central Bank warning the Public on the volatility/riskiness of the Asset). The Central Bank/Treasury has prohibited Credit Cards issued in Sri Lanka from purchasing Crypto since around 2019. That has not stopped Sri Lankans (mostly tech savvy youth in their 20s and 30s) being active in the market. I believe/suspect many working in the middle east and elsewhere have their funds on these platforms and use them for transfers etc. As a former fund manager I can say, though it is a highly volatile and therefore represent a degree of risk, it can’t be ignored anymore and could be very useful as a tool of diversification (across currencies and asset classes etc.) for Portfolio Managers/Companies in Sri Lanka once regulatory clarity is in place.
Furthermore, since Sri Lanka receives over $6 Billion annually as remittances through the official and unofficial (Undiyal etc.) channels from those working abroad, millions of dollars can be saved (for the individuals and for the Country) in terms of fees/commission by encouraging remittances via officially sanctioned Crypto platforms and wallets (I believe/suspect this is already happening in a significant way regardless). After steady growth over many months, November 2024 has seen a drop (via the Banking channels) in remittances to Sri Lanka. Is this a sign of those who are working abroad switching to alternative channels (including Crypto) to send their hard earned dollars to Sri Lanka? Time will tell. If the sector is allowed to operate openly and regulated appropriately, it can be a new source of tax revenue to the Government. Finally, BitCoin may be a future strategic reserve asset that can be considered for inclusion at the country/macro level for Sri Lanka as well.
Chandu Epitawala
Colombo, December 2024
Chandu Epitawala holds a Bachelor of Science degree from Hawaii Pacific University, USA, and a Master of Business Administration from the University of Texas, Arlington. With extensive experience as an Analyst, Fund Manager, and former Director of Surveillance at the Securities and Exchange Commission of Sri Lanka, Chandu Epitawala has been leading a private Investment Management and Trading firm for the past decade.
I was introduced to Cryptos five years ago by my then 20 year old Nephew who was just out of school but like most of his peers was reasonably tech savvy. Since that introduction I have discovered the fascinating emerging World of Web3 based on Blockchain technology/backbone on which cryptos/projects are built and traded. From the authorities/regulators all over the world, the attitude towards this emerging technological breakthrough with practical, real world applications specially in the financial arena has been one of ambivalence and indifference. Some governments/regulators have initially tried to ban it outright. Others were lukewarm towards it at best. Most financial experts were warning people/investors of the inherent volatility/riskiness of cryptos and to invest only the funds “one can afford to lose”. In this Article, I do not advocate, encourage or explore investing or trading in this asset but wish to highlight the emerging phenomenon and the possibilities/opportunities arising from this new technology.
Still oblivious to millions of people (in the World and in SL), a new, digital asset class is evolving since around 2010 or so and gradually getting traction worldwide as well as acceptance by an increasing number of people around the world (currently estimated market size to be over 400 mn) and institutions (Banks, those involved in Fund transfers and Payments etc. ) not to mention policy makers/regulators around the world. Target audience of this article is Sri Lankan policy makers/regulators and finance/banking professionals and CEOs who are involved in fund/asset management, payments, fund transfers etc. We all have heard of the name/term Bitcoin but not much else about this emerging technology is known or understood. Though I don’t come from an IT or technical background (in fact my IT knowledge is very limited and that’s one reason many in my generation understand little or nothing about the subject and are reluctant to dabble in this arena) since early 2020, I have been following and studying this market, technological developments/innovations and this truly global, easily accessible and disposable, emerging asset class. In this article, I wish to briefly share some of my observations/insights.
The Platform on which Cryptos are built on and traded – Blockchain (Web 3)
All the projects/business ideas represented by Cryptos or Tokens are built and operated on Blockchain which apparently had been around since 2000 or so. This technology is like a Chain-link where each Block is linked to the previous one. A key feature is no central authority (a Treasury, a Central Bank etc.) controls the issuance, price/rates, rules and practices or in other words Decentralized/Community driven. Once a record is made, no one person/authority can erase it without everyone’s (in the Chain) consent which makes it virtually an impossible task. With that community driven approach, it is fully transparent and secure to that extent. Some of the Cryptos (so called Layer 1s) have since emerged with a feature called Smart Contracts (electronic contracts). This allows two unknown Parties from anywhere in the world to exchange value (money or payments in exchange for goods/products and services) in a secure and transparent manner directly without an intermediary. This is a revolutionary idea as this potentially allows anything (a piece of art, a gemstone, land, vehicle, financial product, commodity, any currency in the world etc) to be tokenized (represented by a Digital Token) and exchanged on the Blockchain with an unknown counterparty from anywhere in the world using a smart electronic contract which is permanently recorded (Of course delivery of the physical goods etc. need to be streamlined). Unique assets such as Art, Gem Stones etc can be represented by a Non Fungible Token (NFT) or indivisible token and other homogenous products/goods such as currency, shares of a company, Gold, Silver etc. etc. can be represented by a token that is fungible (can be divided into even one millionth of a fraction allowing widespread participation by billions of people in terms of investment and trade, fund transfers/payments etc). The Bitcoin which has emerged (mainly due to its limited/fixed supply) more as a store of value coin or “Digital Gold” and the dominant token (representing more than half of market capitalization and daily turnover) in the last 15 years or so is a classic and the best example of the latter.
Another key feature or an economic advantage of these Blockchain based developments (includes so called Crypto but more broadly tokenization) is elimination of the middlemen or intermediaries/facilitators such as Banks, Stockbrokers, Lawyers, Consultants, etc etc. thus reducing transaction costs and increasing the speed of transactions. The decentralization and transparency (permanent, unalterable electronic records/Smart Contracts) allow Peer to Peer (P2P) transactions between any two unknown counterparties across the world. What’s more, no paperwork involved and can be accessed through your smartphone or laptop (24/7) without having to go to a physical location like a Bank, a Lawyer etc which can make the transaction instantaneous and at a much lower transaction cost. For example, even today millions use these platforms and token created on them to transfer funds across borders for a fraction of the cost Banks (and Money Transfer Companies) charge and instantaneously without any paperwork and having to go to a Bank (or Western Union office etc.)
Blockchain technology or platform has many real world applications in terms of transparent and efficient delivery of public services not to mention endless commercial applications/possibilities (Web3 is nothing short of an upgrade of the internet itself which enables secure exchange of Value). For example, the land registry or the vehicle registry (or any other Registry for that matter) can be on Blockchain allowing easy public access, swift and low cost transactions, transparency etc. etc.
Cryptos (AltCoins) – Tokens
Cryptos can be mined using high powered computers (a process which consumes vast amounts of electricity and to that extent environmentally unfriendly) or simply bought at the primary market from the Issuer at the Initial Coin Offering (ICO) and bought/sold in the secondary market in either centralized Exchanges (24/7 trading) or decentralized ones. Unlike Shares, they can also be swapped or exchanged for each other quite easily based on current market prices. They are stored in Wallets and every Wallet (the name used for equivalent to a bank account with a unique address/identification) is (or can be) linked to an Exchange. Just like share and commodity markets, all derivative/hedging instruments (futures contracts, short selling etc.) as well as margin trading facilities (a market based or constantly changing rate of interest charged on an hourly basis) are available at your fingertips (without any paperwork, approvals, phone calls or having to go to a physical location).
Other than Bitcoin, all other coins or tokens can be called Alt Coins. There are currently over 30,000 of them and 100s of new ones representing new business ideas (solving an existing problem in the sphere or catering to a market/commercial need) or new projects are added to the sphere everyday (no different to the real world of business). Almost 99% of them may fail or not gain traction and eventually disappear or go bankrupt not to mention the Scams and Frauds that are out there deliberately trying to cheat people out of their funds in a lightly regulated environment. Each one will have a White Paper explaining their project objectives/strategy, mission/vision etc and lay out the details of the team behind it.
I believe Crypto Coins or Tokens have baffled many experts, academics, regulators, and regular people alike mainly for the reason they carry or represent features of Securities, Commodities, and Currencies all rolled into one. They (Coins/Tokens) are issued (like Shares of a Company) at an Initial Coin Offering (ICO) and funds raised so to that extent it is a Security representing ownership of a set of assets/ idea/project/business. Some have limited (by algorithm which can’t be changed and forever be limited) issue of tokens and others are open to issue additional tokens at a later date (Dilution). They trade and fluctuate heavily in price (upto 30% within 24 hours) in the secondary market based on market supply and demand for the Coin (not necessarily based on earnings or assets of the Project/Business). To that extent they are like Commodities (Gold, Silver etc). The owner does not get any dividends in cash but may get additional coins/tokens like bonus shares. They trade in the secondary market (on many Centralized Exchanges as well as decentralized exchanges or DAX around the clock (24/7) like currencies and used like currencies for payments and money transfers. Most coins can be divided like currencies to make payment/transfer of any particular amount. Most coins, other than Stablecoins which are pegged to a real world fiat currency (1 for 1), fluctuate in price measured in terms of USD.
Stable Coins are digitized or tokenized real world currencies or fiat money (different to proposed Central Bank Digital Currencies). The dominant Stable Coin in the Crypto sphere is the USDT (T represents the issuing Company Tether which has a current market Capitalization of over $130 Billion as the 4th largest Cryptocurrency/Coin). There are many other USD pegged Stable Coins (USDC etc) and other Stable Coins pegged (1 for 1) to other Currencies such as Euro, AUD, UAE Dirham etc. Remember Euro pegged Stable Coin can fluctuate in Price in terms of USD but stable (do not fluctuate) in terms of Euro.
As a result there is debate in the US and elsewhere as to which government agency (the Central Bank, the SEC, the Commodities Regulator or an entirely new Regulator like in UAE) should or better suited/placed to regulate the digital/virtual assets sphere.
The difference between Cryptos and proposed Central Bank Digital Currencies (CBDC)
Most Central Banks around the World are developing or contemplating issuing a Government backed Digital Currency of their own to facilitate easier/faster digital payments/transactions. However, they represent each countries’ fiat currency and will remain under central authorities and still subject to decisions made by bureaucrats/politicians especially in terms of money printing/expansion of money supply. And CBDC transactions by the users can be monitored by the Government which will most likely make them unpopular. BitCoin and many other Cryptos are on the other hand limited in their issue by an algorithm which can not be changed and cross border use/transfers can not be restricted by Governments. Cryptos that are limited/restricted in issue (ie BitCoin) by definition can be truly a solid hedge or protection against inflation/debasing of value of many fiat currencies in the World (including the USD). This remains one of the main attractions of Bitcoin as a store of value. Stable Coins are almost identical to CBDCs and used by the Crypto users as the interface between Virtual Assets and the real world.
The Macro Picture/Issues for the Authorities/Policy Makers/Regulators
Philosophically, the entire Crypto industry in general and BitCoin (the Creator is unknown) in particular was born and had taken root as a Libertarian concept/idea where those who generally distrust/despise governments/politicians/policy makers and who want to break free from their control and from the ill effects of their misguided decisions (particularly endless printing of fiat money all over the world and resultant inflation) seeking a decentralized (Community driven) alternative where wealth is preserved and trust in the currency/medium of exchange/store of value is restored. This technology/concept is favored by or popular with those who are opposed to centralized (few People) decision making in a Country. Therefore, all Governments may not welcome such technological innovations and its use by their citizens. The well known historian and author Yual Noah Hariri called BitCoin the currency of distrust.
From the developments I have observed in the last five years I can say Cryptos as a concept is here to stay as they and the underlying Blockchain technology have many useful real world, commercial applications. And the decentralized nature of the technology or the applications make them attractive to many consumers, buyers, sellers and also make it impossible for authorities to ban or eliminate them. So many policy makers/regulators around the world have gradually come to terms with these realities and now increasingly inclined to allow and encourage developments within this sphere while regulating the markets to prevent fraud, scams, hacking of accounts/wallets etc and protect the unsophisticated, retail participants. The industry which is community driven is self regulating (they regularly come up with remedies/solutions etc) as without the public trust and confidence it can’t prosper and grow.
And of course the Governments/ the Tax Authorities are interested in their fair share of the economic activity and profits/wealth that is generated. In fact the recent developments in the US (specifically after the election of Crypto friendly Donald Trump as President) will profoundly and favorably change the Regulatory environment for Cryptos all over the world as others take their cue from the developments in financial markets/regulations in the USA. For example, after years of deliberating, the US SEC authorized BitCoin Exchange Traded Funds (ETFs) in January 2024. This opens up a much larger pool of investors, savers, traders to participate or get exposure to this new Asset Class without directly buying them. Since then titans of the fund management industry (Fidelity, BlackRock etc.) have started BitCoin ETFs which have grown to over $33 Billion in Value in less than a year (Growth had been much faster than Gold ETFs ever was which after many decades currently stand at $32 Billion). I suspect, 2025 will be a watershed year for Crypto Industry once Donald Trump and his Team take office on January 20th.
In 2023, right after Sri Lanka’s economic/currency collapse, an American Venture Capitalist/BitCoin enthusiast called Tim Draper visited Sri Lanka and gave a proposal to the Central Bank/Government which was swiftly (and understandably) rejected by them (reported in many Newspapers and Websites). The Price of Bitcoin was around $20000 in the market at the time (Today it is $100000). With the benefit of hindsight, imagine the positive impact on the economy, inflation (prices), forex reserves, national debt etc., had SL accepted or adopted the proposal!! Some Countries and Companies in the US and elsewhere have already made BitCoin a part of their Reserves and I suspect more will join in the coming years. Much will depend on what the US policy makers (both State and Federal levels) and large Corporations would decide in the next few years. The year 2025 will see important developments for the industry coming from the US Government/Regulators.
Having said all this, it must be pointed out many prominent Academics, Economists, Financiers/Asset Managers (ie Warren Buffet, Christian La Guard, Ray Dalio, Paul Krugman, Jim Rogers etc) are still not in favor of or negative about Cryptocurrencies. The number of Naysayers though have gradually reduced in number over the last 10 years. The most prominent among the converts is Larry Fink (CEO/Chairman of BlackRock – the largest Asset Manager in the World with $11 Trillion under Management) who was initially opposed but now in favour of Digital Assets, Tokenization etc.
Some Statistics and Facts to illustrate the current global status/size, developments and benefits of the Technology/Industry/Markets
- Total Market Cap of Cryptos today (10 Dec 2024) is around $ 4 Trillion out of which $2 Trillion is BitCoin (Gold market cap is around $17 Trillion and Silver stands at around $1.4 Trillion.
- Daily total Turnover/Volume of trades of all Cryptos in all Centralized and Decentralized Exchanges ranges from $100 billion to $350 billion.
- In 2023, BitCoin processed $36.6 Trillion transactions (Visa and MasterCard together $24 Trillion) More interesting to find out the fees involved in both these Categories. BitCoin fees would be a fraction of Visa/Master Card transaction fees.
- This year Dubai legalized payments in Crypto for Real Estate transactions, allowed Bank accounts to directly deal/convert to Crypto, and licensed a Crypto Exchange (OKX). All Crypto transactions in Dubai are tax free. Dubai already has a Virtual Assets Regulator in place.
- Many jurisdictions exempt capital gains taxes (CGT) from Crypto transactions but in some countries they can go upto 40%. This obviously could change with time.
- As an interim step or development to facilitate greater use many Crypto Wallets are now linked to Visa or MasterCard (with over 100 mn Vender acceptance) so that the owner/holder of Crypto can freely use their Crypto funds via a Debit Card.
- El Salvadore, which heavily depends on remittances from Salvadorians working abroad, apparently pays annually $300mn to $400 mn to money transfer companies and Banks as commission and fees. Shifting to Cryptos as a method of fund transfers can save 90% of these costs which is beneficial to the individuals involved and the Country. Sri Lanka can do the same.
- Statistics show BitCoin is being adopted by People at a faster pace than the Internet itself. Currently there are 400 mn active Crypto Wallets (Accounts). This adoption is the most critical factor for the development/growth of the Industry and markets.
- Bills are being introduced in some US States (Pennsylvania, Florida etc) and Countries such as Brazil allowing the holding of BitCoin as a Strategic Reserve Asset (like Gold).
- The Company behind Ripple or XRP Token which specializes in facilitating global fund transfers (far cheaper, secure and speedier alternative to SWIFT) just became the number three Token in terms of Market Capitalization ($150 Billion) reflecting confidence in its business model/project. They already work closely with large global Banks and Financial Institutions.
- Bhutan with a $4 billion Economy holds $1 bn in BitCoin and El Salvadore holds $600 mn in BitCoin as a Reserve Asset. Many more Countries (including some developed countries) are expected to join in accepting/holding BitCoin as a Reserve Asset in the coming years.( As of now, both the US and the Chinese governments each hold approximately 200,000 BitCoins.)
- Over 60 Countries already have BitCoin ATMs installed at various public places where People can buy, sell or send/transfer BitCoins and other Tokens. Fees at ATM’s remain high though.
The challenge for all countries and regulators is to come up with measures to prevent, trace and interdict funds (accounts/wallets) involved in drugs, crime, corruption, money laundering, tax evasion, terrorist activities etc. from getting into the Crypto platforms in the first place by having proper KYC protocols etc. The problem is no different to the one faced and tackled by the Banking system. It is speculated some of the “dirty money” may already be in the system. The good news is the Blockchain enables all transactions to be traced and monitored and beneficiaries of all Wallets (Accounts) to be identified.
The economic possibilities available in the industry/markets in this arena are endless and the jobs and wealth creation that will come with it. It’s high time the Sri Lankan authorities/regulators take a serious look at this emerging digital economy/industry and its economic possibilities/opportunities for our youth initially at least within the Port City Colombo given that the Port City Colombo is already earmarked/gazetted as a dollarized zone.
For Sri Lankan Portfolio Managers, this new/global asset class though volatile and risky represent new possibilities/opportunities for diversification of risk across currencies or hedge against Rupee depreciation (after obtaining the necessary permission/approvals from the regulator etc.). For Bankers (and others involved in fund transfers and payments), it is worth taking note of the new developments taking place in terms of shifts in the current payments and fund transfer platforms/models or risk losing business. New technological shifts have created a Kodak (which went bankrupt because of not adopting the digital revolution in photography that made them obsolete) moment.
In Conclusion, like it or not Cryptos as a concept/idea are here to stay but will evolve over time. The number of people actively using the platforms to transfer funds etc and have more confidence in a Digital Asset as an investment vehicle than on a real asset are growing. Since my introduction to this sphere in 2020, I was surprised to find out how many youths (hundreds of thousands) from rural areas in Sri Lanka are already involved in the sector even without much regulatory clarity coming from the authorities (other than the Central Bank warning the Public on the volatility/riskiness of the Asset). The Central Bank/Treasury has prohibited Credit Cards issued in Sri Lanka from purchasing Crypto since around 2019. That has not stopped Sri Lankans (mostly tech savvy youth in their 20s and 30s) being active in the market. I believe/suspect many working in the middle east and elsewhere have their funds on these platforms and use them for transfers etc. As a former fund manager I can say, though it is a highly volatile and therefore represent a degree of risk, it can’t be ignored anymore and could be very useful as a tool of diversification (across currencies and asset classes etc.) for Portfolio Managers/Companies in Sri Lanka once regulatory clarity is in place.
Furthermore, since Sri Lanka receives over $6 Billion annually as remittances through the official and unofficial (Undiyal etc.) channels from those working abroad, millions of dollars can be saved (for the individuals and for the Country) in terms of fees/commission by encouraging remittances via officially sanctioned Crypto platforms and wallets (I believe/suspect this is already happening in a significant way regardless). After steady growth over many months, November 2024 has seen a drop (via the Banking channels) in remittances to Sri Lanka. Is this a sign of those who are working abroad switching to alternative channels (including Crypto) to send their hard earned dollars to Sri Lanka? Time will tell. If the sector is allowed to operate openly and regulated appropriately, it can be a new source of tax revenue to the Government. Finally, BitCoin may be a future strategic reserve asset that can be considered for inclusion at the country/macro level for Sri Lanka as well.
Chandu Epitawala
Colombo, December 2024
Chandu Epitawala holds a Bachelor of Science degree from Hawaii Pacific University, USA, and a Master of Business Administration from the University of Texas, Arlington. With extensive experience as an Analyst, Fund Manager, and former Director of Surveillance at the Securities and Exchange Commission of Sri Lanka, Chandu Epitawala has been leading a private Investment Management and Trading firm for the past decade.