“Cryptocurrencies only as good as their underlying economic performance” MTI


October, 2021

Developing countries should ask “Why?’’ before “How?”.

Whilst welcoming Sri Lanka’s decision to evaluate the feasibility of Cryptocurrencies, MTI Consulting has cautioned that developing countries should ask “Why?’’ before “How?”.

“Cryptocurrencies are essentially efficient transaction tools. The greater focus needs to be on the underlying economic value creation – via responsible production and consumption. Most cryptocurrencies are decentralized networks based on blockchain technology and are not issued by a centralized sovereign authority. Currently, the adoption motivation is based on speculative investment, less on enabling widespread financial inclusion. There is in lies the pitfall to guard against, whilst pursuing the benefits offered by Cryptocurrencies,” said Hilmy Cader, CEO of MTI Consulting.

MTI highlights the benefits of cryptocurrencies as high transaction speed and low transaction costs due to disintermediation. It’s secured by cryptography and blockchain technology, making it difficult to counterfeit. However, this can also provide a ‘safe heaven’ for illegal activities such as money laundering, tax evasion, and terrorism financing. It’s vulnerable to cyber threats and manipulations by  ‘Whales’, i.e., those that hold large amounts with the potential to manipulate currency valuation.

India takes an alternate approach to Cryptocurrencies

Resulting from their de-monetization drive, India was able to digitally transform its banking infrastructure.  India has set up the National Payments Corporation of India (NPCI), a consortium of state-backed and private banks, which created a complex network called the Unified Payments Interface (UPI). This permits peer-to-peer transactions in real-time between any bank account within the country. India also launched ‘RuPay’ – a financial transaction system designed to reduce reliance on the likes of Visa and MasterCard. All of these moves have improved financial inclusion, transaction speed, and lowering transaction costs. As a result, the Indian Government is not in hurry to adopt cryptocurrencies at a national level, despite growing adoption among the retail investors.

El Salvador’s recent attempt to recognize bitcoin as a legal tender provides developing countries an interesting case study, but it’s too small a sample and too short a time to be used as a prescriptive model. Despite the value tumbling 11% after adoption, after a month, 46% of the population has a bitcoin wallet while only 29% has traditional bank accounts. Many South American countries like Panama, Paraguay, Argentina, and Brazil are evaluating the feasibility, but unclear if it will be a sovereign offering or creating an enabling environment for established cryptocurrencies such as Bitcoin. Larger economies like China, Russia, and Turkey are experimenting with Central Bank Digital Currencies (CBDC) – as they offer better stability than other cryptocurrencies and better flexibility than fiat currencies.  Interestingly, what is driving Iran’s cryptocurrency adoption is sanctions by the USA, hence limited access to International Financial Markets.

The Billion Dollar Question!

  • As humanity moved from a micro-regional based barter system to national currency system, it enabled Central Governments to collect taxes from its people and in turn spend these for greater social good. From education to healthcare, from roads to energy, from checking abnormal profit taking to providing social security to who are disadvantaged and vulnerable.
  • Unlike during the barter era, today we are all reliant on these public services. These are largely enabled by sovereign central governments, whilst there have been PPP models as well.
  • Imagine if a significant proposition of our transactions are done via private blockchains,  from whom and how will the central government track and collect taxes and other forms of revenue based on consumption? 
  • There may well be an AI-based Governance Solution to this, but we must be clear if Cryptocurrencies does improve financial inclusion and not be used a manipulative-speculative tool by a few – that comes at the expense of the wider, poorer population.
  • Shouldn’t Developing Nations first focus on getting their basic right, like agriculture, education, healthcare, transportation, access to justice etc. – before being tempted by what’s in ‘fashion’ and aping them?

“Crypto-Currencies should not end up as Klepto-Currencies!” – MTI

The Early Movers and Shakers in the Crypto World

  • Starbucks, Yum Brands (Owner of KFC, Pizza Hut, etc.), Restaurant Brands International (Owner of Burger King, Popeyes, etc.), Coca Cola, Pay Pal, E-Bay, Microsoft, Tesla – have started accepting Bitcoin asan official payment option
  • The ‘Big Boys’ in Banking have started investing, in total approx. US$ 2.5 billion.  The top investors are: Standard Chartered (US$ 360 million), BNY Mellon (US$ 321 million), Citi Bank (US$ 279 million), UBS (US$ 266 million), BNP Paribas (US$ 236 million), Morgan Stanley (US$ 234 million), JP Morgan Chase (US$ 206 million), Goldman Sachs (US$ 204 million), MUFG (US$ 185 million), ING (US$ 170 million)
  • Current crypto market capitalization is US$ 2.3 trillion (9th Oct) – 17X growth in 12 months. 
  • Bitcoin contributes to 43% of the market cap, while in 2013 Bitcoin accounted for 94%

About MTI

MTI is an internationally-networked boutique management consultancy – having carried out 670 projects across 49 countries – in the last 24 years. MTI’s practices cover Strategy, Operations, Corporate Finance and Digital & Analytics.  MTI has been at the forefront of thought leadership on strategy, having conceptualized breakthrough models and paradigms that challenges conventional thinking and practices. These have been internationally published and have been presented at over 150 conferences around the world.

Photos

Hilmy Cader – CEO, MTI Consulting

Saima Mazhar – MTI Country Director – Bangladesh

Jananga Piyadasa – MTI Strategy Consultant – Sri Lanka

Darshana Buragohain – MTI Country Lead India and Regional Director – East Africa

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