DECENTRALISED: Bitcoin uses peer-to-peer technology to operate with no central authority or banks. Picture: AFP

In the world of digital currencies, bitcoin, not cash, is king. Experts say this could either be the future of money or a speculative bubble that looks a lot like the days of dotcom.

The Brexit vote helped bitcoin prove that the cryptocurrency is now gaining credibility as digital gold – a safe haven asset when markets are volatile. After the UK voted to leave the European Union, the British pound slipped 8 percent. Meanwhile, the price of a bitcoin surged nearly 9 percent.

According to Coindesk, a news site specialising in bitcoin and digital currencies, the move shows that bitcoin is detached from a centralised government allowing for people to preserve their wealth in a secure way.

“With so much happening around the stability of emerging market currencies, bitcoin has proved to be a hedge against currency volatility. A lot of people are buying it because they think it’s a safe place,” says Simon Dingle, a tech expert and bitcoin investor.

Behind the bitcoin uprising is the belief that the digital currency will disrupt the global financial system. It will give consumers a faster and cheaper way to send money around the world without the oversight of a central bank.

Bitcoin believers are placing their trust in the math that is protecting and directing the bitcoin system. But what exactly is bitcoin?

It’s a digital currency created by computers and stored online. You can’t hold it in your hand. Privately held computers called miners produce bitcoins every 10 minutes by solving complex math problems.

Once mined, bitcoins can be sent instantly anywhere in the world from one digital wallet to another. Transactions are nearly anonymous as the wallets can only be identified by a string of digits and not a name.

To ensure that there is honesty among the players, each transaction is assigned a number, posted and then verified on a public open source ledger called a blockchain.

Supply is fixed at a maximum of 21 million bitcoins, which will only be created by 2140. It’s the miners, not the central bank, that manage the supply.

The idea is that the digital currency offers a decentralised way for one to make payments without commercial banks standing in the middle and processing the transaction.

Dingle says bitcoin is unfortunately misunderstood by many as a virtual currency, along with loyalty points from reward schemes and other digital stores of value.

“Bitcoin does not require centralised stores and its transactions are immutable, unlike virtual currencies, which rely on centralised storage and trust in third parties,” he says.

But who decides what a bitcoin is worth? Buyers and sellers name the price. For many, the technology behind bitcoin may be hard to grasp but some high-profile investors endorse it.

Graham Tonkin, head of business development at Swiss-based fintech company Monetas, sees bitcoin as a once-in-a-generation opportunity.

Fintech companies are already building what is termed the “internet of value”, by using a combination of technologies from mobile devices to bitcoin and the blockchain.

Tonkin believes financial institutions have the biggest opportunity to expand low-cost financial services that are more functional yet far cheaper than before.

“This enables banks to expand financial coverage to a population without any more costly investments in brick and mortar,” he says.

Those against bitcoin are worried that the digital currency is a bubble. According to Investopedia, an economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble or a financial bubble) is a situation where asset values within a particular industry, commodity, or asset class, are traded in high volumes at prices that are considerably inconsistent with their intrinsic values.

Tonkin says bitcoin can act as an asset class for people to access and invest in, but there are many risks and uncertain regulations around it. However, he believes cryptofinance will be an impactful and empowering tool that will enable people to better invest, transact and store their wealth.

The electronic nature of bitcoin ensures that transactions are fast and cheap while its decentralisation makes it free from any manipulation. For many enthusiasts, bitcoin is a much better alternative to traditional banking.

With this said, central banks are considering the adage: “If you can’t beat them, join them.”

In the developed world, central banks such as the Bank of England and the Bank of Canada, among others, are looking at the potential of this technology.

“Additionally, the World Economic Forum recently published stats that 90 central banks globally have begun discussing the topic because of the tremendous benefits it would not only bring to the central bank, but also to an entire economy,” says Tonkin.

The governor of the Reserve Bank of South Africa, Lesetja Kganyago, recently announced that the bank was open to exploring the new technology.

Experts say it’s a big U-turn considering that nearly two years ago, the bank issued a statement that fell short of banning cryptocurrencies.

“It’s encouraging that the Reserve Bank recognises the opportunities that blockchain technologies have to transform finances. I’d challenge the regulator to amend its position on cryptocurrencies to acknowledge them as money. This has already happened in Japan,” says Dingle.

In a note that covers applications, regulations and issues around blockchain, authors Ashleigh Hale and Ross Tasker, who are attorneys at Bowman Gilfillan Africa, say regulators, policy-makers, financial institutions and companies across sectors are being increasingly encouraged to keep up with the trends and developments around the blockchain technology.

Bitcoin has proved a hedge against currency volatility. A lot of people are buying it because they think it’s a safe place

“We expect that there will be an assessment of the existing regulatory framework in various African jurisdictions to ensure that blockchain is properly regulated in the interests of ensuring the fair treatment of parties who use the technology,” they say.

The financial services industry in Africa is in the midst of unprecedented transformation driven by mobile technology. The race is on for financial firms to find innovative ways to get customers on board, as a significant portion of the population remains untapped.

Remittance flows into Africa offer an attractive opportunity and over the past year, some bitcoin startups have tried to enter the space. The opportunity lies in using bitcoin to avoid the high costs of international money transfers. Mobile money has paved the way for Africa’s unbanked to step into the formal economy.

“Regulators should be focused on lowering barriers to financial services, and ensure that local regulation encourages participation in the digital economy without requiring unnecessary steps that may discourage the poorest from accessing the benefits of financial inclusion,” says Tonkin.

The finance ministry of India estimates that physical cash costs in emerging markets are between 5 to 7 percent of a country’s gross domestic product.

Tonkin says governments will be among the biggest beneficiaries of cryptofinance. He says reducing this burden enables countries to free up resources to be better spent elsewhere (education, health care), and reducing transaction costs allows business to be conducted more efficiently.

“With the digitisation of a national currency, the burden and cost of cash will be reduced in an economy, and accessing financial services will be exclusively done from a mobile device.

“With the internet, borders will become irrelevant and the word ‘remittance’ will become obsolete,” he concludes.