Beware of crypto-money, expert warns

‘Pump-and-dump Ponzi scheme’

27 February 2018 | Bankwese
Staff Reporter - Because of the high volatility of crypto-currencies they are bound to crush, an international expert invited by the Bank of Namibia (BoN) said at public lecture recently.

“They are a straight-up ‘pump-and-dump’ Ponzi scheme,” according to Dr Joachim Bald, a consultant based at the Frankfurt School of Finance and Management.

The central bank hosted the public lecture to unpack opportunities and risks presented by the “ongoing craze around crypto-currencies as well as the block-chain technology which underpins virtual currencies”, the BoN said in a statement. The event, attended by 57 invited guests including finance minister Calle Schlettwein, bank’s stakeholders and policymakers.

The deputy governor of the BoN, Ebson Uanguta, said the new wave of technological innovations – called fintech – has accelerated change in the financial sector: “We need to be aware and fully understand fintechs so as to take certain appropriate and informed decisions.”

‘Not safe’

In his presentation Bald clarified the wide-held notion that virtual currencies are a form of money. The essential functions of money – that of being a medium of exchange, a store of value and a unit of account – may not be present in cryptocurrencies, he said.

Although cryptocurrency mining is a necessary tool to control money creation and keeps the currency in scarce supply thus boosting demand, the emission gains (seigniorage) are squandered through time consuming and energy intensive computations, he said.

Bald punched holes in beliefs that block-chain is a safe medium, stating that the innovation has been hacked before and therefore it is potentially vulnerable: “The trading venues and exchanges are shockingly amateurish accompanied by crashes and huge spreads everywhere,” he said.

Bald concluded the seminar with his personal advice to stakeholders to think twice about the sustainability of the cryptocurrencies phenomenon.

However, he emphasised that the underlying technology, block-chain, has great innovation potential for the real sector and encouraged research in that area.

Position paper

The BoN published a position paper on distributed ledger technologies (block-chain) and virtual currencies last year.

The paper indicates that the central bank does not consider virtual currencies to be legal tender and a payment instrument in Namibia, and cautioned users to be aware of the risks involved.

Additionally, trading in virtual currencies is not currently regulated in Namibia and thus individuals that engage in such trading would be doing so at their own risk. These include credit, liquidity, operational and legal risks.

Further, the paper cautioned users of virtual currencies to be aware of risks related to money laundering and the financing of terrorism when engaging in the trading of virtual currencies.

The paper is available at: https://www.bon.com.na/Bank/Payments-and-Settlements/Publications/Position-Papers.aspx

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