Currencies – be it the Ghana cedi, euro, British pound or US dollar – are primarily a medium of exchange for goods and services. Currencies have evolved as a buildup on the prior barter system, which was merely an exchange of goods for other goods with no means of assessing proportionality in the exchange – thus, the development of money as the tool of exchange provides an efficient means of attaching value to the goods and services which are being exchanged.
From a historical perspective, currency was used as a receipt representing an individual’s right to claim grain in ancient Egypt. Representing a store-value considered to be a more stable means of transaction by individuals, it became an acceptable tool for trade; and subsequently governments of nations adopted and issued the same as their national medium of transaction.
Traditional currency, distinguished from other forms of currencies, is a form of money that is centralised, backed and managed by a recognised government entity. Apart from its physical form, other acceptable mediums have been developed to carry currency – such as debit and credit cards, etc. All these forms are issued and accepted on the back of centralised regulatory regimes.
Nonetheless, the recent phenomenon of digital currencies (cryptocurrencies) has brought into sharp contrast the role of central banks in the regulation and management of currencies today and for the future across the world. The focus of this article is to evaluate the legality, viability and prospects of digital currencies as real currencies of the near-future, and how the regulatory challenges can be dealt with.
Traditional currencies – the paper formats
The idea and use of currencies are widely acknowledged, as all economic activities are facilitated by them. The advantages associated with the use of traditional currencies have been attributed majorly to the centralised mechanism underlying their issuance. This has provided some stability for their use either in physical or digital form. Further, it is easy to recover lost funds due to user-protection laws that are passed by governments. In Ghana, the only issuing authority of currencies is the Bank of Ghana – which derives its mandate from Article 183 of the 1992 Constitution.
Commercial banks licenced by the Bank of Ghana operate as retail facilitators for the saving, withdrawal and performance of other transactions involving the use of currencies.
The digital currency revolution
Technological and digital revolutions are transforming and impacting the world, and currencies and finance are no exceptions to these revolutions. As Moshit Joshi and Dixit Joshi rightly observed in their article, ‘If the last century has taught us anything, it is not to underestimate the transformative potential of technological innovation’. For some years now, there have been ravings about digital currencies – especially crypto-currencies which are privately designed, owned and managed, with many individuals trading in the same. This has generated a lot of concern from most governments as a result of the impact it is likely to make on nations’ economies as it keeps progressing and gaining more public and global attention.
Digital currency is any currency that is available exclusively in an electronic form. It makes use of an electronic ledger system that creates a network of computing nodes to process transactions: i.e., using cryptographs to anonymise user-identity and transaction details. Digital currencies have utility similar to that of physical currencies – they can be used to purchase goods and pay for services as well. The classic features of digital currencies have been identified as their existence only in a digital form; they can store and transfer value; they are decentralised with no regulatory authority.
The types of digital currencies include the widely known cryptocurrencies, stable coins, and the central bank digital currencies (CBDC). The increasing preference for digital currencies is a result of their faster transfer and transacting times, since it requires no intermediaries and the currencies exist on the same network; cheaper transaction cost; limitless access. Research has shown that digital currencies have a tendency of facilitating the implementation of monetary and fiscal policies, facilitating cross-border payments, and also serving as an efficient means of governmental payments.
A point for consideration now is whether digital currencies, especially crypto-currencies such as Bitcoin, are viable currencies or if they merely store value.
The basic functions of a currency are to store value, serve as a medium of exchange, and operate as a unit of account. And the viability of crypto-currencies must be determined against the backdrop of a currency’s basic functions. To a considered extent, cryptocurrencies such as Bitcoin operate as a store of value – but their volatility sets a limit to how much a store of value it is. Thus, it is unable to maintain its relative price over a period of time as a result of the instability in its pricing.
For a currency to be a unit of account, it must be able to measure the real economic value of an item; however, items priced in Bitcoin tend to have their prices fluctuating along with the price movements of Bitcoin. As such, it does not represent the real value of an item. On the basis that crypto-currency is yet to establish itself as a plausible store of value, it cannot be functional as a medium of exchange. For instance, most people who hold Bitcoin or accept it as a cash balance only do so because they expect it to appreciate over time so they can sell – and this act will have a bearing on its liquidity because of the reduction in demand that is caused in the process.
Bitcoin’s property as a medium of exchange heavily relies on scalability, liquidity and adoption. That is to say the number of transactions performed on a block-chain per second is relatively low compared with transactions performed on other digitised forms of traditional currency; such as VISA, which is an international payment system.
Liquidity in relation to crypto-markets has been explained to mean the ability to buy or sell ‘cryptos’ at a fair market price. This requires easy convertibility to other asset classes and a sufficient number of buyers and sellers in the market. However, the crypto-market is still evolving; hence, there is a limited number of investors currently trading on the same – thus relatively low market demand.
Adoption and regulation
On the issue of adoption, crypto-currencies are now gaining public knowledge; therefore, there is a measured number of people currently trading in the same. A study shows that at the end of 2020 Bitcoin traders were pegged at 18%, indicating a substantial increase from the previous year, 2019. Another point to be made lies in the fact that money is used to purchase crypto-currencies, and this defeats the whole purpose of currency production. Unlike traditional currencies which are issued by a central authority, individuals who want to trade in crypto-currencies expend money to purchase the same.
In effect, although crypto-currencies somewhat fit the description and functions of a currency, they are not so given the intended purpose of currencies – due to the various limitations attributed to them. They are more of assets like precious metals such as gold than they are currencies. Most nations do not have laws regulating the use and trade in digital currencies, but steps are being taken to incorporate the same into their laws.
In the Ghanaian context and as indicated earlier, Article 183 of our Constitution mandates the central bank as the only issuing authority of currencies in the country: meaning that only the Bank of Ghana can be the issuer of a currency; and the Bank in the execution of its mandate has adopted for itself applicable legislations and rules, especially in the finance sector. The same cannot be said for digital currencies, which are unregulated by any authority or legislation because they are not recognized as a currency in the country.
Now, it is time to decide whether digital currencies which are privately owned and managed should be allowed to operate in the country in the absence of governmental control. The mandate of the Bank of Ghana – to promote and maintain the stability of the currency of Ghana and direct and regulate the currency system in the interest of the economic progress of Ghana – can be leveraged to provide a regulatory framework and deal with the evolution of digital currencies which seem to be drifting away from state monopoly and control of currencies.
The existing digital currencies are not issued by our central bank, hence there is no regulatory framework to monitor their use or trade. The crypto-currency market in Ghana has started on a slow pace; but with the recent sensitisation by ‘brand ambassadors’ pitching its usefulness to the citizens, it is only a matter of time befor the citizenry become acquainted with its use and trade.
It is estimated that over 900,000 people, representing 3.01% of Ghana’s total population, currently own crypto-currency. Since the trade in crypto-currencies is not backed by any law in force in the country, the central bank and Securities and Exchange Commission have variously issued notices to the public warning of the unregulated nature of crypto-currencies. This became necessary because of the many dangers the public was exposed to: such as issues of cyberattacks; the non-refundable nature of hacked accounts; and the volatile nature of these currencies.
Long after the central bank issued a public notice sometime in 2018, recognising the emerging developments in block-chain with respect to finance as well as the many dangers it poses to the nation and citizens, not enough has been done to provide regulation for digital currencies in Ghana.
On the other hand, most countries have adopted Central Bank Digital Currencies (CBDCs); regulating digital currencies as a measure to control the use and trade of digital currencies. For instance, the US launched a research into the creation of its CBDC (e-dollar) through its Project Hamilton. The Bahamas was the first country to launch a global central bank digital currency (CBDC) called the ‘Sand dollar’ in May 2020, but Sweden’s eKrona is the first digital currency to hit the market with the backing of a major economy. China has also launched a pilot project for its digital Yuan to assess use of the digital currency in its economy, and currently it is spreading its use by adding on more cities in its project. Countries like England, Canada, Singapore, Thailand and Japan are considering plans to launch a digital version of their nations’ fiat currency.
In Africa, the central bank of Nigeria launched its eNaira digital currency in October 2021 following a ban it placed on the use and trade of cryptocurrencies in the country sometime in February 2021. Studies show that about 80% of central banks around the world are also conducting pilot tests.
Therefore, the central bank must hasten its pace of introduction for the e-cedi it announced sometime in 2021 as being at an advanced development stage. With the operation of a CBDC for a country like Nigeria, the rollout of its e-Naira can only be accessed by individuals with existing bank accounts. Generally, it will require the use of a smartphone and installation of an application that will help its users to purchase or move monies from their bank accounts onto the same. Like cryptos, it will facilitate easy payments and quick financial transactions.
Challenges ahead and the reality
Some challenges which have been identified with the adoption of CBDCs include: that it will require the use of high energy due to its high power consumption rate; it will still be prone to cyberattacks; it will co-exist with other digital currencies – and hence limit its adoption as users will still be open to other choices; individuals will transfer their monies held in their bank accounts to the CBDC account, and this will affect the traditional banking system as governments will still print paper-currencies and this can lead to a banking disaster in the case of an economic downturn; there will be no guarantee for the privacy of users information; the use of the CBDC will result in an unstable currency due to the change in location of accounts from regular bank accounts to the block-chain-held accounts.
In considering the possibility of future use of digital currencies as money, nations are slow to fully adopt the usage of crypto-currencies because this would reduce the central bank’s role and also weaken state authority over money supply – it would break the state’s monopoly in the issuance of currencies.
Nonetheless, digital values, crypto-currencies, stable coins and NFT are here to stay, despite the ups and downs of the crypto market and risks associated with the same. The future of digital currencies and other digital assets which utilise them is in continuous change, but the steady expansion of technology is favourable to the rapid increase in electronic forms of money and payment. The adoption by countries of CBDCs is a step in the right direction, as more research is being conducted into how best to regulate, especially, decentralised digital currencies like crypto-currency.
The possibility of digital currencies becoming the currency of the future may seem frail now – but progressively, if conclusive solutions are proffered on its regulation as well as the problems associated with its use and trade on a large scale, there is a high possibility for such consideration by governments. In this light, there is a possibility that digital currencies will become a major means of payment in our financial space – taking into account the technological progressions we have made in the last century.
ABOUT THE AUTHOR
The writer is a Part II student of the Ghana School of Law and interns at SUSTINERI ATTORNEYS PRUC. Cecilia has an interest in Commercial Transactions, Financial Technology (Fintech), Start-ups and SMEs, Company Law and Contracts as well as Alternative Dispute Resolution. She is reachable at [email protected]