tag:theconversation.com,2011:/fr/topics/currencies-9635/articlesCurrencies – The Conversation2023-07-24T03:01:23Ztag:theconversation.com,2011:article/2090252023-07-24T03:01:23Z2023-07-24T03:01:23ZThe future of money is digital – but NZ needs a careful framework to prevent the pitfalls of cryptocurrency<figure><img src="https://images.theconversation.com/files/538682/original/file-20230721-23-hklbnt.jpg?ixlib=rb-1.1.0&rect=15%2C15%2C3537%2C2349&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>New Zealand’s central bank is preparing for a future that includes the mainstream use of cryptocurrency. </p>
<p>At the end of last year, the Reserve Bank of New Zealand (RBNZ) published an issues paper, <a href="https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/consultations/future-of-money/fom-private-innovation.pdf">Private Innovation: Te Auahatanga</a>, on digital currencies. The paper sparked a wide-ranging discussion on the development of the <a href="https://www.ird.govt.nz/cryptoassets/what-cryptoassets-are">cryptoasset</a> market and how to respond to the challenges it presents. </p>
<p>The RBNZ received 50 submissions on its paper, with consultation ending in April. A <a href="https://www.rbnz.govt.nz/hub/news/2023/06/rbnz-ramps-up-monitoring-of-stablecoins-and-cryptoassets">summary of the submissions</a> was recently published. </p>
<p>We took a look at the key concerns held by those who participated in the consultation and what these concerns could mean for the uptake of cryptocurrencies in New Zealand.</p>
<h2>The future of money in NZ</h2>
<p>The RBNZ has mapped out a near future where businesses could accept digital currencies for payments, reducing currency conversion issues for international customers. Cryptocurrencies could also be used to streamline payments to suppliers or employees, particularly those based overseas. </p>
<p>And by leveraging the <a href="https://www.ibm.com/blog/how-transparency-through-blockchain-helps-the-cybersecurity-community/">transparency of blockchain</a>, businesses could improve trust by efficiently tracking transactions and supply chains. </p>
<p>But businesses will need to improve their security measures to protect against online threats as well as manage the potential market volatility associated with cryptocurrencies.</p>
<p>While outlining a path for cryptocurrencies, the RBNZ noted the challenges of regulating organisations that are entirely digital and decentralised. The bank also raised the question of how New Zealand’s existing rules on money laundering and the financing of terrorism would apply to cryptocurrencies.</p>
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<h2>The key hurdles for cryptocurrency</h2>
<p>Five key themes emerged out of the submissions received by the RBNZ. These core themes highlighted the concerns held by regulators, businesses and everyday New Zealanders.</p>
<ul>
<li><strong>A clear but flexible regulatory framework</strong> </li>
</ul>
<p><a href="https://www2.deloitte.com/us/en/insights/industry/public-sector/future-of-regulation/regulating-emerging-technology.html">Research</a> on other markets has shown that regulations cannot be static. The rules need to evolve with the technology. That said, regulations need to initially be quite prescriptive. </p>
<p>The New Zealand Financial Markets Authority (NZFMA) could establish a regulatory “sandbox” for cryptoassets, allowing businesses to test their crypto-related technologies in a controlled environment under close supervision. This would encourage innovation as well as help shape effective regulations, balancing the growth of the sector with risk management and consumer protection. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/welsh-mining-towns-had-alternative-currencies-200-years-ago-heres-what-the-crypto-world-could-learn-from-them-205511">Welsh mining towns had alternative currencies 200 years ago – here's what the crypto world could learn from them</a>
</strong>
</em>
</p>
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<p>The NZFMA could also demand that New Zealand residents transact their cryptoassets through exchanges that are based in New Zealand and thus under the country’s regulations in order to develop trust. These can be relaxed once the market matures. </p>
<ul>
<li><strong>Information and accessibility</strong> </li>
</ul>
<p>The submissions also highlighted the need for clear, accurate and accessible information on cryptocurrencies. Some respondents expressed concern about the general lack of knowledge about cryptocurrencies and how they work.</p>
<p>The lesson from the collapse of the <a href="https://www.techtarget.com/whatis/feature/FTX-scam-explained-Everything-you-need-to-know">digital trading platform FTX</a> is that New Zealand investors have to be protected, or at least made aware of, the risks of transactions through exchanges in more lenient jurisdictions. </p>
<ul>
<li><strong>Risks and opportunities</strong></li>
</ul>
<p>Risk and opportunities were also points of discussion. Respondents to the RBNZ paper acknowledged the risks associated with cryptocurrencies, such as financial crime and the risk to the wider financial system. </p>
<p>At the same time, they saw a significant opportunity to enhance competition and further innovation in New Zealand.</p>
<ul>
<li><strong>A monitoring approach</strong></li>
</ul>
<p>Respondents supported the RBNZ’s proposed monitoring approach which underscored a “same-risk, same-regulation” principle. This holds that if a cryptoasset presents similar risks to an existing financial product, it should be regulated in a similar manner. </p>
<p>This implies a flexible regulatory stance that evolves based on the risk profile of the asset, thereby creating a fair and balanced regulatory environment for all financial instruments, traditional or digital. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/scams-and-cryptocurrency-can-go-hand-in-hand-heres-how-they-work-and-what-to-watch-out-for-182033">Scams and cryptocurrency can go hand in hand – here's how they work and what to watch out for</a>
</strong>
</em>
</p>
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<p>The RBNZ has proposed working closely with international regulators and private sector information providers – companies or organisations that provide data, analysis and insights about the crypto market. This could include blockchain analytics firms, crypto exchange platforms, research institutions and financial technology companies.</p>
<p>Our own <a href="https://link.springer.com/book/10.1007/978-3-030-78873-5">earlier research</a> supports the belief that external regulations are not enough. It is essential that financial intermediaries dealing in cryptoassets develop a corporate culture of “performance with integrity”, one in which each member of the organisation is centred on the best interest of the client. </p>
<p>We need to monitor cryptoasset businesses and ensure they have robust corporate governance. Another lesson from the FTX failure is that exchanges themselves can not be custodians of customers’ assets – this must be done by regulated third party institutions.</p>
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<ul>
<li><strong>Stablecoins</strong></li>
</ul>
<p>Stablecoins, a type of cryptocurrency with value pegged to fiat currencies (a government-issued currency that is not backed by a commodity such as gold) or gold, drew interest during consultations. Participants saw their stability as beneficial. Stablecoins were seen as combining the benefits of cryptocurrencies with the stability of traditional currencies. </p>
<p>However, it must be noted that stablecoins differ in risk exposure according to the collateral they use; the <a href="https://www.sciencedirect.com/science/article/abs/pii/S1544612322005359">crash of the Terra stablecoin</a> in May 2022 versus the <a href="https://www.cnbc.com/2023/02/09/stablecoin-giant-tether-records-surprise-700-million-profit.html">resilience of Tether</a> is testament to this. Regulations must be very clear on the reserve assets demanded, and market supervisors must monitor these reserves very closely. </p>
<h2>The future is digital</h2>
<p>Although promising, the future of cryptocurrency in New Zealand is not without its challenges. The RBNZ will need to keep a close eye on things. The central bank will need to walk a fine line between encouraging new ideas and managing the risks. </p>
<p>For the moment, the RBNZ is taking a cautious approach. While there won’t be any immediate policy changes, the RBNZ will be enhancing its monitoring of the financial ecosystem, tracking global regulatory trends and collaborating with financial organisations to address data gaps.</p>
<p>The goal should be to make sure people understand cryptocurrencies, manage the risks and promote innovation. As one respondent put it: </p>
<blockquote>
<p>The future is digital. Let’s embrace it, understand it, and make it work for us.</p>
</blockquote><img src="https://counter.theconversation.com/content/209025/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New Zealand’s central bank is taking a long, hard look at cryptocurrencies and the role they will play in future business. Here’s what businesses had to say about our digital future.Abhishek Mukherjee, Lecturer in Accounting and Finance., University of WaikatoParesha Sinha, Associate Professor, University of WaikatoPaul David Richard Griffiths, Professor of Finance; (Banking, Fintech, Corporate Governance, Intangible Assets), EM NormandieLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2099052023-07-17T15:37:09Z2023-07-17T15:37:09ZWhy the pound has shot up while UK economy is struggling – expert Q&A<figure><img src="https://images.theconversation.com/files/537789/original/file-20230717-27-qo031m.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The pound is up about 30% against the US dollar since autumn 2022. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/pound-symbol-cloud-111564317">Stock_Shot/Shutterstock</a></span></figcaption></figure><p><em>When Liz Truss and Kwasi Kwarteng’s <a href="https://theconversation.com/mini-budget-2022-experts-react-to-the-new-uk-governments-spending-and-tax-cut-plans-191274">tax-cutting mini-budget</a> triggered a UK debt crisis in autumn 2022, the pound plummeted to almost parity with the US dollar. In 2023 the UK has endured <a href="https://www.reuters.com/markets/europe/uk-economic-growth-unrevised-01-first-quarter-2023-2023-06-30/">weak growth</a>, <a href="https://tradingeconomics.com/united-kingdom/productivity">falling productivity</a> and <a href="https://www.theguardian.com/business/2023/jun/20/how-uk-inflation-compares-with-other-major-economies">high inflation</a>, yet the pound <a href="https://www.cnbc.com/2023/04/06/sterling-is-the-best-performing-g10-currency-this-year.html#:%7E:text=The%20City%20of%20London%20is,as%20well%20as%20Roman%20ruins.&text=LONDON%20%E2%80%94%20The%20British%20pound%20is,continue%20over%20the%20medium%20term.">has been</a> the strongest performing currency among the G10 leading economies. It is currently trading at almost US$1.31, its highest level since April 2022.</em> </p>
<p><em>To help understand what’s going on and where the pound goes from here, we spoke to Ganesh Vishwanath-Natraj, assistant professor of finance at the University of Warwick.</em> </p>
<hr>
<h2><a href="https://www.bloomberg.com/news/articles/2022-09-26/probability-of-pound-sliding-to-parity-this-year-jumps-to-60">Many thought</a> last autumn that the pound would keep falling to dollar parity and below. What changed?</h2>
<p>The Bank of England’s <a href="https://tradingeconomics.com/united-kingdom/interest-rate">interest rate tightening</a> is probably the key factor. Though also the government’s fiscal policy has been more restrained. </p>
<p><strong>Pound v US dollar 2021-23</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/537796/original/file-20230717-200541-xfxfbf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart showing the pound's performance against the US dollar 2021-23" src="https://images.theconversation.com/files/537796/original/file-20230717-200541-xfxfbf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/537796/original/file-20230717-200541-xfxfbf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=345&fit=crop&dpr=1 600w, https://images.theconversation.com/files/537796/original/file-20230717-200541-xfxfbf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=345&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/537796/original/file-20230717-200541-xfxfbf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=345&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/537796/original/file-20230717-200541-xfxfbf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=434&fit=crop&dpr=1 754w, https://images.theconversation.com/files/537796/original/file-20230717-200541-xfxfbf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=434&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/537796/original/file-20230717-200541-xfxfbf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=434&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">GBPUSD chart.</span>
<span class="attribution"><span class="source">Trading View</span></span>
</figcaption>
</figure>
<h2>But interest rates have been tightened in many countries. Why would it have made such a difference in the UK?</h2>
<p>If you compare them to the US, for example, the federal funding rate has risen from basically 3% to 5% since last October. The equivalent UK rate has gone up from just over 2% to 5%. Not only has the UK tightened more, the <a href="https://www.ft.com/content/4391a7af-5c5e-4fda-a494-30d4aa2dbbf1">markets expect</a> the Bank of England to keep tightening. </p>
<p>One reason for the stronger pound is that the US dollar has weakened over the same period. This may account for 50% of the change in the pound. Yet the pound has also gained against other currencies like the euro (rising from about €1.08 to €1.17 over the same period). This suggests that the pound’s appreciation is more likely due to UK policies than foreign factors.</p>
<h2>Why has the US dollar been losing value?</h2>
<p>The dollar is often seen as a measure of risk appetite – in other words, when the dollar is strong, there’s more pessimism in the global economy. The <a href="https://finance.yahoo.com/quote/%5EVIX/">VIX index</a> is evidence for this: it is a measure of how much fear is in the market. Since October, it has fallen from about 32 to 14. </p>
<p><strong>The US dollar over time</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/537794/original/file-20230717-184356-hng7u5.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="The DXY chart" src="https://images.theconversation.com/files/537794/original/file-20230717-184356-hng7u5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/537794/original/file-20230717-184356-hng7u5.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=349&fit=crop&dpr=1 600w, https://images.theconversation.com/files/537794/original/file-20230717-184356-hng7u5.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=349&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/537794/original/file-20230717-184356-hng7u5.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=349&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/537794/original/file-20230717-184356-hng7u5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=438&fit=crop&dpr=1 754w, https://images.theconversation.com/files/537794/original/file-20230717-184356-hng7u5.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=438&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/537794/original/file-20230717-184356-hng7u5.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=438&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This shows the DXY, which is the dollar against a basket of international currencies.</span>
<span class="attribution"><span class="source">Trading View</span></span>
</figcaption>
</figure>
<p>The whole <a href="https://www.livemint.com/market/dedollarisation-the-eroding-dominance-of-the-us-dollar-11689403313340.html">de-dollarisation narrative</a> may also be having an effect. This is the idea that the dollar’s status as the world reserve currency is eroding because countries like China, Russia and Saudi Arabia have been turning away from the US currency. This is probably more of a long-term issue, but it may still be encouraging investors to short the dollar (bet that it will fall).</p>
<p>One other thing to note is that the falling dollar goes against inflation expectations. US inflation has been falling faster than in other countries, which all things being equal should cause the dollar to rise. </p>
<h2>UK ten-year gilt yields are now higher than last autumn. Doesn’t that suggest sentiment about the UK has got worse?</h2>
<p>The spike in gilt yields in autumn 2022 reflected investor panic after the mini-budget [gilts are bonds issued by the UK government to borrow money – the yields are the interest paid on the bonds; the higher the yields the lower the demand for the debt]. Yields fell back down to about 3% after the change of fiscal policy once Rishi Sunak became prime minister, which was probably the “correct” level for where interest rates were at the time. The rise in gilt yields since then reflects the rises in interest rates. </p>
<p><strong>UK 10-year gilt yields</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/537797/original/file-20230717-21441-joaef5.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart of UK gilt yields over time" src="https://images.theconversation.com/files/537797/original/file-20230717-21441-joaef5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/537797/original/file-20230717-21441-joaef5.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=334&fit=crop&dpr=1 600w, https://images.theconversation.com/files/537797/original/file-20230717-21441-joaef5.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=334&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/537797/original/file-20230717-21441-joaef5.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=334&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/537797/original/file-20230717-21441-joaef5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=420&fit=crop&dpr=1 754w, https://images.theconversation.com/files/537797/original/file-20230717-21441-joaef5.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=420&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/537797/original/file-20230717-21441-joaef5.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=420&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Trading View</span></span>
</figcaption>
</figure>
<h2>Is it unusual to see a currency strengthening so much when the economy is weak?</h2>
<p>High inflation and <a href="https://www.cnbc.com/2023/06/21/uk-net-debt-hits-highest-level-in-more-than-60-years-topping-100percent-of-gdp.html#:%7E:text=LONDON%20%E2%80%94%20The%20U.K.%20public%20sector,amounted%20to%20100.1%25%20of%20GDP.">rising government debt</a> would normally be associated with a weakening currency, so the rising pound is not a reflection of UK fundamentals. It could reflect the fact that investors are expecting UK inflation to fall quickly, but that’s not what forecasts are saying. For example, NIESR (The National Institute of Economic and Social Research) <a href="https://www.niesr.ac.uk/publications/uk-economy-sluggish-growth-high-inflation?type=uk-economic-outlook#:%7E:text=Specifically%2C%20we%20expect%20CPI%20inflation,(figures%201.3%20and%201.4).">thinks that</a> inflation won’t return to 2% levels until 2025. </p>
<h2>Many thought Brexit helped to cause the pound’s 2022 crash. Does the pound’s appreciation reflect investors feeling more optimistic about Brexit?</h2>
<p>Probably the effects of Brexit on the pound were seen more in the one-off fall in 2016 after the referendum. The pound has never recovered to pre-Brexit levels. </p>
<p><strong>The pound’s performance over time</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/537793/original/file-20230717-226753-igodz2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="The BXY chart" src="https://images.theconversation.com/files/537793/original/file-20230717-226753-igodz2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/537793/original/file-20230717-226753-igodz2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=350&fit=crop&dpr=1 600w, https://images.theconversation.com/files/537793/original/file-20230717-226753-igodz2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=350&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/537793/original/file-20230717-226753-igodz2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=350&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/537793/original/file-20230717-226753-igodz2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=439&fit=crop&dpr=1 754w, https://images.theconversation.com/files/537793/original/file-20230717-226753-igodz2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=439&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/537793/original/file-20230717-226753-igodz2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=439&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This shows the BXY, which is the pound against a basket of international currencies.</span>
<span class="attribution"><span class="source">Trading View</span></span>
</figcaption>
</figure>
<h2>Who will win and lose from a stronger pound?</h2>
<p>The winners will include consumers of imports and those travelling abroad, particularly to the US. Firms that buy goods in dollars will be benefiting. On the other hand, exporters are losing out. </p>
<h2>Is it good news overall?</h2>
<p>I would say so, yes. In general, it means that investor sentiment on the UK economy has improved and the gilt market has stabilised. It means there are net inflows into the UK economy (meaning more money is coming in than going out). </p>
<h2>Where does the pound go from here?</h2>
<p>I always pay attention to <a href="https://www.economist.com/big-mac-index">The Economist’s Big Mac Index</a>, which gives a sense of the relative value of different currencies by comparing the price of a McDonald’s Big Mac around the world. When last published in January, it suggested the pound was 12% undervalued against the US dollar. The new index is due any time now, and will probably show that this undershoot has been corrected. </p>
<p>The question is whether the pound now keeps rising towards the sort of US$1.50 levels we used to see before Brexit. I think it’s likely that we will head in this direction. Brexit was in my view a one-off productivity shock in which some businesses and sectors had to react, such as <a href="https://www.aru.ac.uk/news/fintech-companies-true-to-their-word-after-brexit">by moving</a> certain activities abroad. Now that this has happened, you would probably expect it to be offset by new industries springing up to take advantage of the new arrangement. </p>
<p>There has been a lot of talk about the UK positioning itself to benefit from <a href="https://www.gov.uk/government/publications/national-ai-strategy">AI</a> and <a href="https://forkast.news/headlines/uk-bill-regulate-crypto-passes-into-law/#:%7E:text=The%20move%20indicates%20the%20U.K.,crypto%2Dfriendly%20European%20countries.%E2%80%9D">crypto</a>, for instance. There is certainly potential there, though it’s hard at this stage to know what the impact will be. </p>
<p>However, a rising pound is conditional on the public finances remaining healthy and inflation falling in line with expectations. If there are issues on those fronts, particularly combined with exogenous events like a war that made the world more risk averse again, another crash in the pound would become more likely.</p><img src="https://counter.theconversation.com/content/209905/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ganesh Viswanath-Natraj does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Does this mean everyone has cheered up about Brexit?Ganesh Viswanath-Natraj, Assistant Professor, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2065652023-06-22T12:45:30Z2023-06-22T12:45:30ZA BRICS currency is unlikely to dislodge dollar any time soon – but it signifies growing challenge to established economic order<figure><img src="https://images.theconversation.com/files/533267/original/file-20230621-21-r6auqr.jpg?ixlib=rb-1.1.0&rect=35%2C0%2C4000%2C2658&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A window into a new way of doing global economic business.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/view-of-a-reflection-on-a-window-of-a-man-staring-at-the-news-photo/1258374197?adppopup=true">Rodger Bosch/AFP via Getty Images)</a></span></figcaption></figure><p>Could a new currency be set to challenge the dominance of the dollar? Perhaps, but that may not be the point.</p>
<p>In August 2023, <a href="https://twitter.com/CyrilRamaphosa/status/1633803100308791299">South Africa will host</a> the leaders of Brazil, Russia, India, China and South Africa – a group of nations known by the acronym BRICS. Among <a href="https://www.bloomberg.com/news/articles/2023-05-10/south-africa-urges-careful-debate-on-option-of-introducing-brics-common-currency#xj4y7vzkg">the items on the agenda</a> is the creation of a new joint BRICS currency. </p>
<p>As a scholar who has <a href="https://sites.tufts.edu/cierp/rising-power-alliances-project/">studied the BRICS countries</a> for over a decade, I can certainly see why talk of a BRICS currency is, well, gaining currency. The BRICS summit comes as countries across the world are confronting a changing geopolitical landscape that is <a href="https://theconversation.com/the-global-south-is-forging-a-new-foreign-policy-in-the-face-of-war-in-ukraine-china-us-tensions-active-nonalignment-207078">challenging the traditional dominance of the West</a>. And while the BRICS countries have been seeking to reduce their reliance on the dollar for over a decade, <a href="https://www.bbc.com/news/world-europe-60125659">Western sanctions on Russia</a> after its invasion of Ukraine have accelerated the process.</p>
<p>Meanwhile, <a href="https://www.bbc.com/news/business-65474456">rising interest rates</a> and the recent <a href="https://theconversation.com/a-brief-history-of-debt-ceiling-crises-and-the-political-chaos-theyve-unleashed-205178">debt-ceiling crisis</a> in the U.S. have raised concerns among other countries about their dollar-denominated debt and the demise of the dollar should the world’s leading economy ever default.</p>
<p>That all said, a new BRICS currency faces major hurdles before becoming a reality. But what currency discussions do show is that the BRICS countries are seeking to discover and develop new ideas about how to shake up international affairs and effectively coordinate policies around these ideas. </p>
<h2>De-dollarization momentum?</h2>
<p>With <a href="https://www.bis.org/statistics/rpfx22_fx.htm">88% of international transactions</a> conducted in U.S. dollars, and the dollar accounting for <a href="https://www.cnbc.com/2023/04/24/economic-and-political-factors-behind-acceleration-of-de-dollarization.html">58% of global foreign exchange reserves</a>, the dollar’s global dominance is indisputable. Yet de-dollarization – or reducing an economy’s reliance on the U.S. dollar for international trade and finance – <a href="https://www.reuters.com/markets/signs-de-dollarisation-emerge-dollar-top-currency-jpmorgan-2023-06-05/">has been accelerating</a> following the Russian invasion of Ukraine.</p>
<p>The BRICS countries have been <a href="https://www.cambridge.org/core/elements/can-brics-dedollarize-the-global-financial-system/0AEF98D2F232072409E9556620AE09B0">pursuing a wide range of initiatives</a> to decrease their dependence on the dollar. Over the past year, Russia, China and Brazil have <a href="https://markets.businessinsider.com/news/currencies/dollar-dominance-russia-china-india-brazil-oil-trade-reserve-currency-2023-1">turned to</a> greater use of non-dollar currencies in their cross-border transactions. Iraq, Saudi Arabia and the United Arab Emirates are actively <a href="https://www.dw.com/en/why-the-dollars-dominance-is-declining-in-the-middle-east/a-65662358">exploring</a> dollar alternatives. And central banks have sought to shift more of their currency reserves away from the dollar and <a href="https://www.ft.com/content/ef6ed550-422a-4540-a8af-41ff2ac30e67">into gold</a>.</p>
<p>All the BRICS nations have been critical of the dollar’s dominance for different reasons. Russian officials have been championing de-dollarization to ease the pain from sanctions. Because of sanctions, Russian banks have been <a href="https://time.com/6153951/swift-sanctions-russia/">unable to use</a> SWIFT, the global messaging system that enables bank transactions. And the West froze Russia’s <a href="https://www.businessinsider.com/repo-global-task-force-freeze-330-billion-russia-oligarch-assets-2022-6?utm_medium=ingest&utm_source=markets">US$330 billion</a> in reserves last year.</p>
<figure class="align-center ">
<img alt="Under a banner with Chinese letter and 'XIV BRICS SUMMIT' five screens show the face of five world leaders in front of flags." src="https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=352&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=352&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=352&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=443&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=443&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533301/original/file-20230621-11103-g7nxfu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=443&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">BRICS leaders at the time of the 2022 summit.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/chinese-president-xi-jinping-hosts-the-14th-brics-summit-news-photo/1241486840?adppopup=true">Li Tao/Xinhua via Getty Images</a></span>
</figcaption>
</figure>
<p>Meanwhile, the 2022 election in Brazil reinstated Luiz Inácio Lula da Silva as president. Lula is a longtime proponent of BRICS who previously sought to reduce Brazil’s dependence on and vulnerability to the dollar. He has reenergized the group’s commitment to de-dollarization and spoken about <a href="https://www.reuters.com/article/spain-brazil-lula/update-1-brazils-lula-supports-trading-currency-for-brics-countries-idUSL1N36T1WW">creating a new Euro-like currency</a>.</p>
<p>The Chinese government has also clearly <a href="https://www.fmprc.gov.cn/mfa_eng/wjbxw/202302/t20230220_11027664.html">laid out its concerns</a> with the dollar’s dominance, labeling it “the main source of instability and uncertainty in the world economy.” Beijing directly blamed the Fed’s interest rate hike for causing turmoil in the international financial market and substantial depreciation of other currencies. Together with other BRICS countries, China has also <a href="https://asia.nikkei.com/Politics/International-relations/Xi-rallies-BRICS-against-sanctions-abuse-Cold-War-mentality">criticized the use of sanctions</a> as a geopolitical weapon.</p>
<p>The appeal of de-dollarization and a possible BRICS currency would be to mitigate such problems. Experts in the U.S. are deeply divided on its prospects. U.S. Treasury Secretary Janet Yellen believes <a href="https://finance.yahoo.com/news/treasury-secretary-janet-yellen-says-041422267.html#:%7E:text=Treasury%20Secretary%20Janet%20Yellen%20said,most%20countries%20have%20no%20alternative.">the dollar will remain dominant</a> as most countries have no alternative. Yet a <a href="https://foreignpolicy.com/2023/04/24/brics-currency-end-dollar-dominance-united-states-russia-china/">former White House economist sees a way that</a> a BRICS currency could end dollar dominance.</p>
<h2>Currency ambitions</h2>
<p>Although talk of a BRICS currency has gained momentum, there is limited information on various models under consideration.</p>
<p>The most ambitious path would be something akin to the Euro, the <a href="https://www.ecb.europa.eu/euro/html/index.en.html">single-currency adopted</a> by 11 member states of the European Union in 1999. But negotiating a single currency would be difficult given the economic power asymmetries and complex political dynamics within BRICS. And for a new currency to work, BRICS would need to agree to an exchange rate mechanism, have efficient payment systems and a well-regulated, stable and liquid financial market. To achieve a global currency status, BRICS would need a strong track record of joint currency management to convince others that the new currency is reliable.</p>
<p>A BRICS version of the Euro is unlikely for now; none of the countries involved show any desire to discontinue its local currency. Rather, the goal <a href="http://infobrics.org/post/38136">appears to be</a> to create an efficient integrated payment system for cross-border transactions as the first step and then introduce a new currency. </p>
<p>Building blocks for this already exist. In 2010, the <a href="http://brics2022.mfa.gov.cn/eng/zdhzlyhjz/others/202208/t20220826_10754259.html">BRICS Interbank Cooperation Mechanism</a> was launched to facilitate cross-border payments between BRICS banks in local currencies. BRICS nations <a href="https://www.brics-pay.com/">have been developing “BRICS pay</a>” – a payment system for transactions among the BRICS without having to convert local currency into dollars. And there has been talk of a <a href="https://cointelegraph.com/news/brics-nations-discuss-shared-crypto-to-break-away-from-usd-and-swift">BRICS cryptocurrency</a> and of strategically aligning the development of <a href="https://cyberbrics.info/promoting-brics-economic-integration-via-central-bank-digital-currencies%EF%BF%BC">Central Bank Digital Currencies</a> to promote currency interoperability and economic integration. Since many countries expressed an interest in <a href="https://www.dailymaverick.co.za/article/2023-05-07-countries-of-the-global-south-show-a-surge-of-interest-in-joining-brics-anil-sooklal/">joining BRICS</a>, the group is likely to scale its de-dollarization agenda. </p>
<h2>From BRICS vision to reality</h2>
<p>To be sure, some of the group’s most ambitious past initiatives to set up major BRICS projects to parallel non-Western infrastructures have failed. Big ideas like developing a <a href="https://moderndiplomacy.eu/2018/06/12/brics-setting-up-its-own-credit-rating-agency/">BRICS credit rating agency</a> and creating a <a href="https://jsis.washington.edu/news/reactions-u-s-cybersecurity-policy-bric-undersea-cable/">BRICS undersea cable</a> never materialized. </p>
<p>And de-dollarization efforts have been struggling both at the multilateral and bilateral level. In 2014, when the BRICS countries launched the New Development Bank, its <a href="https://www.ndb.int/wp-content/uploads/2022/11/Agreement-on-the-New-Development-Bank.pdf">founding agreement</a> outlined that its operations may provide financing in the local currency of the country in which the operation takes place. Yet, in 2023, the bank remains heavily <a href="https://www.wsj.com/articles/a-bank-china-backed-to-challenge-the-dollar-now-needs-the-dollar-d9dc27ee">dependent on the dollar for its survival</a>. <a href="https://www.ndb.int/insights/address-by-ndb-president-dilma-rousseff-at-opening-of-the-plenary-session-of-the-8th-annual-meeting-of-the-ndb/">Local currency financing represents</a> around 22% of the bank’s portfolio, although its new president hopes to increase that to 30% by 2026. </p>
<p>Similar challenges exist in bilateral de-dollarization pursuits. Russia and India have sought to develop a mechanism for trading in local currencies, which would enable Indian importers to pay for Russia’s cheap oil and coal in rupees. However, <a href="https://money.usnews.com/investing/news/articles/2023-05-04/exclusive-india-russia-suspend-negotiations-to-settle-trade-in-rupees-sources">talks were suspended</a> after Moscow cooled on the idea of rupee accumulation.</p>
<p>Despite the barriers to de-dollarization, the BRICS group’s determination to act should not be dismissed – the group has been known for defying expectations in the past.</p>
<p>Despite many differences among the five countries, the bloc managed to develop joint policies and survive major crises such as the <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/1758-5899.13010">2020-21 China-India border clashes</a> and the war in Ukraine. BRICS has deepened its cooperation, invested in new financial institutions and has been continuously broadening the range of policy issues it addresses. </p>
<p>It now has a huge network of interlinked mechanisms that connect governmental officials, businesses, academics, think tanks and other stakeholders across countries. Even if there is no movement on the joint currency front, there are multiple issues on which BRICS finance ministers as well as central bankers regularly coordinate – and the potential for developing new financial collaborations is particularly strong. </p>
<p>No doubt, talk of a new BRICS currency in itself is an important indicator of the desire of many nations to diversify away from the dollar. But I believe focusing on the BRICS currency risks missing the forest for the trees. A new global economic order will not emerge out of a new BRICS currency or de-dollarization happening overnight. But it can potentially emerge out of BRICS’ commitment to coordinating their policies and innovating – something this currency initiative represents.</p><img src="https://counter.theconversation.com/content/206565/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mihaela Papa previously received funding for BRICS research from Minerva Research Initiative federal grant.
She is affiliated with the Carnegie Council for Ethics in International Affairs.</span></em></p>Talk of a joint BRICS currency feeds into ‘decline of the dollar’ rhetoric. But it is the economic bloc’s focus on innovation that will reshape the international system.Mihaela Papa, Adjunct Assistant Professor of Sustainable Development and Global Governance, The Fletcher School, Tufts UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1872282022-07-22T20:42:08Z2022-07-22T20:42:08ZSri Lanka’s crisis: Can the South Asian economy break from the past and find a route to stability?<figure><img src="https://images.theconversation.com/files/475513/original/file-20220721-13056-ehhhix.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4309%2C2864&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The writing was on the wall in Sri Lanka.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/man-rides-a-bicycle-walk-past-slogans-painted-on-a-wall-news-photo/1242028894?adppopup=true">Arun Sankar/AFP via Getty Images</a></span></figcaption></figure><p>Sri Lanka <a href="https://www.reuters.com/world/asia-pacific/sri-lanka-could-tip-back-chaos-if-six-time-pm-voted-president-2022-07-20/">has a new president</a> and <a href="https://www.npr.org/2022/07/22/1112873020/rajapaksa-ally-named-prime-minister-sri-lanka">prime minister</a> – but a change in who leads the crisis-hit South Asian nation alone will not solve the country’s severe economic problems.</p>
<p>Ranil Wickremesinghe – who on July 20, 2022, was voted in by lawmakers to replace fleeing former president Gotabaya Rajapaksa – and his appointed premier Dinesh Gunawardena inherit an economy grappling with <a href="https://www.cbsl.gov.lk/en/news/inflation-in-june-2022-ncpi">record inflation as high as 59%</a>, a currency that <a href="https://www.xe.com/currencycharts/?from=LKR&to=USD">has lost almost half its value</a> since March 2022 and <a href="https://www.nytimes.com/2022/07/09/world/asia/sri-lanka-fuel-shortage-food.html">severe shortages of daily necessities</a> such as food and fuel. Nearly all economic activity in the country <a href="https://www.thehindu.com/news/international/sri-lanka-needs-to-do-more-on-debt-restructuring-before-a-bailout-package-is-finalised-says-imf/article65585692.ece">has ground to a halt</a>.</p>
<p>The government’s deficit <a href="https://www.newscutter.lk/sri-lanka-news/no-money-to-pay-government-salaries-money-to-be-printed-14052022-35982/">is so large it can’t afford</a> to pay public workers, and the central bank has almost no foreign currency – needed to finance imports and pay back foreign debt. </p>
<p>In short, Sri Lanka <a href="https://theconversation.com/sri-lanka-teeters-on-economic-edge-from-pandemic-fueled-financial-crisis-and-ukraine-war-spillovers-179741">is facing an unprecedented economic crisis</a>, placing tremendous pressure on the new leaders to act fast to fix things. </p>
<p>As an <a href="https://scholar.google.com/citations?user=jxC8cesAAAAJ&hl=en">economist and former official at the Central Bank of Sri Lanka</a>, I believe the path forward will be difficult. The country will need to break with past <a href="https://theconversation.com/behind-the-crisis-in-sri-lanka-how-political-and-economic-mismanagement-combined-to-plunge-nation-into-turmoil-187137">policies and practices that put it in a financial hole</a> while putting in place reforms to get the economy back on track. In particular, there are four key economic challenges the new government will have to address, though they’re all interconnected. </p>
<h2>Addressing Sri Lankans’ immediate needs</h2>
<p>To avoid the fate of his <a href="https://www.yahoo.com/lifestyle/self-exiled-former-sri-lankan-125541354.html">now exiled predecessor Gotabaya Rajapaksa</a>, President Wickremesinghe will have to address the immediate needs of his people.</p>
<p>After being sworn in, <a href="https://www.newscutter.lk/sri-lanka-news/no-money-to-pay-government-salaries-money-to-be-printed-14052022-35982">Wickremesinghe said his priority</a> was to ensure that people are able to eat three meals a day.</p>
<figure class="align-center ">
<img alt="A man in an orange cap stands in a smoky street surrounded by strewn bits of paper." src="https://images.theconversation.com/files/475703/original/file-20220722-3516-k8a7la.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/475703/original/file-20220722-3516-k8a7la.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/475703/original/file-20220722-3516-k8a7la.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/475703/original/file-20220722-3516-k8a7la.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/475703/original/file-20220722-3516-k8a7la.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/475703/original/file-20220722-3516-k8a7la.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/475703/original/file-20220722-3516-k8a7la.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A supporter of Ranil Wickremesinghe celebrates the announcement of his election as Sri Lankan president.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/supporter-of-ranil-wickremesinghe-celebrates-the-news-photo/1409897243?adppopup=true">Abhishek Chinnappa/Getty Image</a></span>
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<p>While food inflation has reached 76%, prices of many basic food items have increased by a higher margin – <a href="http://www.statistics.gov.lk/InflationAndPrices/StaticalInformation/retail/DCSB-WRP-2022-07-W2">rice by 160%, wheat flour by 200% and sugar by 164%</a>. To put that in context, a preschool teacher earning <a href="http://www.labourdept.gov.lk/images/PDF_upload/ExtraGazettes/2138-03_e.pdf">minimum wage</a> would need more than a day’s wages to purchase a kilogram (2.2 pounds) of sugar and a kilogram of wheat flour or rice. A cylinder of <a href="http://www.colombopage.com/archive_22A/Jun05_1654443342CH.php">cooking gas</a>, if they were lucky to find one, would cost more than a half-month’s salary. </p>
<p>Cost of living ranks alongside other pressing issues. Reopening the <a href="https://www.usnews.com/news/world/articles/2022-07-03/with-no-fuel-and-no-cash-sri-lanka-keeps-schools-closed">shuttered schools</a> and universities is another priority. The other urgent need is restoring transportation services. With no fuel to purchase, <a href="https://www.newsfirst.lk/2022/07/20/fuel-crisis-private-bus-services-in-limbo/">private bus services are in limbo</a> and <a href="https://newsable.asianetnews.com/weird-news/watch-amidst-fuel-shortage-in-sri-lanka-people-hang-from-loaded-bus-gps-rea66d">public transportation has become an adventure ride</a>, with passengers <a href="https://www.youtube.com/watch?v=x_F05Mv0d7I">dangling from the door and windows</a> and even sitting inside the luggage box. </p>
<p>Restoring transportation and electricity services requires foreign currency to import fuel, but support from the International Monetary Fund, which provides financial help to struggling economies through loan packages, <a href="https://www.bloomberg.com/news/articles/2022-04-20/sri-lanka-seeks-bridge-loans-as-imf-aid-may-need-six-months">is months away</a>. Unless the new president can persuade its regional powerhouses – India and China – to provide more help, economic hardships will continue and life in Sri Lanka will not be normal. </p>
<p>In the past, Sri Lanka has been able to rely on tourism to help bring revenue to the island nation. But this will be impossible while social unrest continues and shortages of essentials limit the country’s ability to serve visitors. Meanwhile, remittances from overseas Sri Lankans have also suffered because of a lack of confidence in the national currency, known as the rupee.</p>
<p>As Wickremesinghe has noted, <a href="https://www.newscutter.lk/sri-lanka-news/no-money-to-pay-government-salaries-money-to-be-printed-14052022-35982">things will get worse</a> before they get better. </p>
<h2>Balancing the budget</h2>
<p>The next item on the president’s to-do list will likely be finding a way to bring the budget deficit down. Last year, <a href="https://www.cbsl.gov.lk/en/statistics/statistical-tables/fiscal-sector">expenses were 240% of revenue, and 91% more was needed to repay debt</a>. Money printing covered a large portion of this gap but only exacerbated inflation.</p>
<p>The primary reason for Sri Lanka’s current crisis <a href="https://theconversation.com/sri-lanka-teeters-on-economic-edge-from-pandemic-fueled-financial-crisis-and-ukraine-war-spillovers-179741">is decades of fiscal mismanagement</a>, with too much spending and too little revenue. </p>
<p>Fixing this problem will require a combination of higher taxes and significant budget cuts. But the <a href="https://www.cfr.org/blog/sri-lankas-crisis-likely-wont-be-resolved-soon">budget gap is too wide</a> to eliminate completely the need for money printing. The best that can be hoped for is an aggressive reduction.</p>
<h2>Restructuring Sri Lanka’s huge debt</h2>
<p>Such budgetary reforms will likely be necessary to solve another challenge Sri Lanka faces: overseas debt. </p>
<p>Sri Lanka has amassed about <a href="https://www.reuters.com/world/asia-pacific/yellen-says-its-chinas-interest-restructure-sri-lankas-debt-2022-07-14/">US$51 billion in foreign debt</a> over the past decades but has virtually no foreign currency with which to pay it back. The government <a href="https://www.reuters.com/world/asia-pacific/sri-lanka-temporarily-suspend-foreign-debt-payments-c-bank-governor-2022-04-12">suspended payments on foreign debt</a> in April, sending it into default. </p>
<p>At the end of 2021, <a href="https://www.cbsl.gov.lk/en/publications/economic-and-financial-reports/annual-reports/annual-report-2021">about 45% of the debt was owed to private investors</a>, while the rest belonged to countries and multinational institutions. The Asian Development Bank owned the biggest share, at 16%, while Japan, China and the World Bank held 10% apiece. </p>
<p>For Sri Lanka to emerge from its crisis, it will need significant help from the IMF. But the IMF requires assurances that <a href="https://www.imf.org/en/News/Articles/2022/06/30/pr22242-imf-staff-concludes-visit-to-sri-lanka">Sri Lanka’s debt sustainability be restored</a> before lending it money. </p>
<p>And other international organizations, such as the World Bank, will not be willing to lend Sri Lanka more <a href="https://www.worldbank.org/en/news/statement/2022/05/24/world-bank-statement-on-sri-lanka">until the country signs an agreement with the IMF</a>. And U.S. lawmakers <a href="https://twitter.com/SFRCdems/status/1542979994892357633">have recently suggested</a> IMF support will be contingent on Sri Lanka’s increasing the independence of its central bank, fighting corruption and doing more to promote the rule of law.</p>
<p>While <a href="https://www.investopedia.com/terms/g/g7.asp">G-7 countries</a>, the group of leading economies, including Japan, <a href="https://www.bbc.com/news/world-61028138">appear willing to help Sri Lanka</a> in its effort to restructure its debt, some bondholders – such as Caribbean-based Hamilton Reserve Bank, which <a href="https://www.business-standard.com/article/international/sri-lanka-sued-by-us-bondholder-after-island-nation-s-historic-default-122062300224_1.html">holds just $250 million worth</a> – <a href="https://www.bloomberg.com/news/articles/2022-06-21/sri-lanka-sued-by-bondholder-in-us-following-historic-default#xj4y7vzkg">have already taken legal action</a> to claim their dues. </p>
<p>In May, <a href="https://www.business-standard.com/article/international/sri-lanka-picks-lazard-clifford-chance-as-advisers-for-debt-restructuring-122052400610_1.html">Sri Lanka took a first step</a> toward restructuring its debt, but <a href="https://www.bbc.com/news/world-asia-62161350">it may take several months</a> before the country is able to successfully negotiate with its creditors to ensure debt sustainability.</p>
<h2>Garnering public support for reforms</h2>
<p>Wickremesinghe’s biggest and most unenviable challenge, however, is less about the economy and more about the politics of fixing it. </p>
<p>He won’t be able to do much about Sri Lanka’s economy until he’s able to bring about political stability. And right now, Sri Lanka <a href="https://apnews.com/article/elections-asia-presidential-race-and-ethnicity-9f43a592bd31eea614a25c35438d920b">remains in turmoil</a>. </p>
<p>Wickremesinghe, who previously served as prime minister appointed by his toppled predecessor, will need a wide mandate and support from opposition politicians if he is to drastically change Sri Lanka’s policies. Upon election, <a href="https://www.sbs.com.au/news/article/protests-economic-and-humanitarian-crises-sri-lankas-new-president-faces-an-uphill-battle/3qze8th7x">he immediately urged his rivals</a> to join him and “work together to bring the country out of the crisis,” adding, “Our divisions are now over.”</p>
<p>He will also need to address <a href="https://www.hindustantimes.com/world-news/rajapaksas-resignation-what-are-the-demands-of-sri-lankan-protesters-101657370420588.html">protesters’ demands</a> over reducing executive powers while bringing in strong anti-corruption measures and strengthening democratic institutions.</p>
<p>Yet <a href="https://www.bbc.com/news/world-asia-61429791">many doubt Wickremesinghe’s ability to unite Sri Lanka</a> and question his mandate to serve out the remaining term of the presidency. <a href="https://www.cbsnews.com/news/sri-lanka-news-protests-colombo-president-ranil-wickremesinghe/">He has been a target of protesters</a> since being appointed president. And a <a href="https://timesofindia.indiatimes.com/world/south-asia/sri-lanka-crisis-news-live-updates-july-22/liveblog/93037932.cms">confrontation between armed forces and protesters</a> soon after Wickremesinghe took power doesn’t bode well.</p>
<p>Turning around an economy so deep in crisis will take time. Inflation in Sri Lanka is <a href="https://apnews.com/article/inflation-asia-south-prices-93a4cc1c829e4cd53aaaf6afacb06a26">not believed to have peaked yet</a>, and people will continue to face economic hardships for some time. </p>
<p>But political stability will be needed before Sri Lanka can get out of its economic mess. The fiscal reforms expected by the IMF will be painful and will be viable only with public support, and that of all major political parties in Sri Lanka’s Parliament.</p><img src="https://counter.theconversation.com/content/187228/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vidhura S Tennekoon was a former employee of the Central Bank of Sri Lanka.</span></em></p>An expert on Sri Lanka’s economy identifies and explains three key challenges that Ranil Wickremesinghe will have to overcome if he hopes to steer the country out of its crisis.Vidhura S. Tennekoon, Assistant Professor of Economics, Indiana UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1724372021-11-23T16:01:23Z2021-11-23T16:01:23ZThe euro is plunging – and probably won’t bounce back soon<figure><img src="https://images.theconversation.com/files/433475/original/file-20211123-15-17ld12v.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">E as in ebbing. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/weak-euro-currency-weakening-finances-man-341844767">kentoh/Shutterstock</a></span></figcaption></figure><p>The euro has weakened against the US dollar since the beginning of 2021, from around US$1.23 to its current exchange rate of US$1.13. That’s a fall of about 9%, which is significant, especially since these are the two major currencies of the world. The drop has also intensified in November, falling 3% since the turn of a month, which has seen violence in European capitals over COVID restrictions, migrant problems at the Belarus-Poland border and Russian troops amassing on the border of Ukraine. </p>
<p>The decline should be seen in a broader context, though. The euro is still stronger than a couple of years ago, when it was about US$1.10. It also went through some heavy weekly volatility from February to April 2020 in the early part of the COVID pandemic, bouncing between about US$1.07 and US$1.13 at a time when lots of investors were fleeing to the US dollar for safety and there was much uncertainty about what lockdowns would mean. </p>
<p><strong>Euro vs US dollar chart</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Euro vs dollar chart" src="https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com/symbols/EURUSD/">Trading View</a></span>
</figcaption>
</figure>
<p>Explaining currency movements on a weekly or even monthly basis is well known to be extremely difficult, especially when it comes to major economies like the US and the countries in the eurozone. But certainly we need to look at what is happening in both regions and not just one or the other. Using this simple idea, there are several explanations for the recent euro depreciation. </p>
<h2>Inflation differences</h2>
<p>The first explanation relates to the Federal Reserve and the European Central Bank (ECB) stimulating their economies using quantitative easing (QE), which is essentially creating money to buy financial assets such as government bonds from banks and other major investors. Both central banks have been doing this extensively since the start of the pandemic. </p>
<p>However, with annual inflation in the US now reaching a serious level <a href="https://news.sky.com/story/us-inflation-hits-highest-level-since-1990-at-6-2-as-food-and-fuel-prices-surge-12465340">of 6.2%</a>, compared with a <a href="https://www.reuters.com/world/europe/euro-zone-oct-inflation-confirmed-41-yy-energy-spike-2021-11-17/">less troublesome 4.1%</a> in the eurozone, the feeling is that the Fed will end its asset purchases sooner. This is because increasing the money supply has the potential to stoke inflation. Indeed, the Fed <a href="https://www.reuters.com/business/cop/dollar-hovers-near-peaks-fed-heads-taper-2021-11-03/">has recently</a> already started “tapering” or slowing down the rate of QE with a view to stopping it in the second half of 2022. On the other hand, the ECB <a href="https://www.bloomberg.com/news/articles/2021-10-06/ecb-said-to-study-new-bond-buying-plan-for-when-crisis-tool-ends">has been discussing</a> a replacement for its US$2.2 trillion (£1.7 trillion) QE programme when it ends in March 2022. </p>
<p>Connected to this is an <a href="https://www.bloomberg.com/news/articles/2021-11-18/jpmorgan-economists-now-predict-fed-to-raise-rates-in-september">increasing expectation</a> that the US may also have to begin a series of rises to interest rates from the middle of 2022 to curb inflation, while ECB president Christine Lagarde has just <a href="https://www.cnbc.com/2021/11/19/ecbs-lagarde-says-a-rate-hike-unlikely-for-2022.html">made it clear</a> that the ECB is unlikely to start raising rates until at least 2023. These emerging differences in the monetary-policy stances of the US and eurozone have clearly favoured a strengthening of the dollar (since QE and lower interest rates tend to make a currency depreciate). </p>
<h2>COVID and politics</h2>
<p>A second pivotal factor has been the recent relative strength of the US economy in its recovery from the pandemic compared with the eurozone. In 2021, the US <a href="https://www.imf.org/en/Publications/WEO/Issues/2021/10/12/world-economic-outlook-october-2021">is forecast</a> by the International Monetary Fund to grow 6% compared to 5% in the eurozone, while in 2022 they are respectively expected to grow 5.2% and 4.3%. Again, this points to dollar strength. </p>
<p>More COVID lockdowns in the US seem unlikely (even though cases are <a href="https://www.nytimes.com/2021/11/22/us/us-covid-cases-rising-thanksgiving.html?mc_cid=6d76cfd520&mc_eid=c825ac9090">rising again</a>), though not in the eurozone area, where the rate of infections has been picking up sharply in recent weeks in countries like Germany, France, the Netherlands, Austria and Belgium. Austria is <a href="https://www.bbc.com/news/world-europe-59369488">now back</a> in lockdown, <a href="https://news.sky.com/story/covid-19-germany-may-follow-austria-into-full-lockdown-as-coronavirus-cases-hit-new-high-12472233">and other</a> eurozone countries could follow suit. </p>
<p>A final driver of the recent strength of the dollar is greater political stability. The Biden administration still has three years in office and has recently succeeded in passing its US$1.7 trillion <a href="https://www.theguardian.com/us-news/2021/nov/19/house-democrats-pass-biden-expansive-build-back-better-policy-plan">Build Back Better</a> stimulus package. </p>
<p>By contrast, countries in the eurozone face a period of greater political instability. Germany is seeing the 16 years of relative stability under Angela Merkel coming to an end. <a href="https://www.thetimes.co.uk/article/french-election-2022-macron-is-sitting-pretty-but-sitting-presidents-often-tumble-fqfb6t5g0">The question</a> of whether Emmanuel Macron will succeed in the French elections in April 2022 against Marine Le Pen is also weighing on investors’ minds, as are the continued trade frictions between the EU and the UK over Brexit.</p>
<p>It is happening at a time when <a href="https://www.businessinsider.com/russian-invasion-of-ukraine-a-real-possibility-russia-watchers-warn-2021-11?r=US&IR=T">Russia’s build-up</a> of forces close to Ukraine raises the prospect of military conflict on the edge of Europe – not to mention that Russia <a href="https://www.reuters.com/markets/europe/living-hand-mouth-europes-gas-crunch-shows-little-sign-easing-2021-11-22/">has already</a> been limiting the region’s gas supply and one of its main pipelines runs through Ukraine. In addition, there have been significant <a href="https://www.buzzfeednews.com/article/skbaer/antivax-europe-covid-mandates">anti-vaccine protests</a> in France, the Netherlands, Germany and Italy, and European governments are now under <a href="https://thehill.com/opinion/finance/580976-is-europe-headed-toward-another-debt-crisis">intense pressure</a> to bring their spending under control. </p>
<p>So while short-term currency movements are very difficult to predict, there are many reasons to believe that the recent period of euro weakness will continue. This is making imports to the eurozone more expensive – not least energy – and while it has some benefits for a major exporter like Germany, it also undermines the credibility of the eurozone as a global economic force. </p>
<p>The gamechanger might be if the ECB acknowledged that there is an inflation problem that needs to be tackled, by ending its experiment with QE and beginning the process of raising interest rates. That, however, does not look likely any time soon.</p><img src="https://counter.theconversation.com/content/172437/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Keith Pilbeam does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>To understand the euro’s weakness, you have to look at the US as well as Europe.Keith Pilbeam, Professor of Economics, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1282102019-12-03T19:45:02Z2019-12-03T19:45:02ZCurrency manipulation and why Trump is picking on Brazil and Argentina<figure><img src="https://images.theconversation.com/files/305014/original/file-20191203-67007-e5zemb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Trump says Argentina is intentionally weakening the peso. </span> <span class="attribution"><span class="source">FJZEA/Shutterstock.com</span></span></figcaption></figure><p>President Donald Trump <a href="https://www.reuters.com/article/us-usa-trade-trump/trump-citing-us-farmers-slaps-metal-tariffs-on-brazil-argentina-idUSKBN1Y614O">slapped new tariffs</a> on Brazil and Argentina after accusing them of manipulating their currencies to boost exports. </p>
<p>It wasn’t the first time Trump has labeled another country a “currency manipulator” for supposedly meddling to keep its own currency weak or undervalued. China <a href="https://www.reuters.com/article/us-usa-trump-china-currency-exclusive-idUSKBN1622PJ">received that epithet</a> from the president long before it felt the pain of his trade war. </p>
<p>But the truth is more complicated than Trump makes it out to be. </p>
<h2>Everyone does it</h2>
<p>The first thing to understand is that government efforts to influence their exchange rates – which is often dubbed currency manipulation – is extremely common, as I’ve seen firsthand in <a href="https://scholar.google.com/citations?user=qttICm8AAAAJ&hl=en&oi=ao">my work</a> as an international business professor.</p>
<p><a href="https://www.imf.org/en/Publications/Annual-Report-on-Exchange-Arrangements-and-Exchange-Restrictions/Issues/2019/04/24/Annual-Report-on-Exchange-Arrangements-and-Exchange-Restrictions-2018-46162">All but 31</a> of the <a href="https://www.imf.org/external/np/sec/memdir/memdate.htm">International Monetary Fund’s 189 members</a> meddle, in a mild or total fashion, to influence or fix their exchange rates. Only a few major currencies, such as the dollar or euro, are allowed a “free float” based on market forces of supply and demand with minimal or no government intervention. </p>
<p><iframe id="I2cfN" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/I2cfN/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>Other governments have a variety of ways to manage their currencies. Some peg their currencies to a fixed rate, as long as they can afford to keep it there. Others tie their currencies to a major but stable currency like the euro or a basket of different ones. For example, the Lebanese pound is tied to the dollar at a fixed rate of 1,507.5 to 1. </p>
<p>About 16% of IMF members use a “managed float,” in which they allow market forces to play a role but with the government buying or selling their own currency as needed to bias the exchange rate upward or downward. Argentina and Brazil both adhere to a managed float system. </p>
<h2>Why weaken a currency</h2>
<p>Generally, when the Trump administration has criticized countries, the allegation is that their government is keeping its currency undervalued in order to <a href="https://www.investopedia.com/articles/investing/090215/3-reasons-why-countries-devalue-their-currency.asp">give an artificial boost</a> to exports while making it harder for imports to compete.</p>
<p>A weaker currency makes the products it sells abroad cheaper, while making imports more expensive for its consumers. This may have the effect of boosting jobs in that country. <a href="https://www.reuters.com/article/us-usa-trade-trump/trump-citing-us-farmers-slaps-metal-tariffs-on-brazil-argentina-idUSKBN1Y614O">Trump believes this is what Brazil and Argentina are doing</a>. </p>
<p><a href="https://www.wsj.com/articles/trump-restores-tariffs-on-steel-and-aluminum-shipped-from-argentina-brazil-11575288359">Economists say</a> the two countries are actually trying to prevent their currencies from weakening against the dollar. That’s in part because a weak currency also makes imports more expensive for businesses that rely on foreign inputs to make their products. </p>
<p>So higher import costs, along with persistently high inflation in both <a href="https://tradingeconomics.com/argentina/inflation-cpi">Argentina</a> and <a href="https://tradingeconomics.com/brazil/producer-prices">Brazil</a>, largely offset any gains from their weaker currencies. </p>
<h2>The strong dollar</h2>
<p>But more importantly, these currencies seem undervalued primarily because the U.S. dollar is unnaturally strong. </p>
<p>One reason for the strength of the dollar is that inflation-adjusted interest rates in the U.S. are still relatively high. Another is that the dollar is still a haven, making it an attractive place to park your cash during global economic uncertainty. </p>
<p>As a result, a massive amount of foreign money has <a href="https://www.stlouisfed.org/on-the-economy/2019/may/foreign-demand-currency-fed-balance-sheet">flowed into dollar denominated-bank deposits</a>, treasury bonds, U.S. stocks and real estate over the past few years. And the reality is that the dollar is now exceptionally strong, not that other currencies are weak or necessarily being manipulated. </p>
<p>Ultimately, labeling other countries as currency manipulators is more about politics and geopolitical relations than policy. </p>
<p><em>This is an updated version of an <a href="https://theconversation.com/does-china-manipulate-its-currency-as-donald-trump-claims-60148">article originally published</a> on July 13, 2016.</em></p><img src="https://counter.theconversation.com/content/128210/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Farok J. Contractor does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Most countries manipulate their currencies – at least a little – but at the moment that’s not the real reason they are undervalued relative to the dollar.Farok J. Contractor, Distinguished Professor of Management & Global Business, Rutgers UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1087662019-01-02T10:05:52Z2019-01-02T10:05:52ZFive reasons Bitcoin could enter a more extreme death spiral<figure><img src="https://images.theconversation.com/files/251510/original/file-20181219-45413-1h9phnm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/gold-bitcoin-falling-apart-graph-crashing-1038671149?src=s5SU9NtxQR1Vyak0CveZBA-1-0">Shutterstock</a></span></figcaption></figure><p>Back in December 2017, when its price reached <a href="https://www.coindesk.com/900-20000-bitcoins-historic-2017-price-run-revisited">close to US$20,000</a>, Bitcoin looked like it had finally disrupted financial markets with the potential to <a href="https://www.coindesk.com/bitcoin-gone-mainstream-thats-big-deal">enter the mainstream</a>. A year later and things looked quite different. Bitcoin is now steadily trading below US$4,000 and has been constantly on a downward ride over the last year, losing more than half of its market capitalisation. </p>
<p>And yet cryptocurrency enthusiasts seem to ignore the fact that Bitcoin could yet enter an even more extreme death spiral. Bitcoin is not the only cryptocurrency whose market capitalisation has been hammered. Sell offs have happened across the board, with the price of major alternative coins such as Ripple and Ethereum falling in the past year.</p>
<p>It is not clear what the catalyst was for these price drops and selling. But what is clear is that cryptocurrency prices struggle to find a floor for a number of reasons. These range from the rising cost of mining, regulatory concerns, market manipulation, speculative trading, sky high power consumption, and the increasing scepticism from both the public and the world’s established financial industry.</p>
<h2>1. Rising cost of mining</h2>
<p>If its price continues to drop and the mining costs do not fall to the same extent, the incentives to update the public ledger and validate transactions can quickly disappear, threatening the very existence of Bitcoin as a viable payment system. </p>
<p>Bitcoin is dependent on a <a href="https://theconversation.com/why-energy-sapping-bitcoin-mining-is-here-to-stay-92138">system of miners</a> that verify transactions and record them on a digital ledger called the blockchain. This prevents copies being made of the digital tokens. As a reward for the energy and time involved, <a href="https://theconversation.com/how-do-you-mine-bitcoin-and-is-it-still-worth-it-55977">miners are rewarded in Bitcoin</a>.</p>
<p>But the amount of work involved in mining keeps increasing (making it more costly), as the mining process was always designed to get more and more difficult, to limit the number of new Bitcoin that get issued. Seeing as mining requires vast amounts of energy, a number of miners have <a href="https://www.coindesk.com/600k-bitcoin-miners-shut-down-in-last-2-weeks-f2pool-founder-estimates">shut down their operations</a>, as Bitcoin’s declining value has made mining less profitable.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/251512/original/file-20181219-45419-8pyhhr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/251512/original/file-20181219-45419-8pyhhr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/251512/original/file-20181219-45419-8pyhhr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/251512/original/file-20181219-45419-8pyhhr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/251512/original/file-20181219-45419-8pyhhr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/251512/original/file-20181219-45419-8pyhhr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/251512/original/file-20181219-45419-8pyhhr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Bitcoin mining takes a lot of energy.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bitcoin-mining-farm-hardware-electronic-devices-772693789?src=_ufQc5P6UxPLtMEEhbKwWg-1-6">Shutterstock</a></span>
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<p>This is worrying for Bitcoin’s viability as there needs to be a minimum number of miners at work to maintain the public blockchain ledger. Without the mining activity, cryptocurrencies are just a set of encrypted numbers with no value. Any rational investor would stand clear of mining if the cost of mining is higher than the future price. </p>
<h2>2. Regulatory concerns</h2>
<p>Regulators across the world are beginning to act on cryptocurrencies with diverging views. While countries like <a href="https://news.bitcoin.com/switzerland-to-relax-laws-to-accommodate-blockchain-and-cryptocurrency-startups/">Switzerland</a> and <a href="https://cointelegraph.com/news/from-malta-to-prague-what-is-the-most-crypto-friendly-travel-destination">Malta</a> are trying to become hubs for cryptocurrency businesses, others like <a href="https://www.cnbc.com/2018/09/03/china-clamps-down-on-cryptocurrency-speculation.html">China</a> and the <a href="https://www.fxstreet.com/cryptocurrencies/news/cryptocurrency-market-update-the-us-sec-sweeps-crypto-space-clean-ethereum-takes-the-biggest-hit-201809121105">US</a> have cracked down on cryptocurrency markets. </p>
<p>A case in point comes from the US markets regulator, the SEC. It <a href="https://www.sec.gov/news/press-release/2018-264">announced in November 2018</a> that operators of two <a href="https://theconversation.com/explainer-what-are-initial-coin-offerings-icos-and-why-are-investors-flocking-to-them-84330">initial coin offerings</a> (ICOs) must pay fines and restitution as they broke the law by selling unlicensed securities. This hardly comes as a surprise. In fact, it is likely only the beginning of a decisive intrusion of regulatory bodies in the opaque ecosystem of ICOs. Such a development might be enough to spook some investors to abandon cryptocurrencies altogether.</p>
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Read more:
<a href="https://theconversation.com/bitcoins-rollercoaster-ride-reflects-the-biggest-issue-facing-cryptocurrencies-regulation-101690">Bitcoin's rollercoaster ride reflects the biggest issue facing cryptocurrencies: regulation</a>
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<p>Advocates of cryptocurrencies insist that more institutional investors will get involved in the space thanks to new products such as crypto-specific exchange-traded funds (ETFs). They expect these to take off in the same way that ETFs have become massively popular <a href="https://citywire.co.uk/wealth-manager/news/rise-of-etfs-active-managers-must-evolve-or-die/a1091464">for conventional investors</a>. But the SEC has not approved any crypto ETFs, and it would be overly optimistic to assume that this will happen in the near future. </p>
<h2>3. Market manipulation</h2>
<p>Market manipulation and speculative activity are also important concerns when it comes to the crypto market, which could have been priced into recent performance. My <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3077685">recent research shows</a> how well-informed traders buy cryptocurrencies in bulk, which pushes the price up and gets other buyers to follow suit, until the well-informed traders sell and send the price down, which again everybody follows.</p>
<p>Again, this hardly comes as a surprise. Cryptocurrency markets are incredibly opaque. Anyone paying attention to cryptocurrency trading knows that this kind of pump-and-dump activity and fictitious orders are designed to artificially move prices, exacerbating price swings at the expenses of, perhaps unsophisticated, retail investors. </p>
<h2>4. Power consumption</h2>
<p>A third concern behind the constant price drop is the increasing costs of equipment and electricity. Bitcoin mining is incredibly power hungry. And this power demand is becoming so high in regions where mining is concentrated, such as Canada, that authorities are starting to <a href="https://www.bloomberg.com/news/articles/2018-06-07/quebec-halts-bitcoin-mining-power-requests-amid-booming-demand">deny supply to mining facilities</a>. </p>
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<strong>
Read more:
<a href="https://theconversation.com/bitcoins-high-energy-consumption-is-a-concern-but-it-may-be-a-price-worth-paying-106282">Bitcoin's high energy consumption is a concern – but it may be a price worth paying</a>
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<p>Again, this could threat the very survival of any cryptocurrency which is based on mining. This represents the vast majority. </p>
<h2>5. Industry scepticism</h2>
<p>Large drops in prices are accompanied by a persistent scepticism around cryptocurrencies. To some extent this is due to the fact that the promise to bypass the mainstream, centralised economic system and enable peer-to-peer payments has been disappointing so far. </p>
<p>Major players in the world of finance, such as Berkshire Hathaway’s <a href="https://www.cnbc.com/2018/05/01/warren-buffett-bitcoin-isnt-an-investment.html">Warren Buffett</a> and JP Morgan Chief Executive <a href="https://www.marketwatch.com/story/jamie-dimon-i-dont-really-give-a-shit-about-bitcoin-2018-10-31">Jamie Dimon</a>, constantly express their deep scepticism of cryptocurrencies, suggesting Bitcoin and the likes still face an uphill battle for acceptance. </p>
<p>The one upside to all this is that, although cryptocurrencies may have entered a death spiral, the blockchain economy is here to stay. As well as allowing safe peer-to-peer lending and transactions, it is being used to build more efficient supply chains and in the evolution of the internet of things – to name just a few of its applications. This will only grow as it is applied to everything from <a href="https://www.frontiersin.org/journals/blockchain">education</a> to the <a href="https://civil.co/">media</a>.</p><img src="https://counter.theconversation.com/content/108766/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniele Bianchi consults to Aaro Capital Ltd in London. </span></em></p>Bitcoin has been on a downward ride over the last year, steadily trading below US$4,000. It could get worse.Daniele Bianchi, Assistant Professor of Finance, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/983592018-08-28T12:59:11Z2018-08-28T12:59:11ZA history of Bitcoin – told through the five different groups who bought it<figure><img src="https://images.theconversation.com/files/233853/original/file-20180828-86150-1dk7i9m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/golden-bitcoin-on-keyboard-540755671?src=l37Sdn0-y_jQyrBkOhfGvA-1-28">GeniusKp/Shutterstock.com</a></span></figcaption></figure><p>The recent <a href="https://theconversation.com/bitcoins-rollercoaster-ride-reflects-the-biggest-issue-facing-cryptocurrencies-regulation-101690">fluctuations</a> in Bitcoin’s value are just the latest in a series of spectacular peaks and troughs since it was created in 2009. (Though its price has been falling recently, it remains five times higher than last April, before the latest major peak began.)</p>
<p>Commentators are often <a href="https://theconversation.com/the-bitcoin-bubble-how-we-know-it-will-burst-88511">dismissive</a> of Bitcoin buyers, writing them off as naive victims of a fraudulent bubble. But if we look more carefully, we can trace the history of Bitcoin through five key narratives. Each has drawn in a different group of buyers and in doing so contributed to its long-term growth in value.</p>
<h2>The idealists</h2>
<p>Bitcoin arose from a tiny group of cryptographers who were trying to solve the <a href="https://www.bitcoin.com/info/what-is-bitcoin-double-spending">“double spend” problem</a> facing digital money: “cash” held as a digital file could easily be copied and then used multiple times. The problem is easily solved by financial institutions, who use a secure central ledger to record how much everyone has in their accounts, but the cryptographers wanted a solution that was more akin to physical cash: private, untraceable, and independent of third parties like the banks. </p>
<p>Satoshi Nakamoto’s solution was the Bitcoin blockchain, a cryptographically secured public ledger that records transactions anonymously and is kept as multiple copies on many different users’ computers. The first narrative of Bitcoin’s value was built into Nakamoto’s original “<a href="https://bitcoin.org/bitcoin.pdf">white paper</a>”. This claimed that Bitcoin would be superior to existing forms of electronic money such as credit cards, providing benefits like eliminating chargebacks to merchants and reducing transaction fees.</p>
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<h2>The libertarians</h2>
<p>But from an early stage, Nakamoto also marketed Bitcoin to a libertarian audience. He did so by stressing the absence of any central authority and particularly Bitcoin’s independence from both states and existing financial institutions. </p>
<p>Nakamoto criticised central banks for debasing money by issuing increasing amounts of it and designed Bitcoin to have a hard limit on the amount that could be issued. And he stressed the anonymity of Bitcoin transactions: safe, more or less, from the prying eyes of the state. Libertarians became enthusiastic advocates and buyers of Bitcoin, more as an act of rebellion than for financial reasons. They have remained highly influential in the Bitcoin community.</p>
<h2>The savvy young</h2>
<p>These, however, were small constituencies, and Bitcoin really started to take off in July 2010 when <a href="https://news.slashdot.org/story/10/07/11/1747245/bitcoin-releases-version-03">a short article</a> on Slashdot.org (“news for nerds”) spread the word to many young and technically savvy buyers. This community was influenced by the “Californian ideology” – belief in the capacity of technology and entrepreneurs to transform the world. </p>
<p>Many bought small quantities at a low price and were somewhat bemused to find themselves sitting on significant investments when the price multiplied. They became used to huge fluctuations in the price and frequently advocated “hodling” Bitcoin (a mis-spelling of “hold”, first used in a now <a href="https://bitcointalk.org/index.php?topic=375643.0">iconic message</a> posted by an inebriated user determined to resist constant “sell” messages from day traders). The hodlers insisted, half seriously, that Bitcoin was going “to the moon!” (used 178,000 times on the bitcointalk forums), and talked of buying “lambos” (lamborghinis) with their gains. This countercultural levity generated a sense of community and a commitment to holding Bitcoin that helps to sustain its value.</p>
<h2>The investors</h2>
<p>The last two groups that have contributed to Bitcoin’s history are more conventional. What I consider the fourth group of investors consists of speculators who have been attracted by the volatility and peaks in Bitcoin prices. </p>
<p>On the one hand, we have the day traders, who hope to exploit the volatility of Bitcoin’s price by buying and selling quickly to take advantage of short-term price movements. Like speculators in any other asset, they have no real interest in the larger picture or of questions of inherent value, but only in the price today. Their only narratives are “buy” and “sell”, often employed in an attempt to influence the market. </p>
<p>On the other hand, we have those who are drawn in by news of price bubbles. Ironically, bubble narratives in the press, often designed to deter investors, can have the opposite effect. These investors join what Keynes called a “beauty contest” – they only care what other people might be prepared to pay for a Bitcoin in the short to medium term future.</p>
<h2>The portfolio balancers</h2>
<p>The final and newest group of Bitcoin buyers are the portfolio balancers: more sophisticated investors who buy Bitcoin to hedge against wider risks in the financial system. According to modern portfolio theory, investors can reduce the riskiness of their portfolios overall by buying some Bitcoin because its peaks and troughs don’t line up with those of other assets, providing some insurance against stock market crashes. This is an emerging group, but one that could significantly raise Bitcoin’s acceptability among mainstream investors.</p>
<p>Bitcoin’s value, then, has been built on an evolving series of narratives which have drawn in successive waves of buyers. While mainstream commentators are often dismissive of Bitcoin as lacking inherent value, all asset market values depend on narrative processes like these. </p>
<p>Bitcoin may well collapse again, but so may any other financial asset. Investing in Bitcoin is neither more nor less risky than investing in the latest technology company launched on the stock market without ever having made a profit.</p><img src="https://counter.theconversation.com/content/98359/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dave Elder-Vass receives funding from the Independent Social Research Foundation. He owns an (increasingly) modest quantity of bitcoin.</span></em></p>When you look carefully, the history of Bitcoin can be traced through five key narratives.Dave Elder-Vass, Reader in Sociology, Loughborough UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/963862018-05-16T20:40:00Z2018-05-16T20:40:00ZWhat is the real value of a bitcoin?<figure><img src="https://images.theconversation.com/files/219094/original/file-20180515-195324-k3oge4.jpg?ixlib=rb-1.1.0&rect=0%2C229%2C4031%2C2788&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bitcoins and benjamins: Which is the real currency?</span> <span class="attribution"><a class="source" href="https://www.pexels.com/photo/bitcoins-and-u-s-dollar-bills-730547/">David McBee/Pexels</a></span></figcaption></figure><p>One of the hot questions regarding the bitcoin since the <a href="https://www.wired.com/2011/11/mf_bitcoin/">first ones were created in January 2009</a> is its real value. According to Warren Buffett, the most influential investor in the world, the answer to this question would be: <a href="https://www.cnbc.com/2018/05/07/warren-buffett-on-bitcoin-it-doesnt-produce-anything.html">not much</a>.</p>
<p>We will try as well to answer to this question using two concepts in economics and finance: minimal (or residual) value and Ponzi schemes. The minimal value approach is a prudent approach. Under this approach we would like to know what value remains when everything goes wrong as in cases of market disruption or economic crisis.</p>
<h2>Value as a currency or value as an investment?</h2>
<p>Before we try to value a bitcoin we would need to define it as a currency or as an investment. Its use as a means of payment with <a href="https://www.lifewire.com/big-sites-that-accept-bitcoin-payments-3485965">some merchants</a> can lead us to see the bitcoin as a currency not tied to a country and without central bank.</p>
<p>Bitcoins are usually measured in terms of their exchange rate to the Japanese Yen and US dollar as these two currencies remain the main <a href="https://www.coinhills.com/market/currency/">currencies for which bitcoins are exchanged</a>.</p>
<p>We will now try to value bitcoins as a currency using the minimal-value approach.</p>
<p>All major currencies have a central bank that monitors the exchange rate of their currency respective to other currencies and mostly to the dollar. Contrary to most traded currencies, bitcoin does not have a central bank or an entity monitoring its exchange rate. Therefore, bitcoin exchange rate to the dollar or to the Japanese yen could theoretically go down to zero.</p>
<p>As some <a href="https://www-sciencedirect-com.revproxy.escpeurope.eu/science/article/pii/B9780128021170000023">academics</a> and <a href="http://money.cnn.com/2018/01/26/technology/davos-bitcoin-currency-asset/index.html">practitioners</a> would qualify it bitcoin cannot be considered as a currency but as an investment. In finance, we would measure an investment’s intrinsic value as the sum of future revenues it generates (with a <a href="https://corporatefinanceinstitute.com/resources/knowledge/valuation/dcf-formula-guide/">discount to account for time</a>). Bitcoins do not generate any present or future revenues. Therefore, as an investment and using a minimal value approach bitcoins have a zero minimal value.</p>
<h2>Is the bitcoin the new gold?</h2>
<p>Some assets do not generate revenues, the best known unproductive asset being gold. Bitcoin has frequently been compared <a href="https://www.bloomberg.com/view/articles/2018-01-31/bitcoin-is-the-new-gold">to gold</a> given that it cannot be considered as a currency but like an investment that generates no revenues. Using our minimal-value approach, we can assume that gold has a minimal market value due to its <a href="https://geology.com/minerals/gold/uses-of-gold.shtml">industrial use</a>. Indeed, the value as an industrial good of gold would become the minimal value even if it would have no value as a financial investment. Again, bitcoin at this stage does not have any industrial use and could not pretend to such minimal value.</p>
<p>That said, to avoid a totally biased view of the bitcoin, we could argue on one potential value for it as an investment – finance methods see a value in diversification. For asset managers with large investment portfolios, one value of bitcoin could therefore come from the fact that bitcoin is not fully correlated to financial markets.</p>
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<img alt="" src="https://images.theconversation.com/files/219091/original/file-20180515-195333-1k2pgrh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/219091/original/file-20180515-195333-1k2pgrh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/219091/original/file-20180515-195333-1k2pgrh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/219091/original/file-20180515-195333-1k2pgrh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/219091/original/file-20180515-195333-1k2pgrh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/219091/original/file-20180515-195333-1k2pgrh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/219091/original/file-20180515-195333-1k2pgrh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Warren Buffett, Chairman and CEO of Berkshire Hathaway, in 2013.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/fortunelivemedia/10311228024">Fortune/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<h2>Or maybe a Ponzi scheme</h2>
<p>Then after all we have seen, why do bitcoins have a value on the market? As Warren Buffet puts it, <a href="https://www.cnbc.com/2018/05/07/warren-buffett-on-bitcoin-it-doesnt-produce-anything.html">“All you’re counting on is the next person is going to pay you more”</a>. This answer corresponds to the definition of a Ponzi scheme.</p>
<p>A Ponzi scheme can be defined as a dishonest investment scheme where older investors are paid by new entering investors. For the Ponzi scheme to work you need to have a continuous stream of new investors. In this type of system only one manager works at attracting new investors. In the case of bitcoin, the specificity relies on the fact that all owners become bitcoin managers in most cases without knowing it.</p>
<p>Ponzi schemes do not usually give solid grounds for an asset value. Again, assets valued through a Ponzi scheme end up having no value once the Ponzi scheme unravels or collapses. Ponzi schemes usually collapse in times of crisis, <a href="https://www.sec.gov/fast-answers/answersponzihtm.html#PonziCollapse">when it lacks new entrants or when people try to massively withdraw from it</a>. If the bitcoin system proves to be a Ponzi scheme, the next economic downturn may soon unravel it and bring down bitcoin to its minimal value: not much.</p><img src="https://counter.theconversation.com/content/96386/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dejan Glavas ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>One of the hot questions regarding the bitcoin since the first ones were created in 2009 is its real value. We will try as well to answer to this question using two concepts in economics and finance.Dejan Glavas, PhD Candidate in Finance, ESCP Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/948012018-04-16T22:37:50Z2018-04-16T22:37:50ZBitcoin’s wild ride and what’s ahead for the cryptocurrency<figure><img src="https://images.theconversation.com/files/214344/original/file-20180411-592-gl1ra9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">This 2013 photo shows Bitcoin tokens at a shop in Utah. What does the future hold for the volatile cryptocurrency?</span> <span class="attribution"><span class="source">(AP Photo/Rick Bowmer)</span></span></figcaption></figure><p>Bitcoin has been on a volatile ride in recent times, <a href="https://www.marketwatch.com/story/bitcoins-rally-seems-closely-tied-to-something-you-may-do-every-day-2017-08-15?link=sfmw_fb%20for%20bitcoin%27s%20recent%20and%20earlier%20bubble%20behavior">its value rising and falling</a> like a kite caught in variable winds. </p>
<p>Its future will likely be as unpredictable as its past given that it’s a currency propped up by risk-takers, a target of lawmakers and tied to nothing more substantial than an algorithm.</p>
<p>But there are certain variables and concurrent conditions that are signals worth watching when considering Bitcoin’s future.</p>
<p>An international research team comprised of me, Theodore Panagiotidis at the University of Macedonia in Greece and Orestis Vravosinos at the Barcelona Graduate School of Economics in Spain <a href="https://doi.org/10.1016/j.frl.2018.03.016">recently analyzed a broad spectrum of data</a> representing several years in the life of Bitcoin. </p>
<p>It was our attempt to reach a deeper understanding of what drives the cryptocurrency’s value. </p>
<p>Can you really predict how investors will behave around something with so many layers of complexity — around what is essentially a black box system and the subject of so much hype? </p>
<p>It’s not an easy task. We set out to bring a measure of predictability to the path the cryptocurrency will take.</p>
<h2>Online buzz, gold impact Bitcoin</h2>
<p>We looked closely at 21 variables that could potentially affect Bitcoin returns. Vital market determinants like gold and oil prices, various currency exchange rates and stock market indexes from around the world were part of the mix. </p>
<p>Government policy-related economic uncertainty, along with the internet search intensity of Bitcoin, were crucial areas of our research. </p>
<p>We took more than 2,500 observations of variables spanning a seven-year period and filtered it through what’s known as a LASSO — a “least absolute shrinkage and selection operator.” It’s an analytical model to determine what the possible predictors, or covariates, might be. </p>
<p>We found that of all the many variables, the amount of online chatter about Bitcoin, along with gold returns, and uncertainty over government policy stand out as possible predictors. </p>
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<img alt="" src="https://images.theconversation.com/files/214599/original/file-20180412-587-xysmbl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/214599/original/file-20180412-587-xysmbl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=414&fit=crop&dpr=1 600w, https://images.theconversation.com/files/214599/original/file-20180412-587-xysmbl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=414&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/214599/original/file-20180412-587-xysmbl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=414&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/214599/original/file-20180412-587-xysmbl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=521&fit=crop&dpr=1 754w, https://images.theconversation.com/files/214599/original/file-20180412-587-xysmbl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=521&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/214599/original/file-20180412-587-xysmbl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=521&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">In this February 2018 photo, a huge advertisement of Bitcoin is displayed near Shibuya train station in Tokyo. Bitcoin has been a legal form of payment in Japan since April 2017.</span>
<span class="attribution"><span class="source">(AP Photo/Shizuo Kambayashi)</span></span>
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<p>Having said that, Bitcoin is a moving target that appears not to conform to any logical patterns. </p>
<p>In relationship to gold, Bitcoin’s value tends to rise as gold rises. But will that remain consistent if the economy stumbles? In those circumstances, investors seek the safer haven of gold, American dollars and euros, entities they know to have value supported by governments and central banks. The riskier currencies, like the crypto ones, might be abandoned. </p>
<h2>Mysterious, alluring</h2>
<p>There are <a href="https://doi.org/10.1016/j.frl.2018.03.016">many cryptocurrencies in circulation</a>, but Bitcoin has outstripped them all in popularity, mostly because it is cloaked in mystery and because of the media attention surrounding its dramatic value fluxes. </p>
<p>There is a fascination with something that is new, that is technologically created and that’s hard to hack. The idea of having a Bitcoin network that can evade governments is alluring to people. </p>
<p>We found that the general chatter and interest surrounding Bitcoin, positive and negative alike, is a main determinant of its value. We used Google and Wikipedia analytics to measure the hype.</p>
<p>Bitcoin as a means of exchange has been running under the radar of regulation over the entirety of its nine-year lifespan. But we cannot see that scenario continuing for long. And it seems that investors <a href="https://link.springer.com/article/10.1007/s10257-016-0304-0">are also mindful of the looming possibility of regulatory oversight</a> since Bitcoin’s value tends to respond negatively when there is speculation about government action. </p>
<p>With Bitcoin and other cryptocurrencies, transactions are conducted free of taxation. We can’t be sure what the nature of those transactions are, but often cryptocurrencies are used to avoid taxes or duties, or to engage in illicit commerce, which makes them even more shadowy, darkly appealing currencies.</p>
<h2>Governments will want in on the action</h2>
<p>It’s not clear how governments will ultimately respond to this tax-free commerce, but we can be certain that they’ll eventually act. Wherever there are goods and services changing hands and money is being made, <a href="https://www.cnbc.com/2017/11/30/bitcoin-investors-beware-the-irs-wants-its-cut-and-you-may-not-know-it.html">government is eager to get a piece of the action.</a> </p>
<p>If cryptocurrencies continue to grow and position themselves as systems that are beyond the influence of banks and the reach of government regulation, we can be sure that governments will enact national laws and take their share of the proceeds. </p>
<p>Many people believe that Bitcoin is going to replace the money we currently use, but we doubt it. </p>
<p>That’s because big government will never allow it. Governments want the tax revenues, and they want control.</p>
<p>Once governments begin to demand access to Bitcoin transaction records, especially those carried out with mainstream businesses, it is likely that regulations will follow. Once that happens, the black box will be opened and Bitcoin’s appeal as an underground tax avoidance scheme will be lost. </p>
<p>Bitcoin’s fate is therefore highly unpredictable and dependent on what governments will do in the future. Once the crytocurrency was taken seriously by gamblers and techies, it became volatile, and that volatility is showing no signs of abating.</p>
<p>What our research has shown is that with something as erratic as Bitcoin, with online chatter its main driving force rather than economic fundamentals, it would be best for investors to fasten their seatbelts and hold on tight.</p><img src="https://counter.theconversation.com/content/94801/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thanasis Stengos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The fate of Bitcoin’s fate is highly unpredictable and dependent on what governments will do in the future.Thanasis Stengos, Professor of Economics, University of GuelphLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/939032018-04-10T20:02:17Z2018-04-10T20:02:17ZCentral-bank digital currencies: toward a cashless society?<figure><img src="https://images.theconversation.com/files/212784/original/file-20180401-189810-v2d154.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sweden is studying the possibility of an "e-krona", an electronic form of the country's currency.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>While private digital currencies such as the bitcoin are in the news daily, countries including <a href="https://www.ccn.com/chinas-digital-currency-must-have-controllable-anonymity-says-central-bank-official/">China</a> and <a href="https://www.forbes.com/sites/rogeraitken/2017/09/26/cashless-society-is-this-what-an-e-krona-in-sweden-could-look-like/">Sweden</a> are studying the creation a new form of money – a central-bank digital currency (CBDC). The objective is to complement (or eliminate altogether) banknotes and coins. But CBDCs risk revolutionising both the way money is created and distributed and the present two-tier financial system of central and commercial banks.</p>
<h2>Why are central banks considering the introduction of CBDCs?</h2>
<p>Cost considerations play a role: banknotes and coins are costly to produce, distribute, handle, and replace. Currently handling costs related to cash are cross-subsidised by commercial banks’ revenues.</p>
<p>Banknotes allow anonymous transactions: a reduced use or elimination of banknotes would help fight illegal activities. For example, in an attempt to combat fraud and corruption back in November 2016, the Indian government launched a demonetization policy, withdrawing 86% of its currency overnight.</p>
<p>In Sweden, cash payments in the retail sector fell from close to 40% in 2010 to about 15% in 2016. Two-thirds of the country’s consumers now say that they can manage without cash, and more than half of all the country’s bank branches <a href="http://www.swissmlf.ch/wp-content/uploads/2017/10/Riksbank-ekrona-report-092017.pdf">no longer conduct over-the-counter cash transactions</a>. </p>
<p>Stefan Ingves, governor of Sweden’s central Riksbank, <a href="https://www.thelocal.se/20180313/swedish-cryptocurrency-could-be-coming-soon-but-cash-is-still-needed-riksbank-boss">supports the creation of the “e-krona”</a>, but stated that it’s “reasonable” for banks to continue handling money. “A ban on cash goes against the public perception of what money is and what banks do.” He also noted that for preparedness reasons, “we need notes and coins that work without electricity.” </p>
<p>The growing popularity of private digital currencies and the distributed-ledger payment technologies they use also have central banks on alert. They can ill afford to be left behind on the currency or the technology. The problem, Ingves recently said, was that all payments could end up being controlled by private-sector banks.</p>
<h2>Can cash be eliminated?</h2>
<p>The elimination of cash is currently not feasible. Not everyone has (or can have) a bank account, a credit/debit card, or access to electronic payment systems via a smart phone or computers. People cannot be forced to have or use these tools. Access to a debit/credit card might be denied to persons not deemed creditworthy. In addition, an economy entirely based on electronic payments is subject to disruption, including cyberattacks.</p>
<p>But there are also important conceptual issues. Banknotes issued by central banks form our base money; they are our unit of measure of value. The United States <a href="https://www.thebalance.com/what-is-the-history-of-the-gold-standard-3306136">abandoned the gold standard in 1971</a> and today countries no longer back their currency with a more primitive form of money such as gold (an exception is Venezuela, which recently launched the “petro”, a cryptocurrency backed by the country’s oil reserves); today’s base money is fiat money whose value is maintained by trust.</p>
<p>Nevertheless, the largest share of the monetary mass is not in banknotes but in bank deposits. Banknotes contribute from 5% to 10% of the monetary mass depending on the country; the remaining 90-95% is formed by bank deposits. Though a bank deposit is simply a number in a computer, it is a debt redeemable on demand in banknotes, with the central banks standing ready to supply the requisite banknotes should a commercial bank not have sufficient cash on hand.</p>
<p>Were there no banknotes as base money, deposits would not be the debt of commercial banks with their clients but simply numbers that represent purchasing power. These numbers would appear conventionally as liabilities on the balance sheets of banks whose only obligation would be to transfer, upon request, a given sum to another entity. “Money,” that is purchasing power, might thus be in the hands of private-sector banks. Public trust in the generation and distribution of money might be shaken.</p>
<h2>CBDCs could change the creation and distribution of money</h2>
<p>Central banks are studying ways to eliminate banknotes while retaining their role as providers of base money. Our current banking system is two-tiered with central banks and commercial banks performing distinctly different roles. Central banks guarantee the safety and integrity of money, ensure that the monetary mass allows for economic growth, and produce the cash required by economic activity. But central banks do not deal directly with non-bank entities; commercial banks store the public’s money in accounts and transfer that money on the demand of the account’s holder.</p>
<p>In the current two-tier banking system, money is generated in two ways. First, money is created by commercial banks when they simultaneously extend a loan and credit an account of the same sum. Second, following the 2007-08 financial crisis, central banks have been creating money with <a href="http://www.businessinsider.com/what-is-quantitative-easing-2010-8?IR=T">quantitative easing</a> (QE); since QE began, the US Federal Reserve Bank has bought over $4.2 trillion in assets. Banknotes do not enter directly in this money creation process, but they do provide the accounting underpinnings. Central banks no longer target the total quantity of money directly but target instead interest rates.</p>
<p>Presently, individuals and non-bank entities cannot obtain banknotes directly from the central bank but must go through commercial banks. Should central banks create CBDCs as base money there is the possibility that they allow non-bank entities or individuals to hold CBDC accounts directly with the central banks. The possibility of doing so comes from technological advances that permit distributed ledgers, a technology that allows safe peer-to-peer transfer of money without going through today’s clearing systems. Distributed ledger is used, for example, to confirm transactions in private cryptocurrencies such as bitcoin and Ethereum.</p>
<p>The process could go further. Should the central banks allow private non-bank entities or individuals to hold CBDC accounts directly, central banks might extend credit in their digital currency. This could have important consequences for the two-tier banking system.</p>
<hr>
<p><em>Sergio Focardi is the author of <a href="https://www.routledge.com/Money-What-It-Is-How-Its-Created-Who-Gets-It-and-Why-It-Matters/Focardi/p/book/9781138228955">“Money: What It Is, How It’s Created, Who Gets It and Why It Matters”</a> published by Routledge, April 2018.</em></p><img src="https://counter.theconversation.com/content/93903/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sergio Focardi ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>With countries such as China and Sweden are studying plans to create a new form of money – a central-bank digital currency. CBDCs risk revolutionizing both the way money is created and distributed.Sergio Focardi, Enseignant-chercheur en Finance quantitative à l’ESILV et à l'EMLV, membre du De Vinci Research Center, Pôle Léonard de VinciLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/933282018-04-03T19:56:44Z2018-04-03T19:56:44ZThe shock of Indian demonetisation: a failed attempt to formalise the economy<figure><img src="https://images.theconversation.com/files/212673/original/file-20180329-189801-905cdk.png?ixlib=rb-1.1.0&rect=3%2C124%2C1032%2C608&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">People queuing to withdraw cash at an ATM. Demonetisation in India has not met its target and actually reinforced informal networks.</span> <span class="attribution"><span class="source">Santosh Kumar</span>, <span class="license">Author provided</span></span></figcaption></figure><p>On November 8, 2016, at 8 p.m., the Indian prime minister Narendra Modi announced the ban of the 500 and 1,000 rupee banknotes, the two highest value in circulation. From midnight onward, these two notes were no longer legal tender and had to be exchanged in banks for new notes.</p>
<p>The Modi’s measure was championed as an efficient means to fight corruption, promote a less-cash-based economy, and boost social protection. Recent <a href="http://www.epw.in/journal/2017/52/review-rural-affairs/insights-demonetisation-rural-tamil-nadu.html">ground-breaking data</a> from South India by a team of the <a href="http://www.ifpindia.org/content/labour-finance-and-social-dynamics">French Institute of Pondicherry</a> (IFP) and the <a href="https://en.ird.fr/the-ird">French National Research Institute for Sustainable Development</a> (IRD), and within the <a href="https://neemsis.hypotheses.org/">NEEMSIS survey</a> indicate serious reservations over those stated goals.</p>
<p>The implementation process faced technical disruptions, leading to severe cash shortages, and the overall poor preparation of the policy led the country into chaos for more than three months. The violence of the measure has been heavily criticized – for instance, <a href="http://www.thehindu.com/opinion/interview/%E2%80%98Serious-job-losses-are-taking-place%E2%80%99/article17046208.ece">Amartya Sen</a>, <a href="http://www.macroscan.org/dem/jan17/pdf/Barbara_Harriss_White.pdf">Barbara Harriss-White</a> and <a href="http://www.thehindu.com/news/cities/Hyderabad/Demonetisation-not-a-solution-to-problem-of-black-money-says-Prabhat-Patnaik/article16841981.ece">Prabhat Patnaik</a>).</p>
<p>Field observations qualify some of these criticisms while widely confirming doubt as to its credentials as a “pro-poor measure” and as an efficient mean to formalise the economy. In fact, it is rather the opposite that was observed.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/210616/original/file-20180315-104676-79drfb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/210616/original/file-20180315-104676-79drfb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/210616/original/file-20180315-104676-79drfb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/210616/original/file-20180315-104676-79drfb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/210616/original/file-20180315-104676-79drfb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/210616/original/file-20180315-104676-79drfb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/210616/original/file-20180315-104676-79drfb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Restitution of results of socio-economic survey (NEEMSIS) to villages in Tamil Nadu.</span>
<span class="attribution"><span class="source">Christophe Jalil Nordman</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Everything has changed so that nothing has changed?</h2>
<p>Demonetisation was supposed to drive out “black money”, either by encouraging black money-holders to give up their holdings, or through detection by the tax authorities once the cash was deposited in the banking system. Data from the Reserve Bank of India has now shown that this <a href="http://www.thecitizen.in/index.php/NewsDetail/index/1/11610/The-RBI-Report-And-The-Truth-About-Demonetization">failed</a>, backed up by observations at the micro level.</p>
<p>While the narrative was that people had to queue for days to deposit notes in banks, and this is partly true, field observations also reveal that old notes went on circulating very intensively: huge amounts of cash were disseminated by black money-holders into a myriad of networks, the ultimate objective being to sub-contract the deposit of non-taxable small amounts, often through a long chain of intermediaries. Both the strength and plasticity of informal networks have allowed cash holders to get rid of their old notes quite easily, using a range of tactics and social relations.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/210584/original/file-20180315-104642-3wly2d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/210584/original/file-20180315-104642-3wly2d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/210584/original/file-20180315-104642-3wly2d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/210584/original/file-20180315-104642-3wly2d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/210584/original/file-20180315-104642-3wly2d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/210584/original/file-20180315-104642-3wly2d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/210584/original/file-20180315-104642-3wly2d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Business correspondent facilitating access to bank in a village.</span>
<span class="attribution"><span class="source">Isabelle Guérin</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Furthermore, although recycling old cash had a cost, but often lower than taxation, many black money-holders had been able to use demonetisation as an opportunity to broaden their clientele or discover new market niches. For instance, an entrepreneur specialising in recycling gunny bags has invested in a construction company. Demonetisation also strengthened pre-existing business relations, allowed to build new ones, or to set up new projects. Some trader networks even used the demonetisation to boost their sales by accepting old cash, while using their network to recycle it.</p>
<h2>Failed confidence in banks</h2>
<p>Demonetisation, by forcing people to deposit their holdings in bank accounts and in line with a <a href="http://onlinelibrary.wiley.com/doi/10.1111/dpr.12272/abstract">number of measures over the past decade</a>, was also supposed to promote bank savings, especially among the poor. <a href="http://hal.ird.fr/ird-01413177/document">Mutual distrust</a> between bankers and villagers, especially among the most marginalised, was already tangible before the demonetisation. The many difficulties rural banks faced in delivering cash during the demonetisation obviously heightened such mistrust.</p>
<p>This was even more pronounced among women and Dalits, often badly treated by bankers.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/212672/original/file-20180329-189821-18teyc0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/212672/original/file-20180329-189821-18teyc0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=301&fit=crop&dpr=1 600w, https://images.theconversation.com/files/212672/original/file-20180329-189821-18teyc0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=301&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/212672/original/file-20180329-189821-18teyc0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=301&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/212672/original/file-20180329-189821-18teyc0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=378&fit=crop&dpr=1 754w, https://images.theconversation.com/files/212672/original/file-20180329-189821-18teyc0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=378&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/212672/original/file-20180329-189821-18teyc0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=378&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A group of women complaining to a clerk officer that their labour welfare benefits cannot be withdrawn from the bank.</span>
<span class="attribution"><span class="source">Santosh Kumar</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Managing cash</h2>
<p>During demonetisation, and for more than three months, the scarcity of cash significantly slowed down the economy. According to various <a href="http://www.jadbm.com/latest-articles.php?at_id=194">estimates</a>, the Indian economy lost 0.5 points of growth as a direct result. Despite the shortage of new banknotes, many economic transactions continued on the basis of mutual trust and credit, through deferred wage payments and consumer good purchases on credit. Delayed payments, which affected castes unequally, in turn reinforced informal channels of wage payments, such as wage advances, rather than formalising them.</p>
<p>In Tamil Nadu, many workers are seasonal migrants in cane cutting and brick moulding. They are used to receiving large wage advances that are distributed during the off-season.</p>
<p>Advances on wages after demonetisation were mostly received by lower castes working in brick kilns, where employers tried to use this as an opportunity to get rid of part of their old cash surplus. Labour intermediaries, usually in charge of distributing advances and managing labourers, had to negotiate with workers. Some families accepted the old cash, deposited it slowly in the bank to avoid any suspicion, and withdrew it slowly. Given the liquidity scarcity all the rural banks faced, they had to go there many times in vain, spending considerable time and money to convert their employers’ old – and certainly black – cash.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/212674/original/file-20180329-189813-who19m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/212674/original/file-20180329-189813-who19m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/212674/original/file-20180329-189813-who19m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/212674/original/file-20180329-189813-who19m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/212674/original/file-20180329-189813-who19m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/212674/original/file-20180329-189813-who19m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/212674/original/file-20180329-189813-who19m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Transporting of woody material in Tamil Nadu. Workers used to be paid in advance by cash.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/90417577@N00/3069895321/in/photolist-bYbFz9-D4BXAL-7MAGNK-5Fh1VF">Ajay Tallam/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>While interpersonal networks have been instrumental in coping with the shock of demonetisation, not all households were equally equipped to do so.</p>
<p>Interpersonal relationships of gender and caste have partially helped mitigate the harmful effects of demonetisation, but excluding those households without anyone to count on. Monetary surplus were injected into networks through gifts, loans, or wage advances. In fact, saving is first and foremost <a href="http://blog.imtfi.uci.edu/2017/01/ceremonial-expenses-as-relational.html">relational</a>, taking the form of investment “in people”.</p>
<p>Ceremonial gifts are a good example: people regularly contribute to ceremonies in their circles, which are subsequently reciprocated at their own ceremonies and are thus considered as saving.</p>
<p>The nature of these networks is highly diverse. Some are clearly based on hierarchy, meaning on caste, patriarchy or social class, and any new loan or wage advance strengthens the borrower’s inferiority, whether through high interest payments, free services or new features of labour bondage. Other financial transactions are instead based on solidarity and reciprocity, expressing the so-called <a href="https://wol.iza.org/articles/do-family-and-kinship-networks-support-entrepreneurs">redistributive nature of interpersonal networks</a>, and are most often found within caste and kin.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/212675/original/file-20180329-189810-mdpsfa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/212675/original/file-20180329-189810-mdpsfa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/212675/original/file-20180329-189810-mdpsfa.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/212675/original/file-20180329-189810-mdpsfa.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/212675/original/file-20180329-189810-mdpsfa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/212675/original/file-20180329-189810-mdpsfa.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/212675/original/file-20180329-189810-mdpsfa.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A rural market of vegetables and fruits in Tamil Nadu.</span>
<span class="attribution"><span class="source">Christophe Jalil Nordman</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Formalising or informalising the economy?</h2>
<p>Hence what really seemed to have happened, instead of a clear movement toward more formalised economic transactions, has rather been a reinforcement of the informal economy, which is the very thing that allowed actors to temper the violence and harmful consequences of the shock.</p>
<p>The policy implications of this finding are crucial. It is fully justified to think about measures for formalising the economy, but to expect that technology – through bank and the digitalisation of payments – could solve poverty and lack of protection is an illusion.</p>
<p>In Europe, <a href="https://www.cairn.info/revue-critique-internationale-2015-4-page-9.htm">bancarisation</a> emerged at the same time as social protection, but it did not come first, and was absolutely not the fundamental cause of social protection.</p>
<p>In present-day discourse on digitalisation, the link to formalisation often remains elusive, as if it were automatic. Yet formalisation requires much more than transparency of payment. While cashless policies flourish in various parts of the world, we believe our findings have major implications, and seriously question the merit of such policies, especially for the most marginalised segments of the population.</p><img src="https://counter.theconversation.com/content/93328/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christophe Jalil Nordman works for the French National Research Institute for Sustainable Development (IRD), is affiliated to DIAL and the French Institute of Pondicherry (IFP). This research was supported by the NOPOOR project, the IRD and IMTFI. </span></em></p><p class="fine-print"><em><span>Isabelle Guérin a reçu des financements de IMTFI</span></em></p>Instead of a clear movement toward more formalised economic transactions, demonetisation in India has reinforced the informal economy.Christophe Jalil Nordman, Research Fellow at DIAL (Paris, France) and IFP (Pondicherry, India), Institut de recherche pour le développement (IRD)Isabelle Guérin, Directrice de recherche à l'IRD-Cessma, Institut de recherche pour le développement (IRD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/895852018-01-03T13:15:17Z2018-01-03T13:15:17ZThe Bank of England is planning a bitcoin-style virtual currency – but could it really replace cash?<figure><img src="https://images.theconversation.com/files/200674/original/file-20180103-26166-17d08zw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/image-depicting-golden-bitcoin-british-pound-775989712?src=DdfR8dqeEhSQEqeppiVA4A-1-12">Shutterstock</a></span></figcaption></figure><p>Governments are extremely worried about cryptocurrencies such as bitcoin. These virtual currencies mean you can make payments without involving the banks that most economies and government financial models are built on. People can transfer large amounts of money without the authorities knowing, potentially making it easier to evade tax or launder money.</p>
<p>So several countries’ central banks, including the <a href="http://www.telegraph.co.uk/news/2017/12/30/bank-england-plots-bitcoin-style-digital-currency/">Bank of England</a> and the <a href="https://www.reuters.com/article/us-israel-cenbank-currency/israel-central-bank-mulls-issuing-digital-currency-for-faster-payments-idUSKBN1EI0D5">Bank of Israel</a>, are reportedly planning to launch their own digital currencies. This could help lure people back into using an official system that combines some of the benefits of both traditional and crypto- currencies. But the risks involved may be too great for many typical cash users to bear.</p>
<p>One of the major drawbacks of existing cryptocurrencies is that their value tends to <a href="https://www.ft.com/content/4682c87c-d560-11e7-a303-9060cb1e5f44">swing widely</a> and it is often difficult to pinpoint how much they are really worth. National cryptocurrencies would be tied to the value of the country’s official currency, making them less volatile and easier to actually use as a way of spending.</p>
<p>National cryptocurrencies would also make payments much faster because transactions would be recorded instantly and wouldn’t have to be cleared by a bank (although some implementations require around eight minutes to be verified). The existing systems for electronic payments and transfers can often involve several banks and companies sending each other data and running security checks that add time and expense <a href="https://www.investopedia.com/articles/personal-finance/050515/how-swift-system-works.asp">to transactions</a>. Cryptocurrencies are able to bypass this clearing process altogether because they don’t actually involve transfers from one entity to another. </p>
<p>Instead they use a technology known as a blockchain, which keeps a public but encrypted <a href="https://www.ibm.com/blogs/blockchain/2017/05/the-difference-between-public-and-private-blockchain/">record of all transactions</a>. Basically, as illustrated in the figure below, the payer (in this case, Bob) signs a transaction to agree to pay someone (Alice) a given amount. The transaction is then validated using Bob’s personal encryption code known as his “private key”. If the transaction is valid, it is added onto the blockchain, recording how much money Alice and Bob now have.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=472&fit=crop&dpr=1 600w, https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=472&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=472&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=593&fit=crop&dpr=1 754w, https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=593&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/200544/original/file-20180102-26160-12zl5wb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=593&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Outline of traditional transactions and blockchain based ones.</span>
<span class="attribution"><span class="source">Author supplied</span></span>
</figcaption>
</figure>
<p>Because all transactions would be recorded in this way, the government would have much greater oversight of who is paying whom and how much, helping to crack down on financial crime. Unfortunately, because transactions on blockchain ledger are typically kept as a public record, it might also be possible for other people to access this information and see how much you or anyone else is spending and what you’re buying.</p>
<p>Your money might also be at greater risk if it’s stored as a cryptocurrency. Currently banks guard your wealth and will always release it if you can prove your identity, while credit card companies insure you against fraud. If your bank account is hacked, there is a good chance you will get your money back. But cryptocurrencies store money in independent digital wallets that can be <a href="https://www.linkedin.com/pulse/looking-cryptocurrency-wallets-prof-bill-buchanan-obe-phd-fbcs/">lost or broken into</a>. If that happens there is no one who can help you.</p>
<h2>Currency needs trust</h2>
<p>For a typical shopper, there would be little difference between using a national cryptocurrency and something like Apple Pay, which makes payments at the click of a trusted application on a mobile device. I love using Apple Pay on my iPhone to purchase my coffee in the morning, as well as my bus tickets and even my parking. I now have little use of cash and only carry around my credit cards in a wallet as a backup in case my battery fails.</p>
<p>Having found out over Christmas that most supermarkets now do not have a limit on Apple Pay, I see it as one of the most trusted methods of payment, especially as I trust the <a href="https://support.apple.com/en-gb/HT204587">fingerprint scanner on my phone</a>. I also know that my bank is involved in the transaction. So I believe the days of paper money – and even carrying around cards – are rapidly fading. Our mobile phone and our trust in our apps provide us with more trusted ways of making transactions. </p>
<p>But Apple Pay is still backed up by trusted financial institutions. The step to cryptocurrency may be one step too far for most people. Few people would actually understand the risks of storing the cryptocurrency in a digital wallet and could leave themselves open to losing all their money.</p>
<p>I believe that most countries will deal with cryptocurrencies by regulating them and monitoring their use rather than co-opting them. But it will be interesting to see whether regulation or competition will win in the battle of crytocurrencies. While the encryption of crytocurrencies can create strong digital trust in the technology, human trust in the transactions themselves will likely be the key factor that determines whether citizens adopt government-backed cryptocurrencies.</p><img src="https://counter.theconversation.com/content/89585/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bill Buchanan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>National cryptocurrencies could make payments faster and prevent crime, but they come with their own risks.Bill Buchanan, Head, The Cyber Academy, Edinburgh Napier UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/889712017-12-13T16:14:41Z2017-12-13T16:14:41ZHow Bitcoin futures trading could burst the cryptocurrency’s bubble<figure><img src="https://images.theconversation.com/files/199000/original/file-20171213-27555-auyx8h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>A new wave was added to the never-ending Bitcoin mania when the Chicago Board of Exchange (CBOE) became the first major derivative exchange to launch Bitcoin <a href="https://www.ft.com/content/9404475c-dd9d-11e7-a8a4-0a1e63a52f9c">futures on December 10</a>. Such was the euphoria among early investors that trading was halted twice due to CBOE speed breakers, which slow or pause trading when price movements are excessive. </p>
<p>The launch of Bitcoin futures at CBOE is set to be followed by its cross-town rival, the Chicago Mercantile Exchange (CME) Group, which plans to launch its own version of Bitcoin futures trading on December 18. And Nasdaq is preparing for a similar launch <a href="https://www.bloomberg.com/gadfly/articles/2017-12-07/if-the-banks-won-t-touch-bitcoin-futures-i-know-who-will">in the second-half of 2018</a>. </p>
<p>Bitcoin futures allows traders to speculate on what the Bitcoin price will be at a later date. For instance, at the time of writing this article, the January contract for Bitcoin was trading around US$18,300, <a href="https://www.theguardian.com/business/live/2017/dec/11/bitcoin-price-futures-trading-begins-cryptocurrency-business-live">up from an opening price of US$15,000</a>. Traders bet on this and profit accordingly.</p>
<p>Such was the excitement at the launch of futures that the Bitcoin price touched an all-time high of US$17,382.64 <a href="https://www.coindesk.com/bitcoin-price-back-17k-set-new-time-high/">after one day of CBOE trading</a>. This might sound good for Bitcoin lovers, but it could yet spell doom for the cryptocurrency in the long run.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/199002/original/file-20171213-27555-eb52w3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/199002/original/file-20171213-27555-eb52w3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=386&fit=crop&dpr=1 600w, https://images.theconversation.com/files/199002/original/file-20171213-27555-eb52w3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=386&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/199002/original/file-20171213-27555-eb52w3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=386&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/199002/original/file-20171213-27555-eb52w3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=485&fit=crop&dpr=1 754w, https://images.theconversation.com/files/199002/original/file-20171213-27555-eb52w3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=485&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/199002/original/file-20171213-27555-eb52w3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=485&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Trading frenzy.</span>
<span class="attribution"><span class="source">Joseph Sohm / Shutterstock.com</span></span>
</figcaption>
</figure>
<p>Bitcoin futures could actually end up reducing the price of Bitcoin. Futures trading gives new investors the choice to bet against Bitcoin and also allows them to settle contracts in dollars, <a href="https://www.cnbc.com/2017/12/11/bitcoin-futures-launch-could-be-bad-for-bitcoins-price-tech-analyst-gene-munster-says.html">boosting their liquidity</a>. Plus, Bitcoin futures allows investors to trade off the cryptocurrency without actually owning it. This protects them from any volatility in the real-time spot market. This could reduce the demand for Bitcoin, pushing down prices. </p>
<h2>Futures lessons</h2>
<p>Even though crypto futures are new to the market, futures contract trading <a href="https://bebusinessed.com/history/history-futures-trading/">dates back to ancient times</a>. In 1750BC in Mesopotamia the Babylonian king, Hammurabi, introduced a legal code, which included stipulations for trading goods at a future date for an agreed-upon price. </p>
<p>A futures contract, in its simplest form, is an agreement to buy or sell an asset at a future date at an agreed-upon price. One party to the contract agrees to buy a given quantity of securities (such as stocks or bonds) or commodities (oil, gold, Bitcoin), and take the delivery on a future date while the other party agrees to deliver the asset. </p>
<p>Futures markets involve hedgers and speculators. Hedgers are concerned with protecting themselves from future price drops. Hedgers will buy or sell their commodity to lock in a price against future risks of it dropping in value. Speculators assume the risk, often borrowing a substantial amount of money to buy contracts that they hope will go up in the future. If the market moves against them, they will lose more than they invested.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/199003/original/file-20171213-27597-9eut85.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/199003/original/file-20171213-27597-9eut85.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/199003/original/file-20171213-27597-9eut85.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/199003/original/file-20171213-27597-9eut85.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/199003/original/file-20171213-27597-9eut85.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/199003/original/file-20171213-27597-9eut85.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/199003/original/file-20171213-27597-9eut85.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Futures trading is nearly as old as normal trading.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
</figcaption>
</figure>
<p>One key requirement of futures contracts is that they must be traded on standardised exchanges such as the CBOE or CME. The arrival of Bitcoin futures at an established and well-regulated derivative exchange will encourage more investors to trade in digital currency, giving Bitcoin a place among mainstream finance. Even household names <a href="https://www.bloomberg.com/news/articles/2017-12-07/goldman-sachs-is-said-to-clear-bitcoin-futures-when-they-go-live">including Goldman Sachs</a> have said they plan to clear Bitcoin futures on behalf of some clients. </p>
<p>This will fuel the cryptocurrency’s price rise, as crypto traders and dealers can hedge their positions based on the future market. For example Bitcoin miners will benefit from futures contracts as they can use them to hedge against their mining cost, getting money in advance from speculators hoping to make a future profit. </p>
<p>On the flip side, the launch of Bitcoin futures will attract greater scrutiny from the regulators which will cast a shadow on the fate of the Bitcoin in the long run. In this regard, the trade association for the futures markets, the Futures Industry Association <a href="https://fia.org/articles/open-letter-cftc-chairman-giancarlo-regarding-listing-cryptocurrency-derivatives">warned</a> the US regulator that not enough risk evaluation has been done on Bitcoin and the risks it poses to financial stability. </p>
<p>The launch of Bitcoin futures has aggravated other regulators, with scrutiny beginning to encircle the cryptocurrency. Hong Kong’s regulator <a href="http://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=17EC79">issued a warning</a> that only licensed firms can offer such products within Hong Kong. In Korea, the Financial Services Commission financial regulator <a href="http://www.businesskorea.co.kr/english/news/money/20022-trade-bitcoin-futures-s-korean-financial-authorities-ban-bitcoin-futures-trading">issued a directive</a> that bans securities firms from taking part in Bitcoin futures transactions. </p>
<p>Perhaps more worryingly, the levels of futures trading has not been as high as the initial flurry of excitement may suggest. The volume of trading since bitcoin’s launch on CBOE <a href="https://www.ft.com/content/40a1aa1e-2cc9-3b09-a90e-deda51b8178a">has been relatively low</a>, especially compared with more established currencies futures.</p>
<p>So, although Bitcoin has the added legitimacy of being traded on futures exchanges, the relatively low levels of interest from big institutional investors is indicative. If history is anything to go by, the tulip bubble <a href="https://www.theguardian.com/technology/2017/dec/11/bitcoin-bubble-warnings-futures-contract-trading-chicago">burst in February 1637</a> – not long after the Dutch created a futures market for buying bulbs in 1636 at the peak of tulip mania. The advent of futures trading may well further inflate the <a href="https://theconversation.com/the-bitcoin-bubble-how-we-know-it-will-burst-88511">“Bitcoin bubble”</a> and push it to its bursting point.</p><img src="https://counter.theconversation.com/content/88971/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nafis Alam does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Futures trading is driving up the price of Bitcoin but institutional investors remain cautious.Nafis Alam, Associate Professor, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/868702017-11-09T16:32:12Z2017-11-09T16:32:12ZHate globalisation? Try localism, not nationalism<figure><img src="https://images.theconversation.com/files/194001/original/file-20171109-13299-1gj0mop.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/deflated-planet-earth-12399259?src=K_ngvD-YcTZvgGPV4SZdvg-1-21">italianestro/Shutterstock</a></span></figcaption></figure><p>It hardly needs saying, but there are changes afoot in the political economy of the world. Where there is <a href="https://en.wikipedia.org/wiki/Globalization">globalisation</a>, there are <a href="http://www.telegraph.co.uk/news/2017/07/06/watch-liveprotesters-gather-g20-demonstration-hamburg/">globalisation protestors</a>. This is <a href="http://www.huffingtonpost.co.uk/dr-andy-price/the-leftbehind-once-had-a_b_13297202.html">nothing new</a>, but it is becoming mainstream. </p>
<p>The antithesis of globalisation, <a href="https://en.wikipedia.org/wiki/Rise_of_nationalism_in_Europe">nationalism</a>, and the pursuit of your own country’s interests over those of everyone else, has bubbled <a href="https://www.ft.com/content/53fc4518-4520-11e6-9b66-0712b3873ae1?mhq5j=e5">back up in Europe</a>. And it’s not just Europe, of course. In the US, <a href="https://www.washingtonpost.com/news/monkey-cage/wp/2017/06/12/trump-is-a-new-kind-of-protectionist-he-operates-in-stealth-mode/">president Donald Trump</a> is (among other initiatives) <a href="http://fortune.com/2017/03/24/trump-executive-order-trade-deal/">rethinking the American commitment to free trade</a>.</p>
<p><a href="http://www.worldbank.org/en/news/feature/2013/10/25/The-Winners-and-Losers-of-Globalization-Finding-a-Path-to-Shared-Prosperity">In the rest of the world</a>, the experience of globalisation shows it creates some <a href="https://www.huffingtonpost.com/branko-milanovic/winners-of-globalization-_b_4603454.html">winners</a> and some <a href="https://theconversation.com/the-least-skilled-workers-are-the-losers-in-globalisation-63655">losers</a>. This varies <a href="https://www.theguardian.com/cities/2015/jan/19/north-south-divide-widen-thinktank-data">geographically</a> and in different <a href="http://www.telegraph.co.uk/finance/newsbysector/industry/11941578/The-perfect-storm-that-has-brought-Britains-steel-industry-to-its-knees.html">economic fields</a>, and is shown in <a href="http://oxfordindex.oup.com/view/10.1093/acprof:oso/9780198728863.003.0002">different aspects of our lives</a>.</p>
<p>And so, someone in London might find their house is worth more. As foreign capital flows in <a href="https://www.thetimes.co.uk/edition/news/new-homes-sold-to-corrupt-foreign-buyers-gh6v9vf3v">to buy up large swaths of the capital</a> it increases their wealth, while others might be priced out of the market. In some sectors of the market, wages <a href="https://www.forbes.com/sites/jeffreydorfman/2016/11/30/trump-is-right-globalization-has-slowed-middle-class-income-growth/#642557b22183">might be declining</a> as a result of global competition, migration, <a href="https://www.theguardian.com/business/2017/jul/06/uk-workers-poverty-pay-gig-economy-frank-field-report">casualisation</a> or <a href="https://www.theverge.com/2017/3/28/15086576/robot-jobs-automation-unemployent-us-labor-market">automation</a>. In the final analysis, however, it is not a matter of whether <a href="https://www.theguardian.com/commentisfree/2016/sep/30/globalisation-poverty-corruption-free-trade-liam-fox">globalisation causes these changes</a>, it is rather more that <a href="http://www.independent.co.uk/news/uk/politics/globalisation-poll-low-wages-inequality-technology-comres-a7467491.html">people feel that it does</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/193964/original/file-20171109-27108-zd7r1e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/193964/original/file-20171109-27108-zd7r1e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/193964/original/file-20171109-27108-zd7r1e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/193964/original/file-20171109-27108-zd7r1e.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/193964/original/file-20171109-27108-zd7r1e.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/193964/original/file-20171109-27108-zd7r1e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/193964/original/file-20171109-27108-zd7r1e.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/193964/original/file-20171109-27108-zd7r1e.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Wealth curve.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/row-typical-english-terrace-houses-693209467?src=HkCE0-SoTz6Nn1dXXkC1-w-3-78">Tana888/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Walls and Wails</h2>
<p>Globalisation is not, however, merely a matter of <a href="https://www.forbes.com/sites/mikecollins/2015/05/06/the-pros-and-cons-of-globalization/#70b76ee9ccce">trade</a>, <a href="http://www.oecd.org/insights/43568302.pdf">migration</a> and <a href="http://www.oecd.org/sti/ind/offshoringandemploymenttrendsandimpacts.htm">foreign outsourcing</a>. To many it seems <a href="http://www.independent.co.uk/news/business/outlook-we-cant-sell-all-of-britain-to-foreigners-1155179.html">Britain itself is for sale</a> as an increasing proportion of UK businesses and assets <a href="http://www.regionalstudies.org/uploads/documents/Britain-for-sale.pdf">answer to foreign owners</a>.</p>
<p>Economic theory suggests, therefore, the nation will increasingly be run for the <a href="https://www.msn.com/en-gb/money/companies/33-quintessentially-british-brands-that-are-not-actually-british/ss-AAfpa3h">benefit of foreign capital</a>, <a href="http://www.dailymail.co.uk/debate/article-1369046/Last-British-owned-port-sold-abroad-UK-sells-soul-highest-foreign-bidder.html">rather than the citizens</a>. On top of this, there is the danger that inflows of foreign capital will cause the exchange rate to appreciate, making it <a href="https://theconversation.com/steel-is-just-another-tipping-point-for-britains-unbalanced-economy-58298">more difficult to export</a>, reducing manufacturing output and reducing employment in those sectors affected.</p>
<p>To protect them from forces beyond their control, citizens across the world are increasingly looking to the nation state for protection, hence the rise of what is often called nationalism. <a href="http://housedivided.dickinson.edu/sites/lincoln/fragment-on-government-july-1-1854/">As Abraham Lincoln noted</a>: </p>
<blockquote>
<p>The legitimate object of government is to do for a community of people whatever they need to have done, but can not do at all, or can not so well do, for themselves – in their separate, and individual capacities.</p>
</blockquote>
<p>It is clear, no individual or community can stand against <a href="http://www.soc.ucsb.edu/faculty/robinson/Assets/pdf/Global%20Capital%20Leviathan.pdf">the forces of global capital</a>, and Western governments appear averse to giving the workforce the <a href="https://www.washingtonpost.com/news/posteverything/wp/2017/08/30/the-trump-administrations-ongoing-attack-on-workers/">means to protect itself</a>, through, for example, <a href="http://www.mirror.co.uk/news/politics/7-times-theresa-tried-slash-10426005">increasing employment rights</a> and <a href="https://www.newstatesman.com/politics/2015/06/conservatives-attacks-trade-unions-are-attack-our-most-fundamental-freedoms">unionisation</a>. However, in their search for a strong government to protect them, citizens are in danger of giving the state <a href="https://mises.org/sites/default/files/Road%20to%20serfdom.pdf">too much power over their lives</a>. </p>
<p>It is by no means assured that the policies which suit a strong domestic government will be better than those which suit foreign owned multi-national corporations. Also, history indicates the fear of global capital may be coopted by unscrupulous politicians into a fear of other nations or fear of other peoples.</p>
<h2>Think Locally</h2>
<p>Rather than nationalism, therefore, <a href="http://www.betterway.network/examples-of-localism/">we might turn to localism</a>. In the UK context, this <a href="https://www.gov.uk/topic/government/devolution">might be devolution</a> with real (financial) localised power, and that power realised through local government and local business.</p>
<p>An economy of big businesses (operated for the benefit of global owners) is less than ideal for the individual and society. In contrast, a society of many small local businesses is more resilient, more <a href="https://www.theguardian.com/money/2013/dec/06/shop-locally-small-business-saturday-seven-reasons">empowering</a> and more in keeping with the spirit of capitalism <a href="https://www.theguardian.com/money/2013/nov/22/house-prices-boosted-thriving-local-trade-small-businesses">and of the market</a>. We must also bear in mind that increasing business concentration (fewer, but larger firms) <a href="https://www.theatlantic.com/business/archive/2015/11/cities-economic-fates-diverge/417372/">is a driver of increasing inequality</a>. If a business is too <a href="http://news.sky.com/story/bank-of-england-governor-ending-too-big-to-fail-not-complete-11059507">big to (be allowed to) fail</a>, then the government has failed in its duty to keep business small.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/193972/original/file-20171109-27161-xhnd9y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/193972/original/file-20171109-27161-xhnd9y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/193972/original/file-20171109-27161-xhnd9y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/193972/original/file-20171109-27161-xhnd9y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/193972/original/file-20171109-27161-xhnd9y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/193972/original/file-20171109-27161-xhnd9y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/193972/original/file-20171109-27161-xhnd9y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/193972/original/file-20171109-27161-xhnd9y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Small enough?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/tambov-russian-federation-june-22-2017-703381087?src=c1QU-JwmSMvCc4mEQCcISA-1-55">Ekaterina_Minaeva</a></span>
</figcaption>
</figure>
<p>Economic theory indicates that those with no stake in a community other than profit extraction avoid suffering from localised ill effects <a href="http://www.manchestereveningnews.co.uk/business/business-news/4000-more-people-unemployed-north-13777711">such as unemployment</a>, <a href="https://www.theguardian.com/voluntary-sector-network/2017/oct/05/poverty-austerity-england-charity-support">poverty</a>, <a href="https://www.theguardian.com/society/2017/aug/29/food-poverty-is-new-normal-in-uk-we-adopted-from-the-states">want</a> and <a href="http://www.independent.co.uk/news/uk/home-news/homelessness-rough-sleeping-rise-crisis-homeless-three-quarters-decade-a7884261.html">homelessness</a>. It follows those who live and work in a community have a greater stake in its prosperity.</p>
<p>The government might likewise consider how we might prevent those who do not even live in the country from <a href="https://www.bloomberg.com/news/articles/2017-10-31/new-zealand-to-slap-home-buying-ban-on-foreigners-to-ease-market">driving up house prices</a>. </p>
<p>Local protection from exploitation by global interests requires the right mix of global and local policies. And local government policies require adequate financing. By local financial power, I don’t mean local taxes. That has the potential to fragment the nation, <a href="https://www.theparliamentmagazine.eu/articles/news/european-court-justice-cracks-down-benefit-tourism">as it has, to some extent, in the EU</a> (whether <a href="http://www.telegraph.co.uk/news/worldnews/europe/11224615/EU-benefit-tourists-face-being-sent-home-after-landmark-court-ruling.html">perceived rightly</a> or <a href="http://www.employment-studies.co.uk/news/true-cost-welfare-tourism">wrongly</a>). </p>
<p>If we fund education or social care out of local taxes, for example, there will tend to be a race to the bottom as local authorities will be motivated to underperform to encourage vulnerable families <a href="http://www.independent.co.uk/news/uk/home-news/over-50000-families-shipped-out-of-london-in-the-past-three-years-due-to-welfare-cuts-and-soaring-10213854.html">to go and live elsewhere</a>. It follows taxes should be collected nationally, and shared proportionally (on the basis of demographic profile) to the devolved authorities.</p>
<p>There is no space here to discuss in detail other possible localism policies here, but there are many ways to promote local ownership and local empowerment. That could include local currencies, boosts to council housing, local authority ownership of utilities or support for locally-owned high street shops. However, it is not a policy mix I suggest, rather it is an emphasis.</p>
<p>Ultimately, the only viable alternative to the choice currently on offer, the choice of <a href="https://en.wikipedia.org/wiki/There_is_no_alternative">Big State or Big Business</a>, is Small State and Small Business, or more appropriately Local Government and Local Business. To pursue localism will require a systemic shift in how the national government goes about shaping society, but I suggest it is possible to promote social justice in a capitalist context in no other way.</p><img src="https://counter.theconversation.com/content/86870/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Albertson is a member of the Labour Party and a Fellow of the RSA. </span></em></p>Putting money into the hands of local communities will be a more useful antidote to the whims of world capitalism.Kevin Albertson, Professor of Economics, Manchester Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/807482017-07-16T19:58:38Z2017-07-16T19:58:38ZThe blockchain could have better security than the banks<figure><img src="https://images.theconversation.com/files/178196/original/file-20170714-14242-1tcyehh.gif?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Voice authentication technology could be used to increase blockchain security. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/umdnews/7562831366/in/photolist-cwiuhf-TzCRPz-nEgux8-nkZsMj-4R9d2J-7i3G4x-dRvUMU-U3G8tw-8tMPwD-UuANgS-chRY5h-UaX2Ze-oD3UH8-8MCUGP-cK5DNb-jARJTp-7yKVEH-oHLE4-a8EqMf-cVq7ef-mk1Ykq-jSz5Yn-9NEtYQ-9NGKrb-6YzmM-9M2DUT-9NJybd-egFRpW-9NDrQR-9NEwpU-9NGabs-tEsAP-9pW7UN-dvnstx-9dNuwX-9deqB-UmzCVK-jARJEt-ruZ24h-bBTzK5-cfsoz-K1FE4-chLkuY-ezXWu9-TsHqWo-3UN759-9NAsCc-dS46mi-8tQTrh-9NGn6D">Merrill College of Journalism/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>There are ways to improve the online ledger blockchain by taking some security notes from banks. If people could use both two-step verification and spending limits on the blockchain, this would reduce any economic loss from cyber attacks and in turn encourage more users.</p>
<p>The <a href="https://theconversation.com/au/topics/blockchain-11427">blockchain</a> is a global network of computers that run the same blockchain software. Transactions on the blockchain are currently limitless and there is no one governing body. Introducing security measures could demonstrate a level of predictability in the blockchain that could build more trust.</p>
<p>At the moment there are third-party sites that perform transactions with the blockchain on your behalf. They are owned and managed separately from the blockchain itself, and this presents a single point of failure.</p>
<p>These sites, like <a href="https://www.kraken.com/">Kraken</a>, <a href="https://changelly.com/">Changelly</a> and <a href="https://shapeshift.io/#/coins">Shapeshift</a>, allow people to purchase, as well as exchange, blockchain assets. Activity on these sites includes purchasing Bitcoin with US dollars or exchanging Bitcoin for Ethereum assets. </p>
<h2>Current flaws in the system</h2>
<p>The blockchain ecosystem is by no means perfect. Many people shy away from using it due to its perceived volatility. There is no “code of conduct” protocol for the blockchain at the moment and it’s likely there never will be. </p>
<p>In addition, creating and maintaining blockchain software is arduous and managed by only a few people globally. These software developers, who are the trailblazers of this technology, are being disadvantaged by constantly being forced to respond to malicious attacks. </p>
<p>There have been many malicious attacks on the blockchain including the <a href="https://twitter.com/eth_classic/status/880597604559720448">very recent attack on a third-party online wallet</a>. In this attack, an unknown user was able to hijack the third-party site and redirect all transactions to their account. </p>
<p>These and other <a href="http://thehackernews.com/2016/10/blockchain-bitcoin-website.html">malicious attacks</a> have made blockchain assets either temporarily unavailable or permanently unrecoverable. It’s for these reasons that the solution to secure the blockchain can’t be owned and managed by third-parties, and must be part of the blockchain itself.</p>
<p>Security measures like the ones we’re proposing may reduce the severity and speed of any malicious attacks. Lowering the bounty for malicious attacks could also prove to be a disincentive for this behaviour.</p>
<h2>Bank style security for blockchain</h2>
<p>The mechanisms we use to build trust in the traditional financial institutions could be coded into the blockchain. </p>
<p>It’s unlikely that a blockchain user will use the technology to spend 100% of the assets in their account, with no notice whatsoever. This is why hacks of these accounts are so obvious, just as they would be if your bank account was suddenly drained. </p>
<p>Adjustable spend and transaction limits currently protect mainstream bank account users from one malicious transaction. There is no reason the same kind of consumer protection cannot apply to cryptocurrency users. </p>
<p>In order for this to work, the blockchain needs to verify that you are the legitimate user of the account, who is wanting to raise and lower spending limits for the purpose of transferring funds. </p>
<p>We propose this could work via voice authentication. This is where a blockchain user performs a transaction on the blockchain and is subsequently prompted to provide a single-use vocal passphrase – this is the second step in the two-step verification process.</p>
<p>This would be similar to the program <a href="http://www.captcha.net/">Captcha</a>, but with one unique twist. Captcha is designed to discern legitimate users of the internet from online robots. It works by generating a one-time image of letters and numbers that the user has to type correctly to proceed. Captcha can verify if you are human, but is unable to verify your individual identity.</p>
<p>Using the human voice with this type of technology could be <a href="https://securityintelligence.com/the-evolution-of-voice-authentication-as-a-security-method/">more commonplace in the future</a>. It’s also less complex than other types of biometric verification, which require sophisticated infrastructure such as retina- and iris-scanning hardware.</p>
<p>More importantly, the human voice shares blockchain attributes. Your voice and your public blockchain key are both public and unique. </p>
<p>At present there is no guarantee of holding blockchain assets without disruption of some kind. Providing security in the blockchain would convert into a degree of predictability in the technology. If this was shown to work in the long term, it would also create trust. </p>
<p>Obviously, we trust traditional currencies. For example, laws provide a promise that a $20 note will result in a mutual exchange of goods and services to that value. So once a degree of predictability is established in a blockchain, there will also be new business opportunities from traditional markets, such as insurance in case of sudden undue economic loss.</p>
<p>It’s in the interests of the majority stakeholders of blockchain to consistently look for responses and improvements that reduce the limitations of the technology. A malicious attack, intent on bringing down the architecture of blockchain technology, would unfairly relegate the blockchain to a history as another ponzi scheme.</p><img src="https://counter.theconversation.com/content/80748/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timothy McCallum has received funding from AMP and Amazon. </span></em></p><p class="fine-print"><em><span>Luke van der Laan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Providing security in the blockchain would convert into a degree of predictability in the technology. If this was shown to work in the long term, it would also create trust.Timothy McCallum, Director USQ Student Guild, Blockchain Programmer, Doctoral Candidate USQ, University of Southern QueenslandLuke van der Laan, Senior Lecturer (Foresight) and Director; Professional Studies, University of Southern QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/793502017-06-19T20:01:29Z2017-06-19T20:01:29ZPrice hikes in Ether and Bitcoin aren’t the signs of a bubble<p>When there is a rapid growth in any of the crypto-currencies and assets such as Bitcoin, Ether, Zcash and others, many will call it out as a <a href="https://techcrunch.com/2017/06/07/what-the-hell-is-happening-to-cryptocurrency-valuations/">bubble</a>. Indeed, on a relatively short time scale it clearly looks like a <a href="http://www.coindesk.com/25-billion-30-days-cryptocurrencies-bubble/">bubble</a>.</p>
<p>The entire <a href="https://coinmarketcap.com/">crypto-currency market capitalisation</a> currently stands at around US$100 billion; it was US$60 billion one month ago. But Bitcoin was worth 1/100 of a US cent in June of 2009, 7 cents in June 2010, and US$7 in June of 2012. </p>
<p>Recently all eyes were on Ether. Over a 90 day period, Ether appreciated twice as quickly as Bitcoin did in late 2013, when Bitcoin crashed to around 35% of it’s highest value. Aside from the 2013 crash, Bitcoin has experienced smaller crashes many times since, but is now worth double its 2013 high. </p>
<p>In the longer term, these are fluctuations around a strong growth trend. Crashes will cause some to abandon the field. But signals of longer term growth in these crypto-currencies and assets point to a possible emergence of a new type of market, through the building of a new economic infrastructure. </p>
<p>Ether is the token of the <a href="https://www.ethereum.org/">Ethereum</a> <a href="https://theconversation.com/au/topics/blockchain-11427">blockchain</a>, a platform that runs “smart contracts” through a distributed online ledger that records transactions. It’s second only to the crypto-currency Bitcoin in price. Some believe it will one day overtake Bitcoin (a process dubbed “<a href="http://www.coindesk.com/flippening-will-ether-pass-bitcoin-will-mean/">The Flippening</a>”).</p>
<h2>Price hikes not the sign of a bubble</h2>
<p>Fundamental aspects of the technology that underpins crypto-currencies and assets are causing people to re-imagine, and then enact, new ways of creating and exchanging value online. </p>
<p>The key difference between Bitcoin and Ethereum is that you can use Bitcoin for payments, but you can use Ether to automate any number of processes using <a href="https://theconversation.com/au/topics/smart-contract-23131">smart contracts</a>. </p>
<p>While many use cases for Ethereum are still at the proof-of-concept stage, it is now attracting the attention of major banks, businesses and <a href="http://www.data61.csiro.au/en/Our-expertise/Expertise-Strategic-insight/Blockchain">governments</a>, all interested in the potential of the technology to provide greater efficiency and transparency in transactions. That normalisation has collapsed the implicit risk premium attached to this technology. </p>
<p>Venture capitalist Albert Wenger describes the current activity in crypto-currencies and assets as “<a href="http://www.usv.com/blog/fat-protocols">fat protocol investing</a>”. To explain what this is, take the example of the underlying internet and web protocols (TCPI/IP and HTTP), used to build and run websites. These are not able to store value - therefore they are “thin protocols” in Wenger’s terminology. So instead, people invest in companies that make software (applications) and hardware that rely on these protocols.</p>
<p>Companies such as Google and Facebook made a fortune by collecting and storing data generated by users through their online interactions. Meanwhile, users, and the developers who created internet and web protocol, received nothing in return. Blockchain is a “fat protocol” because it can be monetised, including incentives for developers but also for users. For example, the creator of JavaScript and co-founder of Mozilla <a href="https://en.wikipedia.org/wiki/Brendan_Eich">Brendan Eich</a>, recently released an Ethereum-based web browser through which users can be paid for the attention they give to advertisements. </p>
<p>What is making crypto-assets and currencies appear bubbly is the way in which many of these new platforms and applications have raised money through what are called <a href="https://blockgeeks.com/guides/what-is-an-initial-coin-offering/">initial coin offerings</a>. An initial coin offering (a word play on ‘initial public offering’) is a mechanism by which developers sell the tokens associated with their platform to the public. Depending on the structure of the offering, buyers can usually then trade the tokens, creating secondary markets. As the founder of Ethereum, Vitalik Buterin, has noted, no-one has figured out the <a href="http://vitalik.ca/general/2017/06/09/sales.html">right model for these offerings</a>. </p>
<p>This could be due to the immaturity of the Ethereum platform and ecosystem (which started development in 2013 and went live only in 2015). What we’re observing here is a new economic infrastructure being built and coming online. In tweets on Tuesday, Buterin <a href="https://twitter.com/VitalikButerin/status/874521946079232000">distanced</a> himself from initial coin offerings, stating he would no longer agree to be an advisor. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"874521946079232000"}"></div></p>
<p>So while the current speculation in crypto-assets should make us pause, this is not speculative <a href="https://theconversation.com/what-economics-has-to-say-about-housing-bubbles-74925?sr=1">like tulips, or gold mining stocks</a>. It is speculative like building a new city, in that infrastructure needs to be developed first before you get to see who moves there. </p>
<p>A further point to note is that investment bubbles are actually <a href="https://www.cis.org.au/app/uploads/2015/04/images/stories/policy-magazine/2007-summer/2007-23-4-jason-potts-b.pdf">useful and important mechanisms</a> for building new technologies because of the way they concentrate speculative resources on a new technology to facilitate exploration.</p>
<p>There is an enormous effort proceeding to building new crypto businesses and infrastructure on the Ethereum platform. If this platform does indeed begin to carry large parts of the global economy as predicted by <a href="https://www2.deloitte.com/au/en/pages/technology/articles/distributed-ledgers.html">Deloitte</a>, a business consultancy, then it’s still massively undervalued.</p>
<hr>
<p><em>These comments should not be construed as offering personal financial advice.</em></p><img src="https://counter.theconversation.com/content/79350/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jason Potts has received funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Ellie Rennie has invested in blockchain technology. She receives funding from the Australian Research Council and Telstra. She is a Director of the Community Broadcasting Foundation. </span></em></p>While the current speculation in crypto-currency and assets should make us pause, this is not a speculative driven bubble like tulips, or gold mining stocks.Jason Potts, Professor of Economics, RMIT UniversityEllie Rennie, Principal Research Fellow, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/726772017-02-23T11:22:40Z2017-02-23T11:22:40ZHow Liverpool’s new local currency fits into global trends of money and power<figure><img src="https://images.theconversation.com/files/158076/original/image-20170223-24107-4urmcx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>The tensions between Iran and the United States are being played out on multiple fronts. One of the less frightening is perhaps Iran’s <a href="http://www.independent.co.uk/news/world/middle-east/iran-stop-using-us-dollar-currency-donald-trump-muslim-ban-immigration-refugee-iraq-syria-libya-a7556846.html">abandonment of the dollar</a> in its financial reporting. But it is also eerily similar to Saddam Hussein’s decision <a href="https://www.theguardian.com/business/2003/feb/16/iraq.theeuro">to abandon the dollar in 2000</a>, which is one of the <a href="http://www.monetary.org/was-the-iraqi-shift-to-euro-currency-to-real-reason-for-war/2010/12">proposed causes</a> of US military aggression in the area in 2003. </p>
<p>This inter-linking relationship between money and the military can also be seen in Trump’s other putative arena of international conflict: his hostility towards China. In particular, his <a href="https://theconversation.com/china-grapples-with-the-mixed-blessing-of-a-trump-victory-68625">opposition</a> to China’s presence in the South China Sea is inextricable from <a href="https://theconversation.com/why-donald-trumps-china-policy-is-a-trade-war-in-the-making-70723">his claim</a> that the Chinese currency is artificially suppressed to give them a trade advantage.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"805538149157969924"}"></div></p>
<p>These international gestures all form part of Trump’s nationalist rhetoric of job creation which is being used to undermine both the international order and the (already minimal) international financial regulatory system. Meanwhile, it is ironic that Wall Street is being freed as never before, all in the name of ostensibly saving Main Street. </p>
<p>The increasingly paradoxical dynamic between the local and the global that this recent rise of isolationism has produced is not only evident on the international stage. There are echoes of it in northwest Britain.</p>
<p>One of 2017’s positive news stories, for example, is the <a href="https://cointelegraph.com/news/local-pound-liverpool-to-get-own-digital-currency-by-march-2017">launch of Liverpool’s own local currency</a>. Liverpool’s local pound is part of the city’s regeneration and is designed to keep money circulating within the city rather than allowing it to be funnelled out through the profits of the global companies that loom large in the city’s new shops and arcades. </p>
<h2>Recurring themes</h2>
<p>This turn to a local alternative currency, <a href="http://www.david-boyle.co.uk/funnymoney/book.html">is a recurring one</a>. Particularly in moments of economic contraction, the emphasis on local communities and the long-term growth of small and independent businesses, means that these currencies are bound to their local communities, in a way that benefits local people and the environment. Liverpool joins the ranks of Totnes and Bristol in the UK, which have successfully used local currencies to regenerate their economies. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/158081/original/image-20170223-24072-1c5t0bp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/158081/original/image-20170223-24072-1c5t0bp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/158081/original/image-20170223-24072-1c5t0bp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/158081/original/image-20170223-24072-1c5t0bp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/158081/original/image-20170223-24072-1c5t0bp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/158081/original/image-20170223-24072-1c5t0bp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/158081/original/image-20170223-24072-1c5t0bp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Keeping things local in Bristol.</span>
<span class="attribution"><span class="source">shrinkin'violet</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Prioritising the local has clearly discernible benefits in an era of global finance. One of the most recent and radical proponents of alternative currencies, Kojin Karatani, <a href="https://web.princeton.edu/sites/sics/NAM_principles.pdf">sees these currencies as powerful</a> because they stand outside of the processes of the global financial system. Because their movement is more fixed and because, crucially, they are unable to bear interest these currencies are not subject to the gaming – withdrawal and speculation, the creation of credit and debt – through which the financial industry has distorted the global economy.</p>
<p>Yet it is also important to remember there is nothing inherently or automatically progressive in the existence of these alternative currencies. In fact, their implicit desire for a restricted form of circulation can even be regressive. </p>
<h2>Crypto undercurrents</h2>
<p>One of the most successful examples of a currency which resisted debt creation, for example, was the early 20th century Social Credit pioneered by CH Douglas, which aimed to take the control of money away from the financial system and give it to ordinary people by creating a “national dividend” that returned the profits of production back to the worker. </p>
<p>Yet the deeply bureaucratic structure of the state that this required, and Douglas’ own deployment of a socially regressive and <a href="http://www.jstor.org/stable/j.ctt809xh">anti-semitic vocabulary</a>, has meant that his ideas are now frequently associated with a deeply conservative social agenda. More recent alternative currencies, from corporate frequent flyer miles to the libertarian Bitcoin, are clearly designed to evade <a href="https://www.yanisvaroufakis.eu/2013/04/22/bitcoin-and-the-dangerous-fantasy-of-apolitical-money/">various aspects of state regulation</a>, rather than benefit local communities. </p>
<p>And therein lies the rub with the launch of Liverpool’s local currency. Its rhetoric is a very familiar one: the claim that it will make money “stick” to the city. Plus, its <a href="http://liverpoolpound.org/">website</a> proudly claims that its issuers are “members of the Guild of Independent Currencies” and that it will work with “our friends in Bristol, Brixton, Kingston, Totnes” to promote a city-wide currency, which is also “fully regulated by the Bank of England”. </p>
<p>Yet what the website doesn’t reveal as prominently is that this is a virtual cryptocurrency that is issued and supported not by the local community but by <a href="https://www.colu.com/">Colu</a>, a technology company based in Israel. Hence, although Liverpool’s pound will operate locally, and may well be successful in privileging local businesses, it will also be charging local merchants for this technology. Meanwhile, it will take its profits out of the area and pool the data that it produces in a global network that will allow, <a href="http://www.telegraph.co.uk/travel/destinations/europe/united-kingdom/england/liverpool/articles/liverpool-gets-its-own-digital-currency/">for example</a>, “an Israeli barrista” to know “how a Liverpudlian customer likes his or her coffee”. </p>
<p>So, even in the seemingly frictionless age of contemporary cybermoney, it seems that the material provenance of the money that we use – be it the US dollar or the local pound in Liverpool – remains as deeply political and contested as ever. And these politics are often more complicated than their rhetoric suggests.</p><img src="https://counter.theconversation.com/content/72677/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nicky Marsh receives funding from the Arts and Humanities Research Council. </span></em></p>Where our money comes from is deeply political and the politics involved is often highly complex.Nicky Marsh, Professor of Twentieth Century Literary Studies, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/689562016-11-23T10:08:53Z2016-11-23T10:08:53ZThe weaker pound is a mixed bag for UK PLC as rivals move to adapt<figure><img src="https://images.theconversation.com/files/146728/original/image-20161121-4544-lumu2r.jpg?ixlib=rb-1.1.0&rect=59%2C79%2C940%2C573&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-323763059/stock-photo-one-pound-coin-on-fluctuating-graph-rate-of-the-pound-sterling-shallow-dof.html?src=Dckjtmb8uQZwgIgJw27Gzw-2-84">Valeri Potapova/Shutterstock</a></span></figcaption></figure><p>The value of the pound plummeted after the Brexit referendum. From close to US$1.50 before the vote to leave the European Union, sterling has now found a new <a href="http://www.xe.com/currencycharts/?from=GBP&to=USD&view=1Y">level close to US$1.20</a>. This has been greeted as a welcome boost to UK exporters as it makes it cheaper for other countries to buy British goods. But this is a simplistic take. The reality is far more complicated and dependent on the markets in which these companies operate. </p>
<p>The <a href="http://www.thisismoney.co.uk/money/markets/article-3701788/What-sterling-s-slump-means-UK-s-economy-businesses-households.html">conventional wisdom</a> about a falling currency and exports fails to acknowledge some fundamental points. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2843755">Our research</a> highlights that such analysis typically does not account for the existence and nature of a company’s competition, domestically and overseas. </p>
<p>In other words, nimble corporate rivals can quickly adapt to counter any potential gains from currency effects, and that applies to UK-focused firms as well as exporters. Let’s take an example from one of Britain’s favourite pastimes: beer. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The tippling point?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/andywilkes/2481933944/in/photolist-4Mjyuy-6EsBky-2VK1Gm-GaA8f-9dSq2a-CXuzn-DDA12-iEwMm-39hwn6-5LMGRC-iEwKW-5RdGNR-3bmBpQ-4MjyBu-6DwLz5-6C68Ec-6Cagi5-8CaK7-2rbhJ-4MfoYz-6DwLif-BF7jy-9cYLym-397iC-98aXMm-6ffCew-6DsBHr-25pc5-24F2K-4TLWV-twRQ-9hvmws-H1eo-6DsBPB-2kd9y-ikoK-wTsuK-kSgo-rRHh-mvTQ-4oz3N-VU1U-4xRqce-twMg-o1Be-QuMp-mvVz-mvSF-hE3b-vSpd">Andy Wilkes/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<h2>Losing its fizz</h2>
<p>Our research studied data from 22 multinational firms and nine markets. One such firm was the brewer SABMiller, a British exporter, which competes in an <a href="http://www.economist.com/node/18651308">international duopoly</a> with Belgian group AB-InBev, the maker of beer brands such as Budweiser, Corona and Stella Artois. We looked at a period before the companies agreed a merger which was <a href="http://www.wsj.com/articles/sabmiller-ab-inbev-shareholders-approve-100-billion-plus-merger-1475059015">approved by shareholders in September</a>. </p>
<p>Now, under conditions of a falling pound, SABMiller would in theory enjoy an increase in its profits as foreign buyers snapped up products now markedly cheaper in their home currency. However, that assumes that its Belgian rival failed to cut its own product prices by what was required to offset the change in the GBP/EUR exchange rate. If AB-InBev is on the ball, and sensitive to exchange rate changes it can very easily decide to cut its product price by more than the increase in the exchange rate. In that scenario, the profits of SABMiller could fall.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Muscling in?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/waltermera182/9514909861/in/photolist-bAE4RS-5k6Nad-9riTv7-5bdRpv-e6vzgM-84dYoJ-7ACBYj-8aT42e-88Gjd3-55QM1h-dHvgA-8fNbuC-dihQkj-4s7jic-dHvyK-8vt2aY-cvd7kS-dHvBH-59aMyo-6mdG3n-7mp44V-4bmT2C-25cRBJ-25cRRo-4bUN7Z-fv3EB7-4CPbKB-aS9xQt-fuNpd2-7UM9wi-ewBZ1s-38hDMs-8c8Pu6-s49Nv-EYo9vC">Walter Gustavo MERA MELO/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Then, what if you have to factor in a third competitor, such as the Netherlands-based Heineken, which shares the same currency as AB-InBev? This means that the exposure of SABMiller will also be affected by Heineken’s change in its product price in response to the exchange rate fluctuation of the euro relative to the pound. The picture here becomes more complex because the degree to which foreign competitors will change their product prices will also depend on the degree of competition between them in their own home markets. It will also depend on their desire to curb product prices in any attempt to offset a boost to the competitiveness of the UK firm; how much margin they are willing to sacrifice in order to stay competitive. </p>
<p>If our UK brewer also faces a domestic competitor then the picture becomes even more complex. SABMiller’s profits would also be affected by the pricing decisions of that local rival in response to changes in the exchange rate.</p>
<p>In short, these are far muddier waters than some would have you believe. The profits of UK-based exporters might enjoy a brief window of opportunity if rivals are slow to adapt, but earnings could just as easily take a hit from a rapidly changing environment as a sector gets used to new realities. Our conclusions don’t only apply to British exporters. It is the same for any multinational firms which face competitors at the international and local level. The sports market is another good example, with its <a href="http://www.economist.com/blogs/graphicdetail/2013/08/daily-chart-14">international oligopoly</a> of US firm Nike, the global leader, and two German firms, Adidas and Puma.</p>
<h2>Kindness</h2>
<p>It is clear the argument that a weakened currency makes domestic exporters better off is not necessarily true. Whether or not a fall in the currency is a good thing for an industry depends on the market structure, and specifically on the size of the price sensitivities with respect to exchange rates of their international competitors.</p>
<p>When <a href="https://www.theguardian.com/business/2016/jan/26/mark-carney-fails-to-rule-out-eight-year-term-at-bank-of-england">Mark Carney</a>, the governor of the Bank of England, said, that Britain “depends on the kindness of strangers”, he had in mind UK’s heavy current account deficit. We argue that British exporters also “depend on the kindness of rivals”. </p>
<p>There is a clear link between the ability of a firm to pass on the exchange rate changes to its customers and the magnitude of their exposure to rival firms operating in the same market, both domestically and overseas. In our example of the beer market, the ability of AB-InBev to pass on the increase in the euro to the price of its beer affects the profits of SABMiller. The higher the former is, the lower the profits of SABMiller will be. This clearly depends on how loyal (i.e. non-price sensitive) the consumers of the Belgian brewer and SABMiller are. </p>
<p>Our theoretical and empirical results suggest that a falling currency is not always good for exporters. If the companies ignore these complex relationships between firms’ price setting behaviour, profits and exchange rates, mistakes are more likely and sometimes these will benefit the exporters of the appreciating country at the expense of the firms in the depreciating country. </p>
<p>The idiosyncrasies of each market, and the price sensitivity of consumers, will play a significant role in determining whether a devaluation will be beneficial for the exporters of a country. Simplistic arguments that a weakened pound is good for British exporters fail to take these into account.</p><img src="https://counter.theconversation.com/content/68956/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>All the talk about a golden time for UK exporters forgets one crucial point.Xeni Dassiou, Reader in Economics, City, University of LondonAthanasios Andrikopoulos, Lecturer in Finance, University of HullLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/655952016-09-27T04:59:44Z2016-09-27T04:59:44ZFour quotes from the first Clinton-Trump debate, explained<p><em>Democrat Hillary Clinton and Republican Donald Trump faced off for their first debate at Hofstra University on Sept. 26. We asked a group of scholars to listen to the often heated exchange and react to just one quote related to their area of expertise. Here are those picks.</em></p>
<h2>Emily Blanchard, Tuck School of Business at Dartmouth College</h2>
<blockquote>
<p>“They’re devaluing their currency… they’re using our country as a piggy bank to rebuild China, and many other countries are doing the same thing.”</p>
</blockquote>
<p>It is not surprising that trade, trade agreements and especially trade with China came under heavy fire in tonight’s debate. Trade – together with technology – has undeniably reshaped the American labor market over the past decade, partly <a href="https://www.aeaweb.org/articles?id=10.1257/aer.20131578">at the expense of middle-class workers</a>. </p>
<p>But with this line about Chinese currency policy, Trump struck wide of the mark. First, the devaluation accusation leveled against China is <a href="https://www.ft.com/content/11e96e1e-03a7-11e5-b55e-00144feabdc0">out of date.</a> While most economists agree that earlier this century the Chinese central bank artificially depressed the value of its currency (which made Chinese exports more competitive in world markets), the <a href="http://www.bloomberg.com/quote/USDCNY:CUR">opposite</a> has been true for more than a year, as China has faced <a href="http://www.wsj.com/articles/the-myths-of-chinas-currency-manipulation-1452296887">mounting pressure</a> to prop up its currency in the face of outward capital flight. </p>
<p>Second, the idea that China is using its trade surplus with the U.S. “as a piggybank” to rebuild its economy demonstrates a fundamental misunderstanding of <a href="https://www.newyorkfed.org/aboutthefed/fedpoint/fed40.html">balance of payments accounting</a>. When a country runs a trade surplus, it is by definition acting as a net lender to the rest of the world. Likewise, when a country runs a trade deficit, it is a net recipient of saving by the rest of the world. By using its trade surpluses to buy U.S. assets (mostly T-bills), China has helped to keep U.S. borrowing costs phenomenally low for more than a decade. If anything, it is China that has been serving as the piggybank to rebuild the U.S. </p>
<p><em>Blanchard’s work centers on the economics and policy implications of globalization.</em></p>
<h2>Valerie Hudson, Texas A&M University</h2>
<blockquote>
<p>“So let’s have paid family leave, earned sick days.” – Clinton</p>
<p>“As far as childcare is concerned and so many other things, I think Hillary and I agree on that.” – Trump</p>
</blockquote>
<p>While it was gratifying to see the first female presidential candidate from a major U.S. political party on stage tonight, what was perhaps even more gratifying was that for the first time, both candidates – one of whom will be our next president – agreed that paid family leave should be the law of the land. We are now one of only <a href="http://www.forbes.com/sites/ritarubin/2016/04/06/united-states-lags-behind-all-other-developed-countries-when-it-comes-to-paid-maternity-leave/#34b084425ada">two</a> nations in the world that does not provide paid maternity leave (Papua New Guinea is the other), despite the fact that research has shown that such leave <a href="https://www.ncbi.nlm.nih.gov/pubmed/22813939">decreases</a> levels of postpartum depression and <a href="http://onlinelibrary.wiley.com/doi/10.1111/birt.12230/abstract">increases</a> levels of breastfeeding. Even with the Family and Medical Leave Act’s provisions, the leave is unpaid, and it is also unavailable to <a href="https://www.dol.gov/whd/fmla/survey/FMLA_Survey_factsheet.pdf">40 percent</a> of American workers. No matter who is elected, we will apparently finally have paid leave, and our children will not have to face the heart-wrenching choices their parents faced. </p>
<p>But there’s more that must be done, as positive a first step as this would be. The larger issue of the invisibility of (largely) women’s unpaid caregiving labor goes beyond paid family leave, and includes issues of <a href="http://www.modernhealthcare.com/article/20160518/NEWS/160519895">workplace fairness</a> for home health care workers, of the massive shortfall in <a href="https://newrepublic.com/article/112892/hell-american-day-care">quality daycare</a> in our nation, and of the persistently high <a href="https://www.caregiver.org/women-and-caregiving-facts-and-figures">poverty rates of caregivers</a> in their old age. Those who represent the social safety net for the vulnerable in our society should not be forced to operate without a net themselves. And when important economic decisions are made for our country, primary caregivers should have a seat at the table to represent this critical element of our economy that would otherwise remain invisible.</p>
<p><em>Hudson is the coauthor of <a href="http://www.jstor.org/stable/10.7312/huds16492">The Hillary Doctrine: Sex and American Foreign Policy</a>.</em></p>
<h2>Chad Williams, Brandeis University</h2>
<blockquote>
<p>“I say nothing.” – Trump</p>
</blockquote>
<p>Republican presidential candidate Donald Trump delivered this blunt answer to debate moderator Lester Holt when asked about racial healing and what he might say to Americans who found his continued claims that President Barack Obama was not born in the United States racist. </p>
<p>Trump, instead of offering any semblance of remorse for his actions, took this opportunity to congratulate himself for compelling President Obama to produce his birth certificate and boasted that he was proud of his accomplishment. </p>
<p>Trump has recently gone to great lengths to paint himself as African-Americans’ best friend. <a href="http://www.theatlantic.com/politics/archive/2016/09/trump-black-outreach/501242/">He has done so</a> in part by depicting a hellish picture of black inner-city communities, exploited by Democratic politicians and ravaged by violence, disease and poverty, which only he can remedy by enforcing “law and order.” The false sincerity of Trump’s outreach was fully exposed by his callous disregard of the damage wrought by his birtherism campaign. </p>
<p>Trump launched his presidential aspirations <a href="http://www.nytimes.com/2016/09/17/us/politics/donald-trump-obama-birther.html">by declaring</a> the first African-American president of the United States illegitimate. This was not just a personal attack on Barack Obama, but also an attack on the millions of black people who supported him and understood what it meant to have their American citizenship questioned.</p>
<p>Trump promises to be president for all Americans. He brags that African-Americans are flocking to his campaign. Yet <a href="http://abcnews.go.com/Politics/donald-trump-african-americans-worst-off-latest-push/story?id=42246717">recent polls</a> still place his support among black voters at between 3 and 6 percent. This is not an accident. When it comes to being a president that will care about the true concerns of African-Americans and address the nation’s deep-seated problems of racial injustice, Trump says nothing and offers nothing. </p>
<p><em>Williams is coeditor of <a href="http://www.ugapress.org/index.php/books/charleston_syllabus/">Charleston Syllabus: Readings on Race, Racism and Racial Violence</a>.</em></p>
<h2>Richard Painter, University of Minnesota</h2>
<blockquote>
<p>“I have no reason to believe that he’s ever going to release his tax returns, because there’s something he’s hiding. …I think the question is, were he ever to get near the White House, what would be those conflicts? Who does he owe money to? Well, he owes you the answers to that, and he should provide them.” – Clinton</p>
</blockquote>
<p>Clinton and Trump went back and forth on his refusal to disclose his tax returns. The exchange seemed to reveal that on the whole he has paid relatively little tax, but that cannot be verified without the returns.</p>
<p>Trump said that the returns were not being released because they were under audit, but Clinton did not follow up with him as to what that has to do with public disclosure and how disclosure could in any way interfere with the audit. </p>
<p>More important, there was not a detailed discussion of what we could learn from the tax returns that we cannot learn from his <a href="http://online.wsj.com/public/resources/documents/TrumpFinancialDisclosure20150722.pdf">Form 278 Financial Disclosure</a> that he did file as a candidate. He said that there is relatively little we could learn from the tax returns, but tax returns have very different information than Form 278, so his claim that the two overlap is not true. First, the tax returns disclose what tax provisions he benefits from, which is an important issue. Are they loopholes or intended tax benefits that Congress has put in the code? </p>
<p>He should not be embarrassed about paying less tax if that is the way the tax code is structured, but he should be up front about that and how as president he would either change the tax code so people like him pay more or whether he would keep it the same. </p>
<p>Second, he talks a lot about businesses making money by sending jobs overseas. Tax returns would tell us a lot about how much income he earns overseas (generally income is taxed where it is made). The Form 278, by contrast, does not require significant disclosure of the geographic location of income and assets. Many of the LLCs and corporations on his Form 278 may be organized in the U.S. but have assets and income overseas. His tax returns would provide some information about this. </p>
<p>There is nothing inherently wrong with Trump or anyone else investing overseas and deriving income overseas or even creating jobs there, but he should be open about how his own business practices relate to the issues he is talking about. We need the tax returns in order to do that.</p>
<p><em>Painter served as chief White House ethics lawyer during the George W. Bush administration.</em></p><img src="https://counter.theconversation.com/content/65595/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>My book on campaign finance reform titled Taxation only with Representation: The Conservative Conscience and Campaign Finance Reform (2016) was funded by Harvard University and by Take Back our Republic, a campaign finance reform group. I am a board member of Take Back our Republic.
I am receiving no compensation for these activities.
I have endorsed Hillary Clinton for president but I am not working for or receiving any compensation from any candidate or campaign. I am a member of the Republican Party.
I am representing pro bono several congressional candidates in a FEC and federal court case seeking to strengthen federal regulation of Super PACs.</span></em></p><p class="fine-print"><em><span>Valerie Hudson receives funding from the US Department of Defense, the Carnegie Corporation of New York, and the Compton Foundation. </span></em></p><p class="fine-print"><em><span>Chad Williams and Emily J. Blanchard do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We asked a group of scholars to listen to Clinton vs. Trump and pick just one quote to react to. Here’s what the experts heard.Chad Williams, Associate Professor of African and Afro-American Studies, Brandeis UniversityEmily J. Blanchard, Associate Professor, Dartmouth CollegeRichard Painter, S. Walter Richey Professor of Corporate Law, University of MinnesotaValerie Hudson, Professor of International Affairs, Texas A&M UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/601482016-06-13T09:56:10Z2016-06-13T09:56:10ZDoes China manipulate its currency as Donald Trump claims?<blockquote>
<p>We have a lot of power with China. We can’t continue to allow China to rape our country, and that’s what they’re doing. </p>
</blockquote>
<p><strong>– <a href="http://www.cnn.com/2016/05/01/politics/donald-trump-china-rape/">Donald Trump</a>, May 1, Fort Wayne, Indiana</strong></p>
<p>After 20 years, the Chinese government must be used to being bashed by U.S. politicians and Congress for unfair trade practices or, as <a href="http://www.wsj.com/articles/ending-chinas-currency-manipulation-1447115601">Trump has declared many times</a>, being a “currency manipulator.” </p>
<p>Indeed, the exchange value of the yuan (also know as the renminbi or RMB) <a href="http://nbr.com/2016/01/14/why-the-chinese-currency-took-the-spotlight/">is fixed each morning</a> by its central bank, the People’s Bank of China (PBoC), with a narrow band of only 2 percent allowed, up or down, within which market forces can have their say. In effect, it is an exchange rate set and controlled by the PBoC. </p>
<p>But why pick on China? In fact, according to the International Monetary Fund (IMF), most governments try to influence their exchange rates, and China is not alone in trying to gain an advantage by undervaluing its currency. Moreover, the Chinese government has yielded to Western pressure over the past decade and let the yuan appreciate by a third, leading some economists (<a href="http://qz.com/412082/chinas-yuan-is-no-longer-undervalued-says-imf/">including the IMF</a>) to say it’s no longer undervalued. </p>
<p>One indicator of this is that, for a visitor, China is no longer cheap. I have been to China two dozen times since 1995 to teach in our Rutgers Executive MBA Program there. I experienced first how cheap everything was when the yuan was 8.27 per dollar. Then, after 2005, with the yuan being strengthened, and wages in China rising, China today is no longer the great bargain it once was – whether for a visitor like me, or a company looking for cheap goods to import.</p>
<p>So why do politicians like Trump keep bashing China? What does “undervaluation” or “overvaluation” of a currency mean? And what advantage can a nation derive from trying to control or manipulate its exchange rate? </p>
<h2>Everyone else is doing it</h2>
<p><a href="https://www.imf.org/external/np/sec/memdir/memdate.htm">Well over half</a> of the IMF’s 189 members meddle, in a mild or total fashion, to influence or fix their exchange rates, as illustrated in the chart below. </p>
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<p>It is only with a few major currencies, such as the dollar or euro, that the government allows a “free float” based on market forces (global supply and demand) with minimal or no intervention (14 percent of all IMF members). Other governments have a variety of ways to “manage” their currencies. Some declare a “fixed peg” (26 percent of IMF members) or “currency board” (4 percent) where the exchange rate is fixed, by fiat, for a considerable period of months or years. </p>
<p>In “managed float” cases (28 percent), market forces are allowed to play, but with the government buying or selling their own currency in the market, as needed, to bias the exchange rate upward or downward. For example the <a href="http://www.thehindubusinessline.com/portfolio/how-rupeedollar-rates-are-determined/article4629962.ece">Reserve Bank of India will intervene</a> by buying dollars when the rupee appreciates too much and by selling them when its currency depreciates significantly.</p>
<p>“Adjustable pegs” (6 percent) are situations in which the government fixes the rate “temporarily” – for months at a time or even daily, as in the case of China. </p>
<p>What exactly is the concern when we accuse a government of “currency manipulation” and why is it considered bad in some instances, but not others? </p>
<p>Even the Japanese yen, a major currency considered to be “free floating,” was <a href="https://www.theguardian.com/business/2016/jan/29/japanese-yen-takes-a-deliberate-dive-to-keep-things-turning">consciously devalued</a> by about a third from 2012 – when it was considered significantly overvalued – to 2015. But this was not derided by members of Congress or U.S. politicians as currency manipulation since the U.S. has friendly relations with Japan, and the Japanese yen was not undervalued at the time as is alleged for the Chinese yuan.</p>
<p>Generally, when countries are criticized, the allegation is that the government is keeping its currency undervalued in order to give an artificial boost to exports while keeping out imports. This has the effect of boosting jobs in that country.</p>
<h2>Gains from currency manipulation</h2>
<p>Take China as an example. </p>
<p>A Chinese exporter earning a dollar in mid-2016 turns it into the bank and gets around 6.5 yuan. By comparing costs in China and elsewhere, some economists calculate that the exchange rate, based on hypothetical purchasing power parity (PPP), should be about 5.7 RMB per dollar, which would supposedly prevail under market equilibrium and without government meddling. <a href="http://www.wsj.com/articles/yuan-devaluation-enters-debate-on-whether-currency-is-undervalued-1439307298">Others disagree</a> and say that the yuan actual exchange rate is already close to the theoretical PPP calculation.</p>
<p>A 5.7 RMB per dollar PPP rate would mean that the 6.5 actual rate is 14 percent undervalued. And as a result, our Chinese exporter earns 14 percent more in revenue with the 6.5 yuan exchange rate than if market forces alone were at work and the economists’ hypothetical rate were to prevail. That gives the Chinese exporter an advantage. </p>
<p>It also helps domestic Chinese companies (that would compete against imports) because the actual 6.5 rate makes imports 14 percent more expensive than they might be if the rate was 5.7 RMB per dollar. This, it is alleged, keeps some foreign products out of China and benefits (or protects) Chinese businesses that produce substitute products that compete with imports. On both the import and export side, an undervalued exchange rate boosts or preserves jobs in China (at the expense of jobs in the rest of the world).</p>
<h2>Over or under?</h2>
<p>For the Chinese, however, it must be particularly galling to hear accusations of currency manipulation since, succumbing to pressure from Western countries, they <a href="http://qz.com/412082/chinas-yuan-is-no-longer-undervalued-says-imf/">have already massively appreciated</a> their currency since 2005. </p>
<p>Since June 2005, following more than a decade of a fixed exchange rate of 8.27 yuan per dollar (when it was indeed clearly undervalued) the Chinese have gradually appreciated their currency to as high as 6.1 RMB per dollar in 2015. </p>
<p>Now, in the <a href="http://www.reuters.com/article/us-china-economy-yuan-idUSBREA4C07420140513">minds of many Chinese economists</a>, their currency is no longer undervalued in the current range of 6.2–6.5 a dollar for three reasons:</p>
<ol>
<li><p>The 36 percent appreciation from June 2005 to July 2015 meant that Chinese exporters were earning up to a third less last July than in 2005, making some <a href="http://www.chinalawblog.com/2011/05/foreign_manufacturing_in_china_would_the_last_company_there_please_turn_out_the_lights.html">uncompetitive</a>. Many have had to shut down in China and relocate to Vietnam, Bangladesh or a country in Africa. The stronger yuan also displaced some domestic production that couldn’t compete with imports that became less expensive for Chinese consumers. As a result, jobs were lost, and the <a href="http://www.wsj.com/articles/SB10001424052702303848104579312393856894058">Chinese economy suffered</a>. </p></li>
<li><p>The yuan, which is fixed mainly against the U.S. dollar, <a href="http://fortune.com/2015/08/11/why-china-devalued-yuan/">has appreciated even more</a> against other currencies. That’s because, as the dollar has climbed against most other currencies since 2013, the yuan has also appreciated against them, adding to its increase in value against the dollar. And that means customers in Europe, Brazil or elsewhere may be paying over 50 percent more to import Chinese goods (in their local currencies) than they were about a decade earlier. </p></li>
<li><p>Wages and prices are surging in China. On the east coast, where most manufacturing and economic activity takes place, wages <a href="http://www.chinabusinessreview.com/chinas-rising-costs/">have been climbing</a> at least 15 percent a year. The rising demand for and cost of labor, coupled with the one-child policy (which was in effect until last year), has caused the labor force to plateau and left many jobs unfilled. Chinese exporters are beginning to feel the squeeze between these rising costs (especially in real estate) and the falling value (in yuan) of the foreign currency they receive. </p></li>
</ol>
<h2>Is the RMB still undervalued?</h2>
<p>While many Western economists <a href="http://www.wsj.com/articles/yuan-devaluation-enters-debate-on-whether-currency-is-undervalued-1439307298">continue</a> to argue that the yuan (RMB) is still undervalued, they tend to agree that at the very least that it’s <em>less undervalued</em>. </p>
<p>The chart below shows that the huge 40.6 percent devaluation of the early 1990s massively undervalued the yuan and accomplished its purpose of making China the world’s leading exporter of manufactured goods. But since 2005, steady appreciation led to its regaining all the ground it had lost in the 1990s. </p>
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<p>Add to that wage inflation in the 2005–2016 period (based on the plateauing of the labor force because of the one-child policy), and many would argue that the yuan is no longer undervalued.</p>
<h2>Why pick on China?</h2>
<p>So why pick on only China when other nations also “influence” their currencies and the case can now be made that the yuan is no longer undervalued (or at least not significantly so)?</p>
<p>Governments are always concerned about the undervaluation or overvaluation of their currencies since they affect exports, imports and competition in general. Free market oriented economists and pundits are critical of countries that intervene or seek to influence their exchange rates. </p>
<p>Others would argue that much of world’s economies are not yet mature, and their institutions not yet evolved enough for their governments to take the risk of such a “hands-off” policy. Besides, they would say that even in a free market oriented country like the U.S., the Federal Reserve has enormous influence on the value of the dollar. When interest rates are lowered (or raised), the dollar weakens (or appreciates), other things being equal.</p>
<p>Japan is one of the U.S’. top trading partners. If we want a more egregious recent example of a currency being deliberately devalued to give its exporters an advantage, we need look no further than the supposedly free market country of Japan. As noted above, the Shinzo Abe government of Japan induced an almost 50 percent devaluation of the yen in just three years.</p>
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<p>For Trump, China makes an easy punching bag. Why pick on China alone when the Chinese government has, since 2005, raised the value of the yuan value by a third so that the yuan is at least close to where it might be in a hypothetical market-driven situation? </p>
<p>At the end of the day, exchange rates around the world fluctuate greatly, whether through government intent, interest rate changes or market sentiment. Picking on only one country like China, however, is a poor substitute for good economic policy.</p><img src="https://counter.theconversation.com/content/60148/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Farok J. Contractor does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Trump is only the latest U.S. politician to bash China over its trade and currency policies. Is the criticism fair?Farok J. Contractor, Distinguished Professor of Management & Global Business, Rutgers UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/533632016-02-07T19:06:25Z2016-02-07T19:06:25ZWhy gold will still be a safe haven in the next financial storm<figure><img src="https://images.theconversation.com/files/110286/original/image-20160204-3012-pg4ygn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Safe havens like gold are supposed to provide shelter in dire times.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>If you believe the financial media, safe-haven assets are constantly changing. </p>
<p>For example, following a period of volatile gold prices, the Wall Street Journal claimed last year that <a href="http://www.wsj.com/articles/golds-role-as-safe-haven-investment-wanes-1445250762">“Gold’s role as a safe-haven investment wanes”</a> and only three months later <a href="http://www.wsj.com/articles/gold-prices-rise-on-safe-haven-demand-1453724027">stated</a> that it had regained its safe-haven property.</p>
<p>Is gold indeed constantly changing its safe-haven status? The answer is a clear “no”. </p>
<p>The confusion may be due to a misunderstanding of what a safe haven really is. </p>
<p>A <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=952289">safe haven</a> is uncorrelated or negatively correlated with equity in extreme periods but not on average. So it is neither a safe asset nor a hedge in a traditional sense. In other words, a falling price of gold does not automatically imply that gold has lost its safe haven status. On the contrary, a falling price in tranquil periods is a necessity for gold to perform as a safe haven asset.</p>
<p>A financial safe haven, similar to the safety of a port, is supposed to provide shelter in a storm. A safe haven is not supposed to provide shelter or positive returns in tranquil times. This distinguishes a safe haven from a risk-free “safe” asset and a traditional hedge. It must perform in times of extreme turmoil but not at all times or over long periods of time. It must provide shelter at the beginning of a severe crisis or turmoil and as long as such shelter is needed. Empirically, it does so for about 10 days. </p>
<p>This short-lived property of gold as a safe haven is both essential and crucial. For example, the price of gold rose immediately after the September 11, 2001 terrorist attacks but became more volatile two weeks after the event. A similar effect was observed for days following the collapse of Lehman Brothers in mid-September 2008. Gold increased in value measured over a two-week period but started to lose value over the subsequent four weeks. </p>
<p>This effect, in contrast to a belief that appears to be widely held, is not evidence of a fading safe-haven property but quite the opposite. It is evidence of an effective and “healthy” safe haven effect. The safe haven is effective when it is needed the most as a shelter and subsequently loses value so that it can perform in the next storm. The price falls to make a future rise possible. The short-lived property of the safe-haven asset also implies that a comparison of the risk-return characteristics with other assets is misleading. </p>
<p>A safe-haven asset is supposed to provide shelter in periods of financial crisis or turmoil, in particular in response to extreme shocks. If it also reacted to small shocks, it could not be distinguished from a classical hedge. And if it outperformed equity over longer periods it would exhibit equity-like features and not be a safe haven.</p>
<p>Hence, a focus on shocks or crises that do not qualify as extreme or to use relatively long periods to assess a safe haven cannot prove that the safe-haven asset lost its safe haven status or that it never had such a status. </p>
<h2>Beyond gold</h2>
<p>There is another pitfall in assessing whether an asset is a safe haven. Gold is not the only safe-haven asset. The US dollar has been shown to increase in periods of crisis and so has the Swiss franc and <a href="http://rof.oxfordjournals.org/content/14/3/385.abstract">other currencies</a>. </p>
<p>Government bonds such as US Treasuries, UK Gilts or German Bunds, also appear to show safe-haven properties. While government bonds are also “safe assets” if held to maturity and assuming that there is no default, currencies play a very special role for gold in a safe-haven context. </p>
<p>If both gold and the US dollar increase at the same time in response to an extreme shock, the actual effect could be masked for gold. For example, if the US dollar appreciated by 5% and the value of gold increased by 5%, the price of gold in US dollars would appear to be stable. And if gold increased by only 4%, the price of gold in US dollars would even fall despite the fact that the value of gold changed consistent with its safe-haven status. While this effect may be disappointing for a US investor (or a Swiss investor), it can be highly rewarding for investors in other countries. For example, since the Australian dollar depreciated significantly during the global financial crisis and gold remained relatively stable, the value of gold in Australian dollars increased considerably showing a strong safe-haven effect for Australian investors.</p>
<p>To summarise, the evidence generally provided to claim that gold is not a safe haven asset is based on a lack of understanding of what a safe haven is, both theoretically and empirically. However, there is a possibility that gold or other safe haven assets eventually <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2142283">may lose their safe-haven status</a>. </p>
<p>If investors included safe-haven assets in their portfolios possibly mistaking them for a hedge, they would potentially inflate their prices in normal times and expose them to common shocks most likely depressing them in crisis times and thus depriving the assets of their safe haven potential. For gold, at current prices, it seems unlikely it is deprived of its safe-haven property.</p><img src="https://counter.theconversation.com/content/53363/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dirk Baur works for UWA.</span></em></p>Claims that gold is not a safe-haven asset are based on a lack of understanding of what a safe haven is.Dirk Baur, Professor of Finance, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/531252016-01-18T04:04:32Z2016-01-18T04:04:32ZExplainer: how currency markets work and why the South African rand is falling<figure><img src="https://images.theconversation.com/files/108194/original/image-20160114-2345-15an85i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The rand's current weakness can be attributed to a myriad of structural problems facing South Africa's economy.</span> <span class="attribution"><span class="source">Reuters</span></span></figcaption></figure><p>Given that South Africa operates within a <a href="http://www2.resbank.co.za/internet/Glossary.nsf/0/6e77f482c063ea5742256b430031f732?OpenDocument">flexible exchange rate regime</a>, the value of the rand, like any commodity, is determined by the market forces of supply and demand. The demand for a currency relative to the supply will determine its value in relation to another currency. </p>
<p>Theoretically, the demand for a floating currency – and hence its value – changes continually based on a multitude of factors. In the case of the rand, its current <a href="http://businesstech.co.za/news/business/108555/how-far-the-rand-has-fallen-from-2000-to-2016/">weakness</a> can be attributed to a myriad of structural problems facing the local economy.</p>
<p>The main determinants of a currency’s value include demand for a country’s goods and services. This is closely linked to the growth and national income of its main trading partners.</p>
<p>Equally important is the domestic interest rate. If it is high it is likely to attract foreign capital, causing the exchange rate to strengthen. But high inflation can wipe out the benefit of high interest rates to foreign investors.</p>
<p>Additional factors serve to drive the currency down. </p>
<p>These include a current account deficit. The current account deficit gets bigger when a country spends more on foreign trade than it is earning and has to borrow capital from foreign sources to make up the difference. </p>
<p>This implies that a country requires more foreign currency than it is getting through sales of exports, and it supplies more of its own currency than foreigners demand for its products. This excess demand for foreign currency leads to depreciation in the value of a currency. </p>
<p>Factors such as political instability and poor economic performance can reduce investor confidence. This inevitably forces foreign investors to seek out stable countries with strong economic performance. Thus, a country that is perceived to have positive attributes will attract investment away from countries perceived to have more political and economic risk.</p>
<p>There is a further complication to currency movements. The buying and selling of currencies is no longer driven only by the need to facilitate trade but also by the demand for currencies as financial assets. This means that currencies are bought and sold like any other asset. Decisions by traders – to buy or sell a currency – can have a marked effect. </p>
<h2>The impact of the turmoil in China</h2>
<p>South Africa’s currency lost 26% of its <a href="http://www.wsj.com/articles/south-african-rand-falls-to-fresh-record-low-1452507129">value</a> in the six months after turmoil gripped Chinese markets in June 2015. This was when the People’s Bank of China surprised markets by executing a 2% devaluation of the yuan and changing the way it traded its currency. The aim was to weaken the yuan to boost its export <a href="http://www.theguardian.com/business/2015/aug/11/china-devalues-yuan-by-2-to-boost-flagging-economy">competitiveness</a>.</p>
<p>This, coupled with slower economic growth, has aggravated the situation for South Africa as well as other African countries that rely on oil and mineral exports to China. Emerging markets most exposed to lower growth prospects and subdued commodity prices have seen the sharpest falls.</p>
<p>The rand is expected to remain under pressure with many analysts predicting that it will fall further in 2016. It is not alone. Many other emerging market currencies have been dealt the same fate. </p>
<p>But the rand is substantially weaker than it might have been. The sudden <a href="http://www.bdlive.co.za/markets/2015/12/10/rand-crashes-after-zuma-fires-nene">reshuffling</a> of the finance ministry was seen as <a href="https://theconversation.com/why-zumas-actions-point-to-shambolic-management-of-south-africas-economy-52174">weakening</a> one of the country’s key macroeconomic institutions and continues to undermine market confidence.</p>
<h2>Implications of the weak rand</h2>
<p>The weak rand has a number of implications for the country’s growth prospect. Firstly, the weakening currency carries the risk of pushing up inflation because imported goods are more expensive. This means that the South African Reserve Bank faces a difficult decision. It can keep interest rates low but then faces even higher inflation. This will only devalue the rand further.</p>
<p>If the central bank takes more aggressive action by raising interest rates, it risks stifling growth in an economy that is only growing at <a href="http://www.fin24.com/Markets/Currencies/weak-rand-shows-investor-concerns-economist-20160111">1.5%</a>.</p>
<p>The rand’s weakening could not have come at a worse time for South Africa. The country is suffering from the worst <a href="https://theconversation.com/south-africas-poor-face-rising-food-prices-as-drought-intensifies-52950">drought</a> since 1992 which has increased food costs and pushed the farming industry into recession. The price of white corn, a staple food in southern Africa, has more than doubled on the South African Futures Exchange in the past <a href="http://www.bloomberg.com/news/articles/2016-01-12/hunger-stalks-southern-africa-as-el-nino-decimates-harvests">year</a>. </p>
<p>With large parts of the economy already in recession, coupled with worsening debt levels and the threat of <a href="https://theconversation.com/south-africa-is-on-a-cliff-edge-just-as-it-was-in-1985-53094">credit-rating downgrades</a>, it looks like the economy will contract. This implies that Finance Minister Pravin Gordhan has limited room to boost spending.</p>
<p>The weak rand will also see the cost of imported goods for consumers rise. In addition, while the rest of the world benefits from record low oil prices, the country’s weaker currency means it will not able to take full advantage of this and may face higher fuel prices in the near future. </p>
<p>On the flip side, the weaker rand does have some benefits. It is helping mines stay afloat. And gold mines could make profits again as the gold price has held up more than the prices of other minerals. There may also be a boost in tourism. </p>
<p>The weaker rand may also have short-term benefits for sub-Saharan countries importing substantial volumes from South Africa. </p>
<p>Finally there may be a boost for local exporters. But this could be stifled by the rise in the price of imported raw materials which will contribute to higher costs of production for manufacturers.</p>
<h2>Is the rand over-traded?</h2>
<p>In 2013 the South African rand was ranked as the 18th most-traded currency in the <a href="http://www.fin24.com/Markets/Currencies/weak-rand-shows-investor-concerns-economist-20160111">world</a>. Surprisingly, while South Africa accounts for only 0.3% of the world’s daily foreign exchange market turnover, the rand accounts for 1.1% of worlds daily currency <a href="http://www.stanlib.com/EconomicFocus/Pages/SARandis18thmosttradedcurrencyintheworld.aspx">trading</a>.</p>
<p>This difference is <a href="http://www.stanlib.com/EconomicFocus/Pages/SARandis18thmosttradedcurrencyintheworld.aspx">largely due</a> to the daily trade taking place outside South Africa by non-residents. This is partly a result of virtually no exchange control restrictions for foreigners trading the rand but many in place for South Africans who wish to trade in foreign currency. </p>
<p>This has been highlighted as a further problem faced by the central bank in trying to influence the value of the rand.</p><img src="https://counter.theconversation.com/content/53125/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fatima Bhoola does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Like any commodity, the value of the rand is determined by the market forces of supply and demand. Its weakening is also affected by a myriad of structural problems facing the South African economy.Fatima Bhoola, Lecturer in Economics, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/524112016-01-07T11:16:19Z2016-01-07T11:16:19ZQuest to find bitcoin’s founder highlights currency’s biggest threat: the taxman<p>Bitcoin enthusiasts have recently been roiled by <a href="http://www.wired.com/2015/12/bitcoins-creator-satoshi-nakamoto-is-probably-this-unknown-australian-genius">claims</a> that an Australian named Craig Wright and his deceased partner are the mysterious founders behind the cryptocurrency. </p>
<p>Of course, we’ve been down this path before. <a href="http://www.nytimes.com/2015/05/17/business/decoding-the-enigma-of-satoshi-nakamoto-and-the-birth-of-bitcoin.html?ref=topics&_r=0">The New York Times</a>, <a href="http://www.fastcompany.com/1785445/bitcoin-crypto-currency-mystery-reopened">Fast Company</a>, <a href="http://www.newyorker.com/magazine/2011/10/10/the-crypto-currency">The New Yorker</a> and Newsweek have all made similar claims about different people, only to be proved wrong. And last month, Wired – the magazine behind the most recent claim – said there are <a href="http://www.wired.com/2015/12/new-clues-suggest-satoshi-suspect-craig-wright-may-be-a-hoaxer/">reasons</a> to believe Wright is actually a hoaxer and not “Satoshi Nakamoto,” as the currency’s creator is known.</p>
<p>Regardless of whether the new claims are correct, it has resurrected a worry that has long plagued bitcoin users. Around one million bitcoins were mined early in the currency’s history and have never been transferred. Were they to be sold en masse, bitcoin’s value could drop precipitously, wiping out a lot of wealth and threatening its status as a reliable alternate currency, independent of banks and governments. </p>
<p>However, the reporting about Wright and the bitcoin businesses and trusts he has established – presumably for tax and secrecy purposes – reveals an even bigger threat to bitcoin users and other supporters of virtual currency: how will such currencies be treated for tax purposes? </p>
<p>This is a question I have been exploring for the last decade, both with regard to virtual currencies designed to be used solely online, such as for World of Warcraft, and those designed for use in the real world, such as bitcoin.</p>
<h2>Currency or investment?</h2>
<p>Bitcoins are created by a computer algorithm and are initially allocated through a process colloquially referred to as “<a href="https://www.bitcoinmining.com">mining</a>.” Miners collect bitcoins by solving complex mathematical equations used to authenticate transfers and in so doing both bring more of the currency into the world and maintain the system.</p>
<p>Bitcoin users have a public key and a private key associated with the bitcoins they own. To effect a transfer, one must use the private key. However, transfers are recorded on a public “block chain,” which uses the associated public key. </p>
<p>This secure public record-keeping obviates the need for third-party intermediaries, like banks. While the world can see the public key and how many bitcoins are associated with it, the owner of the bitcoin can remain anonymous if he keeps his association with that key secret.</p>
<p>Approximately 15 million bitcoins have been issued to date, and they are currently valued at about US$430 each, for a total of approximately $6.5 billion. The algorithm <a href="http://www.cnbc.com/2014/01/23/cnbc-explains-how-to-mine-bitcoins-on-your-own.html">is designed</a> to generate 21 million bitcoins, and experts anticipate that the last bitcoin will be issued sometime between 2110 and 2140. </p>
<p>Bitcoin is designed to be used as a currency, though some hold it as an investment. The difficulty is that governments have taken a <a href="http://www.forbes.com/sites/kellyphillipserb/2015/10/23/virtual-heads-or-tails-eu-says-bitcoin-is-currency-for-tax-purposes-while-us-disagrees">variety of positions</a> on the nature of bitcoin for tax purposes. </p>
<p>For instance, some countries, including those in Europe, have classified bitcoin as a currency for consumption tax purposes, meaning that the various value-added taxes do not apply to bitcoin exchanges, while others, such as <a href="https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia---specifically-bitcoin/">Australia</a>, have not. Similarly, the U.K. <a href="http://www.taxation.co.uk/taxation/Articles/2015/03/10/332784/cryptic-currency">treats</a> bitcoin as foreign currency for income tax purposes, while the U.S. <a href="https://www.irs.gov/pub/irs-drop/n-14-21.pdf">regards it</a> as property. </p>
<p>Those who “mine” bitcoins will likely be subject to income tax on the value they receive under the theory that they are being compensated for validating bitcoin transactions and maintaining the block chain that records all transfers. But this is true regardless of whether bitcoin is recognized as a currency. In other words, they are not really mining and not subject to the complex rules governing mining operations. Instead, they are being compensated for services. </p>
<p>The difficulty arises when people try to spend their bitcoins, however acquired.</p>
<h2>How cash transactions are taxed</h2>
<p>Those who spend local currency, such as dollars (U.S. or Australian) or euros, do not report a gain or loss when they do so. For instance, if I buy a hamburger, I don’t have a gain or loss on the currency used, regardless of whether it has changed value relative to other currencies.</p>
<p>As the baseline currency, a dollar is worth a dollar, even though it may fluctuate against other currencies or be affected by inflation. </p>
<p>Foreign currency is different. If I buy a euro for $1 and spend it later, when it is worth $1.10, theoretically I have a $0.10 gain that I should be taxed on. Different countries have different rules, but in the U.S., taxpayers need not pay taxes on such gains if they are under $200 in a given year.</p>
<p>By refusing to classify bitcoin as a currency for income tax purposes (local or otherwise), tax authorities effectively treat bitcoins as any other property, meaning that those who buy items with bitcoins must report any gain on the transaction associated with a change in its value. That is, it is treated like an investment, regardless of how the owner actually uses it. </p>
<p>It is as if they sold their bitcoins for cash and then used that cash to make a purchase. Worse yet, if the bitcoin has gone down in value, <a href="https://www.irs.gov/pub/irs-drop/n-14-21.pdf">taxpayers</a> might not be able to deduct the losses, because they could be considered personal. Thus, anyone using bitcoin as a currency has to keep track of each bitcoin’s cost so that he can accurately calculate gain or loss. </p>
<p>This administrative task, combined with the potential need to pay income taxes, could make bitcoin too difficult to use as an alternate currency.</p>
<h2>Wright’s woes</h2>
<p>Wright’s tale of woe with the Australia Tax Authority (ATA) (<a href="https://assets.documentcloud.org/documents/2644012/20140218-Transcript-Redacted.pdf">revealed</a> in a transcript made public as part of the effort to prove that he is Satoshi Nakamoto) shows how the decision not to classify bitcoin as a currency creates problems with a tax on goods and services (GST). </p>
<p>Among other things, Wright sought to create an exchange to buy and sell bitcoin. If bitcoin were considered a currency, such exchanges would be exempt from the GST, and the exchange could operate economically. However, if the GST applied to such transactions, as the ATA claimed, the exchange would be forced to purchase $1 of bitcoin for $1.10 (assuming a 10% rate). </p>
<p>In other words, if you use normal currency, it would cost you $1, but if you use bitcoin, it would cost $1.10. Bitcoin becomes a lot less attractive under those conditions.</p>
<p>To avoid this result, Wright and his lawyers established a number of offshore trusts and argued that, for many of the transactions the ATA was investigating, no bitcoin was actually transferred. Instead, the beneficial interests in the trusts, which were not subject to the GST, were transferred. The bitcoin itself was purportedly held offshore, and any transfer of the bitcoin or rights to it were outside the reach of the ATA.</p>
<h2>The problem for tax authorities</h2>
<p>It’s not clear whether such arguments would actually succeed, but they illustrate a real problem that intangible assets raise for both consumption and income taxes, especially for countries that use a territorial tax system (that is, one that doesn’t tax foreign income). </p>
<p>If assets are considered to be outside a given country, they will not be subject to that country’s GST or equivalent tax. Moreover, if the asset can be “wrapped” in a trust or other entity whose ownership interests are exempt from the GST, it can potentially escape tax even if it is held locally. </p>
<p>Similarly, if such assets generate income, for instance when they are bought or sold, under a territorial system, that income will be taxed in the country where the sale occurred. </p>
<p>It is not surprising that Wright <a href="http://www.wired.com/2015/12/bitcoins-creator-satoshi-nakamoto-is-probably-this-unknown-australian-genius">established</a> at least some of his trusts in known tax havens, such as the Seychelles. Even if his efforts to shield bitcoin from tax through these efforts succeed, they are far too complicated for the average user and will likely further impede bitcoin’s adoption as an alternate currency.</p>
<h2>Bitcoin’s challenge</h2>
<p>Much of the recent focus has been on whether Wright really created bitcoin and whether he is sitting on a <a href="http://www.wired.com/2015/12/bitcoins-creator-satoshi-nakamoto-is-probably-this-unknown-australian-genius">hoard</a> worth close to a half billion dollars, which could potentially destabilize the market. </p>
<p>However, the real threat to bitcoin and other similar products may come from a far more mundane source: the world’s tax authorities. Absent favorable rulings, every bitcoin transaction could generate both income and consumption tax liability, rendering bitcoin impractical as an alternate currency. </p>
<p>Sophisticated tax planning to avoid such outcomes might succeed but would make bitcoin harder to use. </p>
<p>Thus, while bitcoin was developed as a means to free individuals from the need to interact with third parties, including the government, it nonetheless needs governmental cooperation if it is to move from the fringes to the mainstream.</p><img src="https://counter.theconversation.com/content/52411/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adam Chodorow does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>How tax authorities decide to treat virtual currencies like bitcoin may determine whether they thrive or die.Adam Chodorow, Professor of Law, Arizona State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/467132015-09-25T09:20:47Z2015-09-25T09:20:47ZRise of cryptocurrencies like bitcoin begs question: what is money?<figure><img src="https://images.theconversation.com/files/96112/original/image-20150924-17067-1g17suk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">If bitcoins exist only in computers, do they really exist? </span> <span class="attribution"><span class="source">Bitcoins via www.shutterstock.com</span></span></figcaption></figure><p>When you begin to delve into the question of what money really is, you must be prepared for some metaphysics. Money, currencies and other such media of exchange differ markedly in their backgrounds and means of operation, and have changed quite recently into forms that are barely understandable. </p>
<p>For centuries, <a href="http://is.muni.cz/el/1456/podzim2009/MPE_MOEK/um/8972262/menger1892.pdf">minted coins</a> not only represented the value and trust of banks, their depositors and eventually nation-states, but also were deemed valuable because they were made from precious metals like gold and silver. These metals are difficult to move around in large quantities, and so <a href="https://en.wikipedia.org/wiki/Banknote">banknotes</a> were invented as early as the seventh century in China and brought to Europe in the 13th century. Unlike coins, banknotes were not treated as valuable in themselves since they were simply printed on otherwise worthless paper. Rather, they served as a form of promissory note or IOU that could be presented to the banks that issued them in exchange for their face value in precious metal, coins or bullion. </p>
<p>In the 20th century, most central banks and governments <a href="http://useconomy.about.com/od/monetarypolicy/p/gold_history.htm">stopped backing up their currencies with precious metals</a>, and yet banknotes maintain fluctuating values, with some in high demand as media for exchange both domestically and internationally. Dollars and euros are highly regarded and preferred currencies for international commerce, as well as for stocking private bank accounts. </p>
<p>Now we have bitcoins and other digital currencies that exist entirely in blocks of zeros and ones and are even “mined” by machines running algorithms. And earlier this month, bitcoins and their ilk were <a href="http://www.bloomberg.com/news/articles/2015-09-17/bitcoin-is-officially-a-commodity-according-to-u-s-regulator">officially deemed</a> commodities by the Commodity Futures Trading Commission, which will now regulate them. </p>
<p>So as the greenbacks and quarters in our pockets slowly disappear, replaced by strings of digits stored on our smartphones, and money takes another step away from being tied to anything of value, a philosophical question comes to mind: does money still exist? And if so, what gives it its value?</p>
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<figcaption><span class="caption">The Guardian explains bitcoin.</span></figcaption>
</figure>
<h2>What’s value without value?</h2>
<p>Money is a “fungible” item, which means that exchange of any one portion for a portion of equal value is not a “taking” of property. That is, you don’t own a particular US$100 bill. You own the value it represents. </p>
<p>This is how banks have long worked, since when you deposit your money, you are not entitled to receive the same coins or bills back as you deposited. This is also how “fractional reserve” banking began (in which banks do not keep all the curency on deposit “within” the bank, just some fraction of it) and was not regarded somehow as theft. People took their money to a bank, they were given a note of deposit, which entitled them to withdraw the same amount plus some interest, but they were not entitled to the <em>same</em> coins or bills that they deposited. </p>
<p>The money on deposit in a bank is not all physically in the bank (excepting that which is in safety deposit boxes) and has not been really since banking was invented. When you deposit a sum, you no longer own the paper or other medium of exchange used for the deposit, legally. What you own is a debt and obligation by the bank to return the equivalent amount of money with interest. </p>
<p>John Searle has described things like <a href="http://ontology.buffalo.edu/smith/courses09/3_Searle_Documents.ppt">money as “some special sort” of social objects</a>. That is, X (coins, bills, strings of digits) work as Y (money) in context C (an economy, coffee shop, bank, etc). In the case of money, anything can conceivably take on the Y role even without an X (think a <a href="http://www.nytimes.com/2015/09/22/business/international/trading-meat-for-tires-as-bartering-economy-grows-in-greece.html?_r=0">barter economy</a>). Where metals, then bills and now bits in computer memory take the role of X, money might well be a “free-standing” Y, meaning it could exist without anything to represent it except the web of intentional states (the debts and obligations) that make more familiar forms of money function. It’s only physical manifestation might be a note in a ledger.</p>
<p>Without precious metal standards backing national currencies, and in the age of digital transactions, money is decreasingly tied to banknotes, just as its ties to metals have faded. Digital ledgers track exchanges and accounts, with digital strings in computer memories representing the trust and value we once attached to more solid things like coins, bills and notes, in more ephemeral digitally encoded, instantly accessible forms attached to cellphones, computers and chip cards. </p>
<h2>A brave new world</h2>
<p>New types of <a href="https://www.cryptocoinsnews.com/cryptocurrency/">cryptocurrencies</a> (where cryptography protects its integrity) like <a href="https://bitcoin.org/">bitcoin</a> and others take the concept one step further, distributing the <em>banking</em> to all its users, tying the transactions and ledgers to no particular party but to all users at once. This is similar to mirrored bank servers, but bitcoin is mirrored among all bitcoin owners.</p>
<p>A bitcoin is as ownable as dollars are when they are deposited in a bank. Skipping the stage of physical, fungible currencies, bitcoins exist by virtue of their representations in a ledger in cyberspace. The information encoded in a massively distributed and constantly updated <a href="https://blockchain.info/">blockchain</a> is incapable of the exclusivity required for owning objects in the traditional sense. But the same is true of the information that tracks most of the money in the world. Money in nearly every denomination exists and flows in a similar state, represented by digital bits. </p>
<p>Bitcoins nonetheless lack some of the institutional guarantees that other types of money has due to nations and their laws.</p>
<h2>Trading on trust</h2>
<p>Depositors to banks are protected in their debts by states, generally, and through contracts with their banks. State insurance and the contractual guarantee that a bank will pay back what has been put into them mean that there is some force behind our trust in the continued existence of a person’s wealth while digitally stored in a bank’s servers. The blockchain exists on many servers at once, spread across the universe of bitcoin owners. </p>
<p>Without government insurance or contractual guarantees, only mutual trust maintains the value and integrity of the system. What bitcoin owners own is the debt, just as those who own money in banks own debts that are recorded in bits. They do not own the bits that comprise the information representing that debt, nor the information itself, they own the social object – the money – that those bits represent.</p>
<p>Bank ledgers exist. They are tangible, even though digital, and they record the debts owed among parties. While cyberspace is ephemeral, it is still <a href="http://www.cse.buffalo.edu/%7Erapaport/Papers/cyber.pdf">real and physically based</a>. Digital bank ledgers now track money without the necessity for physical transfers of currencies. </p>
<p>Bitcoins too exist as digital records of obligations, physically encoded on servers of those who hold them, propagated and distributed for transparency and security, encrypted for privacy. Bitcoins are as real as money in banks. What’s most fascinating about these new digital cryptocurrencies is how much they reveal about the <em>surreal</em> nature of currencies and wealth in our digitized economy. </p>
<p>If bitcoins are as real as any other money, how real can money be?</p><img src="https://counter.theconversation.com/content/46713/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Koepsell does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Money used to be backed by something of real value such as gold or silver. Bitcoins and other digital currencies will sever that link forever.David Koepsell, Adjunct Associate Professor, University at BuffaloLicensed as Creative Commons – attribution, no derivatives.