Cryptocurrencies, coinage, sovereignty, citizenship… & trust

Global - Apr 18 2019
  • #esg

Cryptocurrencies, coinage, sovereignty, citizenship… & trust

Last week China’s state planner officially signaled it wants to eliminate bitcoin and other cryptocurrencies mining in the country, in a move increasing the pressure on a sector under heavy scrutiny since 2017, when Chinese regulators started to ban initial coin offerings and close local trading exchanges for cryptocurrency.

Created just over ten years ago, the bitcoin (BTC) has been a source of fascination, fantasies and copious media coverage since at least 2013, when the FBI seized allegedly drug-related bitcoins from the dark web Silk Road website. But it was not until 2017 that financial hysteria set in, with quotes for one BTC reaching nearly $20,000 with volumes following suit and many trading houses peddling BTC-linked “investment” products... The fever subsided markedly in 2018 with a USD/BTC level ending the year under 4,000. However, the use of bitcoins has stayed solid, particularly on darknet markets where it doubled throughout 2018, its price reaching back to the 5,000 level this year.

In spite of the wild gyrations, what is the appeal of BTC and 100+ other cryptocurrencies (Ethereum -ETH- Ripple -XRP- etc.), which have followed similar trends? According to the website coinmarketcap.com, BTC and ETH alone would account for more than two-thirds of the $157Bn capitalisation, so some people put faith in them.

One reason might be some form of mistrust vis-à-vis Central Banks, States and institutions in general. The (still unknown) bitcoin creator Satoshi Nakamoto is quoted as stating that: "The root problem with conventional currencies is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust." Thus, to bypass a central bank, the basic principle of BTC is to use a checking algorithm that would be very costly to tamper with, if one wanted to, based on an information chain that is spread manifold in a decentralised ledger, and which uses the codes previously validated by all the ledger stakeholders. This way, a transaction can be approved only if all participating stakeholders agree that the bits of information received match what is in the ledger: hackers who would try to randomly generate a code in order to cheat their way in the ledger would have to use an enormous computing capacity -and matching energy to run it- to attempt this, and could not recoup those costs.

The bitcoin blockchain is a public ledger that records BTC transactions. It is implemented as a chain of blocks, each block referring to the previous block, up to the initial block of the chain. A network of communicating nodes running bitcoin software maintains the blockchain: the nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes. To achieve independent verification of the chain of ownership, each network node stores its own copy of the blockchain. A new group of accepted transactions -a block- is created every 10 minutes, added to the blockchain, and quickly published to all nodes, without requiring central oversight.

“Mining” is the record-keeping service done through the use of computing power that maintains the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which is then shared with the network and verified by recipient nodes. Highly encrypted (SHA-256), the information is easy to check for any node in the network, but very time-consuming to randomly generate as mining hackers would have to try many different values. All this ensures that participants do not have to rely on just one central intermediary, that the trust is shared and checks mutually carried out.

Some communities appreciate this freedom from central banks (and, to some extent, authorities): darknet participants, of course, but also, for instance, some citizens in countries where economic conditions cause a flight from the national currency.

Besides, some buyers of cryptocurrencies bet on a longer-term appreciation, e.g. there will only be a limited quantity of bitcoins mined: the BTC protocol specifies that the reward for adding a block (in July 2016, 12.5 newly created BTCs per block added to the blockchain) will be halved every 210,000 blocks (roughly every 2.4 years). In the end, the reward decreases to zero, and a BTC limit of 21 million units will be reached, tapering next century; then the record-keeping will be rewarded by transaction fees only. However, if the shared trust has not been breached, demand for BTC should increase and with it the price as well. It is interesting to note that out of a potential total of BTC 21 million, more than 17,5 had been mined as of February 27, 2019 : the “arms race” for the balance is fully on, and Chinese bitcoin mining hardware manufacturer Canaan which last year planned an IPO, declared sales in China worth 8.7 billion yuan ($1.30 billion) in 2017, 45 percent of global sales by value, but was forecasting quadrupled 35.6 billion yuan sales by 2020 before the latest moves by Chinese authorities...

Understandably, in view of these projections alarm has been raised on the foreseeable increasing energy consumption for structurally diminishing BTC mining returns. However, if (thanks to Moore law & quantum) computing performance keeps improving, is it really a problem, or a red rag to the media bull?

Moreover, apart from volatility and thirst for energy, cryptocurrencies can have problems too:

Nevertheless, cryptocurrency is hip, so it is no surprise that a group like Facebook is reportedly working on its own coin, with an analyst forecasting as much as $19 billion in additional revenue by 2021 from “Facebook Coin”… if it works (back in 2010 similar plans failed). The appeal of this proposition lies mostly in the fact that "Facebook citizens" are now the single largest community on the planet (comparable in size to the population of China or India, or say, Christians globally). Leaving aside the “detail” of regulatory supervision or coinage control which sovereign states like China and others obviously still value, the question is: how deeply does this community share values, ideals, etc., how ready will it be to embrace the same currency to be used by widely diverging groups? And, straddling differing economic zones, how will FB juggle its currency with the dollar, euro, yuan, or rupee that Facebookers would have in their pockets? Or, to put it another way, will FB be able to find a (de)centralised way to create trust in the FB Coin?

Trust, which was at the inception of the bitcoin and other cryptocurrency projects, is the  cornerstone of any monetary and financial system, but also of any mature society: in a time of “fake news” and lingering doubts on the real status of our economies or content for our societies, it is worth watching with attention some of the current experiments, provided they genuinely aim to rebuild said trust and free it as much as possible from external influence.   

Beyond cryptocurrencies, the other side of the coin is the blockchain system which underpins them: it also offers wider opportunities for transactional trust in many fields, including various ESG certification possibilities (solar coin, forestry certificates, cobalt origin, animal welfare, health checks, etc.). At the same time, blockchain applications will create threats to the activities of some currently trusted intermediaries or third parties (banks, notaries, administrations, media, etc.): implications are only beginning to unfold.

Source: Beyond Ratings

Weekly digest publications:

China: towards a “soft cooling”?!

Weekly food for thought
China
Apr 18 2019
See publication

Deforestation: different areas, different causes

Weekly food for thought
Global
Apr 18 2019
See publication

What carbon budget for the new generations?

Weekly food for thought
Global
Apr 18 2019
See publication

Our latest
publications

Title
Category
Tag
Country
Date
Analyst insight
#Carbon #ESG
Global
2019-07-23
Analyst insight
#ESG
Global
2019-07-23
Research note
#ESG
Global
2019-07-23
Weekly food for thought
#Carbon/Climate Change
Global
2019-07-23
Weekly food for thought
#ESG
Global
2019-07-23
Weekly food for thought
#ESG
France
2019-07-23
Analyst insight
#Credit Risk #ESG
Global
2019-07-23
Weekly food for thought
#Carbon/Climate Change #Environment
Global
2019-07-23
Weekly food for thought
#ESG
Global
2019-07-23
Weekly food for thought
#ESG
France
2019-07-23
Analyst insight
#Carbon
Europe
2019-07-23
Weekly food for thought
#Carbon
Global
2019-07-23
Weekly food for thought
#ESG
Global
2019-07-23
Weekly food for thought
#Credit Risk
United States
2019-07-23
Analyst insight
#Environment
Northern Area
2019-07-23
Weekly food for thought
#Carbon/Climate Change
Europe
2019-07-23
Weekly food for thought
#ESG
France
2019-07-23
Weekly food for thought
#Credit Risk
Peru
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change
World
2019-07-23
Weekly food for thought
#ESG
France
2019-07-23
Weekly food for thought
#Credit Risk #GDP
Europe
2019-07-23
Weekly food for thought
#Carbon/Climate Change
Global
2019-07-23
Weekly food for thought
#ESG
Global
2019-07-23
Weekly food for thought
#Credit Risk
France
2019-07-23
Analyst insight
#Credit Risk #France
Europe
2019-07-23
Weekly food for thought
#ESG
Global
2019-07-23
Weekly food for thought
#Carbon/Climate Change
Global
2019-07-23
Weekly food for thought
#ESG
Global
2019-07-23
Weekly food for thought
#GDP
Europe
2019-07-23
Analyst insight
#ESG
Global
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change
Global
2019-07-23
Weekly food for thought
#Carbon #ESG
France
2019-07-23
Weekly food for thought
#Credit Risk
Global
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change
Global
2019-07-23
Weekly food for thought
#ESG
Europe, USA
2019-07-23
Weekly food for thought
#GDP
France
2019-07-23
Analyst insight
#Environment
France
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change
Global
2019-07-23
Weekly food for thought
#Carbon/Climate Change #ESG
Global
2019-07-23
Weekly food for thought
#Credit Risk #GDP
China
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change
Global
2019-07-23
Weekly food for thought
#ESG
USA
2019-07-23
Weekly food for thought
#GDP
Global
2019-07-23
Analyst insight
#Credit Risk #Sovereign Debt
Global
2019-07-23
Weekly food for thought
#Carbon #Climate #IPCC #WMO
Global
2019-07-23
Weekly food for thought
#Carbon #Inequality #Paris Agreement
France
2019-07-23
Weekly food for thought
#GDP #Sovereign Debt
Italy
2019-07-23
Analyst insight
#Credit Risk #GDP #Geopolitics #Sovereign Debt
Global
2019-07-23
Weekly food for thought
#Environment
Global
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change #GDP
Global
2019-07-23
Weekly food for thought
#GDP
France
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change #Environment
Global
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate #Environment
Global
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate #Environment
Global
2019-07-23
Analyst insight
#GDP
Brasil
2019-07-23
Weekly food for thought
#Environment
Venezuela
2019-07-23
Weekly food for thought
#Environment #Natural Capital
Norway
2019-07-23
Analyst insight
#Carbon #Carbon/Climate Change #Climate
United Kingdom
2019-07-23
Weekly food for thought
#Agriculture #Biodiversity #Climate #GHG #Greenhouse gases
Global
2019-07-23
Weekly food for thought
#Biodiversity #Climate #Environment #ESG #IPCC #Oceans #SIDS
Global
2019-07-23
Weekly food for thought
#Credit Risk #GDP
France
2019-07-23
Weekly food for thought
#Carbon/Climate Change
Europe
2019-07-23
Weekly food for thought
#Carbon/Climate Change
France, Canada
2019-07-23
Weekly food for thought
#Credit Risk #GDP
Argentina
2019-07-23
Analyst insight
France, Egypt
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate
France
2019-07-23
Weekly food for thought
#GDP #Sovereign Debt
Germany
2019-07-23
Weekly food for thought
#Environment #ESG
Global
2019-07-23
Analyst insight
#GDP #Natural Capital #Sovereign Debt
South Africa, France
2019-07-23
Weekly food for thought
#Credit Risk #Sovereign Debt
United States
2019-07-23
Weekly food for thought
#Carbon/Climate Change
Global
2019-07-23
Weekly food for thought
#Carbon/Climate Change #Environment #ESG
Global
2019-07-23
Weekly food for thought
#Carbon/Climate Change #Climate
Global
2019-07-23
Weekly food for thought
#ESG
India
2019-07-23
Weekly food for thought
#Credit Risk #GDP
USA, Japan, European Union
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change #GDP #Paris Agreement #Sovereign Debt
Global
2019-07-23
Weekly food for thought
#Climate #Environment #Paris Agreement
Small Island Developing States, Global, Barbados, Fiji
2019-07-23
Weekly food for thought
#Credit Risk #GDP #Sovereign Debt
Venezuela
2019-07-23
Analyst insight
#Carbon #Carbon/Climate Change #Climate #Credit Risk
Global
2019-07-23
Analyst insight
Global
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate
Global
2019-07-23
Weekly food for thought
#Credit Risk #GDP
Global
2019-07-23
Analyst insight
#Biodiversity #Environment #Natural Capital
Brazil
2019-07-23
Weekly food for thought
#Credit Risk #Sovereign Debt
United States
2019-07-23
Weekly food for thought
#Carbon/Climate Change
Global
2019-07-23
Analyst insight
#Credit Risk #Sovereign Debt
United States
2019-07-23
Analyst insight
#Carbon/Climate Change #Credit Risk #ESG #Natural Capital
Global
2019-07-23
Analyst insight
#Carbon #Carbon/Climate Change
Europe
2019-07-23
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate #Paris Agreement
France
2019-07-23
Weekly food for thought
#Credit Risk #Sovereign Debt
Europe
2019-07-23
Weekly food for thought
Global
2019-07-23
Analyst insight
Global
2019-07-23
Weekly food for thought
France
2019-07-23
Weekly food for thought
#Carbon/Climate Change #ESG
Global
2019-07-23
Weekly food for thought
Global
2019-07-23
Weekly food for thought
Global
2019-07-23
Weekly food for thought
Global
2019-07-23
Analyst insight
#Biodiversity #Climate #Environment #Natural Capital #Paris Agreement
Global
2019-07-23
Weekly food for thought
United States
2019-07-23
Weekly food for thought
Italy
2019-07-23
Weekly food for thought
Global
2019-07-23
Analyst insight
Middle East & North Africa
2019-07-23
Weekly food for thought
Global
2019-07-23
Weekly food for thought
Global
2019-07-23
Research note
#Carbon #Carbon/Climate Change #Climate #Paris Agreement
Global
2019-07-23
Weekly food for thought
Global
2019-07-23
Analyst insight
All
2019-07-23
Weekly food for thought
United States
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
#Carbon/Climate Change #Climate #Credit Risk
England
2019-07-23
Weekly food for thought
Global
2019-07-23
Weekly food for thought
Germany
2019-07-23
Analyst insight
Brazil
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
Italia
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
Canada
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
All
2019-07-23
Analyst insight
Sweden
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
Italia
2019-07-23
Analyst insight
All
2019-07-23
Weekly food for thought
USA
2019-07-23
Analyst insight
All
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
United Kingdom
2019-07-23
Weekly food for thought
United Kingdom
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
All
2019-07-23
Research note
All
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
Russia
2019-07-23
Analyst insight
Argentina
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
European Union
2019-07-23
Analyst insight
European Union
2019-07-23
Analyst insight
Greece
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
European Union
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
Cuba
2019-07-23
Weekly food for thought
All
2019-07-23
Analyst insight
Greece
2019-07-23
Weekly food for thought
European Union
2019-07-23
Weekly food for thought
French Guyana
2019-07-23
Weekly food for thought
#Sovereign Debt
Russia
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
Venezuela
2019-07-23
Analyst insight
All
2019-07-23
Weekly food for thought
United Kingdom
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
France
2019-07-23
Weekly food for thought
European Union
2019-07-23
Weekly food for thought
All
2019-07-23
Weekly food for thought
France
2019-07-23

Let's keep in touch!

This field is required
Invalid email

Register to our newsletter to be the first to hear about ...

Get started

More investors are choosing Beyond Ratings' proprietary ESG-augmented financial metrics to gain a 360° view of company and country ESG performance.