THE BIG BANG BITCOIN – BLOCKCHAIN, TULIPS, CRYPTOCURRENCIES AND REGULATORY SANDBOXES

THE BIG BANG BITCOIN – BLOCKCHAIN, TULIPS, CRYPTOCURRENCIES AND REGULATORY SANDBOXES

Bitcoin and other cryptocurrencies have had an astronomic rise in 2017 (“to the moon” as crypto fans like to refer to the rise in value) – with some cryptocurrencies even increasing more than 20 times in value this year alone. It certainly has been the year of cryptocurrencies, with mass media attention and new user wallet registrations reaching an all-time high almost every week (even The Big Bang Theory, one of the most popular comedic sitcoms in the US, dedicating a whole episode to Bitcoin).

With this new euphoria of interest in blockchain, Bitcoin and other cryptocurrencies, we have been extremely busy this year researching distributed ledger technology, providing commercial and regulatory advice on coin offerings and helping our clients navigate their way through the regulatory wilderness in which, not just South Africa, but the world finds itself.

What is Bitcoin and Blockchain technology?

Blockchain or distributed ledger technology, emerged as the technology underlying Bitcoin. Bitcoin was the first significant cryptocurrency to be used and was created in 2009 by a mysterious figure using the alias “Satoshi Nakamoto”. Essentially, blockchain is the operating model that allows Bitcoin transactions to be processed and recorded.

Blockchain introduces a form of collective bookkeeping, or a publicly available digital ledger, via the internet. More specifically, it is a completely decentralised record of ownership which is shared across a network of computers. This shared public digital ledger contains a record of all the transactions that have taken place in each specific cryptocurrency (or potentially any other asset) that have ever been processed by the blockchain. Indirectly, this allows verification at any moment in time of who owns how much of it. Each of the computers connected to the network hosts a complete copy of these records.

The so-called “mining of Bitcoin” process allows new transactions to be verified and added to the digital ledger in a consensual, fully decentralised way. Unlike with conventional payment systems, in the blockchain there is no need for a trusted central bank or central authority to do this job. Distributed ledger technology “decentralises” trust, this being one of the key features of the innovation. It is a distributed, decentralised, immutable, public, digital ledger.

Bubbles and Tulips

Bitcoin and “bubble” have become synonymous during this year’s sky-high rally. According to www.coinmarketcap.com, the total market capitalisation of more than 1000 different cryptocurrencies and tokens are about US$300 billion, of which Bitcoin makes up approximately 56% (as at the time of writing – this could all change in the blink of an eye)!

JP Morgan boss Jamie Dimon recently labelled Bitcoin a fraud and said its astronomic rise is a textbook financial bubble comparable to the Dutch “tulip mania”, wherein 17th century Holland, the price of tulip bulbs initially soared before collapsing in the aftermath. Hundreds of articles conversely have been written over the past few months speculating on how high Bitcoin could possibly go. US hedge fund manager, Mike Novogratz, believes the world will see a Bitcoin price of more than US$40 000 by the end of 2018 and cybersecurity computer programmer and businessman, John McAfee, believes Bitcoin will hit US$1 million by 2020.

While Bitcoin itself is uncertain and could be a “bubble”, cryptocurrencies are gaining traction without many people realizing how much society has already begun to adopt these models. Bitcoin or any other current cryptocurrency might not go the length, but they have opened peoples’ eyes to the endless possibilities that blockchain technology holds for the future.

South African regulators and “regulatory sandboxes”

Whether or not blockchain technology, or rather cryptocurrencies, would pass the legal and regulatory hurdles which exist in South Africa is yet to be determined. In South Africa, cryptocurrencies, to a certain degree, are still unregulated, and crypto-entrepreneurs need to ensure they fit themselves into existing legislation when launching these types of businesses.

A thorough legal investigation needs to be undertaken by any crypto-entrepreneur in South Africa to understand whether their planned blockchain business and/or cryptocurrency system falls within the scope of the Banks Act, 1998, its regulations, the South African Reserve Bank Act, 1990, the National Payment System Act, 1998, and of course for offshore transactions, the Exchange Control Regulations.

Regulators and regulatory bodies across the globe are keeping a close eye on the growing impact of blockchain. Many are also creating “regulatory sandboxes” as controlled environments within which innovation can be stimulated. A “regulatory sandbox” is a regulatory haven, that allows fintech innovators, such as blockchain and crypto-entrepreneurs, to test their products and business models in a live environment whilst being exempt from having to adhere to some of the existing regulatory legislation and requirements. Although regulation may not always move as fast as innovation, it is positive to see the Financial Services Board and the South African Reserve Bank also adopting this “regulatory sandbox” approach in South Africa, which has been most notably lead by the UK.

Whether or not you understand blockchain technology, believe cryptocurrencies is in a “bubble”, a fad or that the world is on the cusp of a technological revolution, one thing is clear – Bitcoin, cryptocurrencies and blockchain have made a massive statement this year and 2018 is certainly going to be interesting!

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