Author: Ricardo Ribas Santolim
Countless articles have been written recently about the extreme rise, and potential fall, of Bitcoin. CYFI can see that the public interest in, and usage of, cryptocurrencies is expanding rapidly. The market cap value of each of the four main cryptocurrencies, Bitcoin, Etherum, Bitcoin Cash and Ripple, has already surpassed US$9 billion. Currently, the CoinMarketCap registers the existence of more than a thousand cryptocurrencies with the total market value increasing from US $7 billion in January 2016, to US $17 billion in January 2017 and US $302 billion in November 2017. Will this exponential growth continue? It is not possible to be sure, but the probability seems high enough to raise questions about how to prepare the public, and particularly children and youth, for the emergence of cryptocurrencies in the global economy.
Better than traditional currencies?
Money has three main functions: medium of exchange, store of value, unit of account. Currently, no cryptocurrency fulfills all three roles well. The excessive volatility prevents it from being a good store of value or unit of account. As a medium of exchange, its increased use and consumer acceptance have shown that cryptocurrencies have the potential to fulfill this role well, but a more widespread acceptance by governments would be necessary to increase their use in this area.
A lot of hype is building up around cryptocurrencies and blockchain but there are many warnings coming from financial regulators about their potential risks. The market is still extremely volatile and prudence needs to be adopted so it does not repeat a dotcom bubble from the late 1990s and early 2000s. This notorious volatility poses a huge risk to cryptocurrencies as investments. For example, between January 1st and November 27, 2017, Bitcoin value rose more than 800 percent. But this wasn't a steady rise. Between just November 8 and 12 or September 12 and 15, the value decreased more than 25 percent. Similar fluctuations, up and down, are common. In addition to this volatility is the fact that the cryptocurrencies are difficult to value in this rather incipient market, often under the control of a few large users with the ability to influence prices. Proof of this vulnerability and risk is the increasingly long list of cryptocurrencies that have failed.
Crypto currency is not a fiat currency, meaning that the currency is not supervised, has no backing from a deposit guarantee scheme nor are the enterprises trading in them supervised. Furthermore Cryptocurrency entail a high integrity risk, including money laundering and financing of criminal activity. Central Banks are also weary of crypto currencies, as evidenced by the following statement on their website, "De Nederlandsche Bank (DNB) has special attention for the rise and growing popularity of virtual currencies, including bitcoins and litecoins. The development of virtual currencies is gaining momentum. At present, they fall outside of the scope of the Dutch Financial Supervision Act (Wet op het financieel toezicht or Wft). Consequently, DNB does not supervise virtual currencies or enterprises trading in them. DNB advises consumers to be aware of this and the potential risks of buying bitcoins or other virtual currencies. The exchange rates are volatile and there is no central issuing institution that consumers can hold liable should the need arise. Moreover, the deposit guarantee scheme does not apply.
Cryptocurrencies and the developing world
Despite these shortcomings, cryptocurrencies are promising present a series of potential benefits, especially in the developing world. The International Telecommunication Union (ITU) estimates that, in 2017, 48 percent of people access the internet in the world. In 2005, that amount was 15.8 percent. Proportional growth in internet access is even more pronounced in developing countries, where this figure jumped from 7.7 to 41.3 percent, and least developed countries, from 0.8 to 17.5 percent. As the main requirement for access to cryptocurrencies is internet access, the industry's growth potential in this regard is also huge. These regions are often where the costs of financial transactions are higher, due to a less developed financial system along with liquidity and institutional capacity problems. It is precisely in this type of environment that the expansion of cryptocurrencies becomes increasingly attractive.
It has been said that currently no cryptocurrency fulfills well the three roles of money, but often, especially outside developed countries, local currencies also fail. In cases like Zimbabwe, which has been facing a cash shortage since 2016 or Venezuela, where the annual inflation rate exceeds three digits, cryptocurrencies would have an advantage over existing local currencies. If it is difficult for virtual currencies to compete with stronger currencies like the euro or the dollar, it may be easier for them to stand up against weaker currencies around the world.
In addition, traditional remittances take several days to arrive at their destination, unlike transactions with cryptocurrencies. The opportunity for cryptocurrencies is greater where the financial services with which they compete have high costs and are inefficient. The potential of cryptocurrencies and blockchain is considerable, not necessarily as a currency (much less as an investment), but certainly as a payment system. On the other hand, access to cryptocurrencies depends on reliable access to internet, energy, computers and smartphones, what can be complicating factors outside developed countries.
The ITU estimates that, in 2017, 67 percent of young people (15-24 years old) in developing countries and 30 percent of young people in the least developed countries are online. In Tanzania, Somalia, Kenya and Uganda, more than 30 percent of the population over 15 have access to mobile accounts. In Kenya in particular, the reach is almost 60 percent for the population between 15 and 24 years old. If young people do not have the financial services that meet their needs in the traditional financial system, there is a greater chance that they will pursue cryptocurrencies for both payments and as a store of value.
How to protect children and youth
In response to growing digital payments, CYFI has published a series of guidelines for financial services aimed at children and young people, including restricting inappropriate products, promoting responsible spending and educating minors on how to use their payment cards safely. These recommendations would also be relevant to a mobile wallet service linked to a cryptocurrency. Other controls can be applied more clearly to cryptocurrencies. A multi-signature system, for example, could require parental approval for transactions above a certain value. The wallets could limit the value of transactions, provide consumer behavior for parents, provide tips for conscious consumption, among many other possibilities.
Safer Payment Guidelines - elaborated based on Safer Payment for Minors, Child and Youth Finance International and MasterCard Incorporated International (2017)
It is important that financial education, especially when aimed at children and youth, openly addresses contemporary financial issues, online security and the opportunities and risks offered by the rise of cryptocurrencies.
Safe online practices recommended by CYFI are also applicable for using cryptocurrencies: use strong passwords, change them frequently, update software, use antivirus products, be wary of using suspicious Wi-Fi networks, be cautious when downloading, be wary of giving apps permission, and be aware of other users' experience with online stores before conducting purchases. Other security practices apply more specifically to cryptocurrencies, such as use different wallets to dilute risks, back up information to protect against data loss, use two-factor authentication or multi-signature systems to enhance security. Teaching and study on the subject are essential, especially since the cryptocurrencies principle is based on the absence of a regulatory body. This increases the liability and risk, bringing a great deal of responsibility to the user. If the cryptocurrency is misused, the damage is difficult to recover and, in the absence of a central organization, there is no way to retrieve a lost password. All this requires increased user care.
Financial education builds one's ability to confidently manage financial resources and navigate financial systems. In this sense, young people gain an understanding of the importance of planning and building a future through financial responsibility, not through highly speculative and risky investments. The idea of easy money offered by cryptocurrencies is tempting, particularly for children and youth, but there are significant risks involved. It is essential that the financial education offered to the next generation includes an open discussion on cryptocurrencies, bringing in parents and guardians to increase accountability and protection.
Cryptocurrencies will be unavoidable in the future. Attempting to deprive children and young people of accessing these currencies can create a system where they use them without proper knowledge and preparation, exposing them to greater risks. In this sense, an official positioning of governments regarding the legality of cryptocurrencies is important. Otherwise, it is difficult to imagine that the topic will be explicitly integrated into national financial education initiatives. Cryptocurrencies have the potential to help many people around the world, especially in developing regions. A full understanding of how cryptocurrencies work, which is essential to ensuring its safe and intelligent use by young people and children, requires knowledge that goes beyond what has traditionally been addressed in financial education programming. Children and youth should be prepared to deal with a future where cryptocurrencies are a significant part of financial systems.