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A Rocky Digital Path



Over the course of their existence, cryptocurrencies (CCs) have been volatile creatures. Largely not regarded as legitimate currency (particularly those developed by third parties and by most countries), they became appreciating or depreciating property. Most recently CCs have seen a marked decline which has brought their potential future into question. This article looks at the sector and how it is affecting others such as trade and trade financing …


The Backstory


The beginnings of what we now know to be the CC sector occurred with David Chaum’s conception of cash in 1983, considered to be the first cryptographic electric currency and shown in figure one.


Figure 1: The history of cryptocurrency (from Wikipedia here and here)


Approximately 30 years later, the UK’s Treasury was announcing a study of CCs and their possible role in the UK economy, and by the time the global pandemic was upon everyone, the crash of the CC bubble had, at least, started (even if we didn’t know it at the time). In between, various countries have come to recognize CCs as legal tender - El Salvador and Cuba being two of note – while China, in September of 2021, even went as far as declaring all CC transactions to be illegal. One perhaps shouldn’t completely write off the new age of CCs, however. For, at the time of writing, and according to Coinbase, one bitcoin is still worth $16,868.96.


FTX


On 5th November 2022, (as discussed by Trade Finance Global) Futures Exchange Trading Limited (FTX) was holding in excess of $8.4 billion in CC balances. FTX is a cryptocurrency exchange and crypto hedge fund. By the 11th of November, the company had filed bankruptcy proceedings within the American legal system.


Reported on by CNBC and other news media, concern about the exchange heightened when it was discovered that FTX’s partner – Alameda Research – held a large proportion of its assets in FTX’s native token, called FTT. Changpeng Zhao – CEO of Binance – announced in quick succession that Binance would offload its holdings of the token. This in turn, caused a rush of clients to withdraw their assets from FTX. Soon, FTX found itself unable to meet the demands of these customers. Binance announced they were to acquire FTX and smooth the way but then backed out after referring to the misuse of customer funds as well as investigations being made by various US governmental agencies. On 12th of December, one of the founders of the company called Sam Bankman-Fried, was arrested for financial offences.


This is not to say that FTX has caused the entirety of CC's recent decline. There has been a variety of factors deemed responsible. Over the last few years, the governmental interest in developing national digital currencies has had an impact. Some major CC exchanges too crashed around the middle of 2021 as a result of Elon Musk’s announcement that Tesla would be suspending payments via bitcoin (Business Today (India)), as well as China’s weighing in by banning the aforementioned CC transactions. It would be remiss not to mention the effects both covid and Russia’s war in Ukraine have had. By December 2022, the Washington Post was reporting how the crypto bubble had ‘popped’ and that it had taken with its billions of dollars in investments by regular people.


Stablecoin CCs that were linked to the US dollar have failed and been abandoned, and a number of pump-and-dump schemes have also brought CCs into disrepute. It perhaps seems there has been some kinship between the notoriety of CCs and the old gold rushes of the 19th century, where the sense of opportunity has been rife but the reality has been less fruitful. Nevertheless, the technology sitting behind CCs – blockchain - need not be lumped in with the troubles of CCs themselves.


The World of Decentralization


The wider world of decentralization has come under closer examination though, what with the volatility of CCs. It has been reiterated over and again that the international trade and trade finance sectors are somewhat outmoded in the way they conduct business (their over-reliance on paper for example).


Big moves have been made in recent times to remedy this but from a public relations standpoint, the irresistible connection of blockchain technology to cryptocurrencies by the uninitiated, might well mean that the process of digitalization of trade finance could get impeded in the meantime.


It hasn’t helped the sector that there have been some blockchain-based trade finance-specific troubles of late too. In May of this year, we.trade filed for bankruptcy after it found it had run out of funding (we.trade was a blockchain-derived European trade consortium). This contrasts with the fact that the business was one of the fastest expanding projects through 2021 with billions of euros in capital. Unable to monetize itself effectively, the consortium was forced to close its books.


Technological Doldrums


On an even wider front, 2022 has been a sore year for the technological sector. Meta cut 11,000 of its staff, and Twitter culled half of its employees upon the arrival of a certain Mr Musk who came to the platform with grand plans. Other tech-based firms such as Coinbase, Shopify, Stripe, and even Microsoft, have been busy eliminating staff over the course of the year. This trend doesn’t appear to have ended yet and is expected to traverse Christmas and continue well into the new year.


In regard to all those failures and frauds that have beset the CC industry over the last year or so, it highlights the need for new and more stringent regulation in order to protect the industry itself as well as its customers. The digital trade finance sector is in its infancy and will be brought kicking and screaming into the technological age, without a doubt.


Achieving this though will require profound long-term capital investment from many quarters. With the broader tech sector in unpredictable times, finding investors may well prove to be difficult, and this may well slow down the much-needed innovation in trade finance. However, it is important to consider the resilience of technology in the modern world. Almost despite any issue, it tends to prevail, and there is no reason to believe it won’t for international trade and the vital finance it is constantly hungry for…

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