Cryptocurrency – future money or folly?

“Bitcoin represents something profoundly important, notwithstanding some of the scepticism that surrounds it,” says Steven Boykey Sidley, the co-founder of multiple technology companies and an award-winning author of six books.

Sidley, who has held the position of chief technology officer at many companies, including Anglo American and one of South Africa’s first blockchain projects, project UBU, was speaking about cryptocurrency at the Rabbi Cyril Harris Community Centre in Johannesburg on 8 June.

Sidley insists that the technological engine that underpins Bitcoin is going to be transformative. He cites the example of getting money to his daughter who is studying overseas. She called him for R1 000. Going through a traditional bank, there was a lot for him to fill in and questions he didn’t know the answers to. He had to call the bank and ask a friend for advice. It took him half an hour, and then the bank would still take 15% out of the transaction.

“So, I called my daughter and said, ‘Please open an account at Crypto Exchange.’ It took her a few minutes. Within about seven seconds, I sent her the R1 000. Nobody asked me my name, nobody asked why I was sending it, the transaction was completely blind to the South African government, European government, or any other surveillance authority.”

Sidley says the inventors of Bitcoin wanted to build a digital form of money that couldn’t be printed, debased, and inflated by any central authority.

The inventors were concerned that the central bank of a country could ban Bitcoin. “So, they did a thing called decentralisation in which there’s no corporation, there’s no partnership, there are no people,” says Sidley. “This is a piece of software that runs on thousands of computers. You can’t put people in jail for using Bitcoin because there’s nobody to sue.”

In 2011, Russian teenager Vitalik Buterin took a copy of the Bitcoin blockchain and built his own one called Ethereum. “But he put one extra piece, a programming language, on top of it,” says Sidley. “He believed that all this magic embedded within this blockchain had many other potential uses which he couldn’t think of. So, he handed this programming language to the world, saying, ‘Can you guys dream up anything that you may want to do with this?’ There was a Cambrian explosion of creativity, which started in about 2014.”

Emboldened with this programming language, people wrote a smart contract on the blockchain to mimic borrowing and lending, says Sidley.

In terms of stocks, if you want to buy shares, you can open an account at the Johannesburg Stock Exchange (JSE) and the broker takes a fee. “The crypto industry has built decentralised exchanges, which have no centre,” says Sidley. “The commissions are cents on the rand. They are 1 000 times less than the JSE, the New York Stock Exchange, or Nasdaq. The stock exchanges can’t compete. Last week, a decentralised exchange on a blockchain exceeded a trillion-rands-worth transaction. It’s now the biggest exchange in the world.”

However, though organised crime investigation company IRS Forensic Investigations (IRSFI) doesn’t have an issue with Bitcoin, it has an issue with people using purported Bitcoin investments to commit crime, says Chad Thomas, the chief executive of the South African independent financial crimes investigation team.

“South Africa has become a black sheep worldwide in respect of Bitcoin-related scams,” says Thomas.

According to Thomas, “The biggest global crypto scam to be reported during 2020 emanated out of South Africa, and that was the Mirror Trading International [MTI] scandals. MTI would take your Bitcoin, and it claimed to have an algorithm which would generate better investment opportunities than if you had to trade it yourself. It became a massive Ponzi scheme.”

Thomas also mentioned the Africrypt scandal, in which two Muslim brothers from Johannesburg are accused of pocketing nearly $3.6 billion (R57.7 billion) in Bitcoin, as well as the Praesidium, Imagina FX, and BTC Global scandals.

These five scandals are arguably the main five Ponzi schemes to affect South Africa in the past five years, says Thomas. “And all have a Bitcoin element to it.”

He says cryptocurrency fraud in South Africa has affected an “unbelievable” amount of people and the total money lost would be about R20 billion.

His advice to identify a Bitcoin scam is to remember that if you buy Bitcoin, you have to convert your rands to Bitcoin, which means a commission must be paid to whichever organisation, agency, or individual is converting it. “Then people claim to play the forex market on your behalf, using Bitcoin, selling into pounds, into dollars, into euro, into ruble, selling back into Bitcoin. Herein lies a problem. They make it sound so complex, that they offer training courses to those who want to play the market themselves. The courses are so overly complicated that they give you an out. Then they say, ‘You could rather invest with us, and we will trade on your behalf.’ That’s the move.”

“They may be scam artists”, says Thomas. “They are going to pretend to trade your money. If you don’t understand the product, neither invest in it nor get somebody else to invest in the product for you,” he says.