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maltatoday, SUNDAY 25 FEBRUARY 2018 VIII Business & Finance e cryptic nature of cryptocurrencies It is ironic how various digital curren- cies that are based on cryptography, which are actually understood by the very few, have become so sought after by so many investors, large to small, widows and orphans included. Within this context it is even more ironic to witness this herd effect, when one considers the relatively recent onset of various legislative and regula- tory measures which were amongst others aimed to protect the interests of investors. A lot has been discussed and de- bated about the merits and demerits of cryptocurrencies as an investment medium. Some investors have in fact benefited from being early stage inves- tors, which carries its risks, but may be rewarding, while other have burnt their hands (or really and truly their money) in taking the plunge. One may argue that the hype around cryptos is not new but rather this has become today's investment novelty which is more driven by the FOMO ef- fect - the Fear Of Missing Out - rather than a carefully analysed approach driven by sound underpinnings – typi- cally the Warren Buffet way. Lest we forget that the state of flux of irrational investor exuberance, as then coined by Alan Greenspan in the year 2000, is not new to the market; in comes the dot-com bubble era, the emerging mar- ket sovereign bond crisis and others that have gripped the investor market and wiped off billions in value. Critics believe that cryptocurrencies like Bitcoin are over‐hyped, that their potential is based on pure speculation, that they are Ponzi schemes, and that these currencies are an insufficiently regulated payment channel used for illegitimate reasons and to support money-laundering mechanisms. As a result, cryptocurrency transac- tions have led to serious political and regulatory concerns around consumer protection, money laundering and financing of criminal activities. This has in turn led a number of banks to block any form of clearing and settlement of transactions linked to cryptocurrencies as has been the case in Malta a few months back. This policy has been driven by the sheer reality that cryptocurrencies allow anonymous funding and may potentially act as conduits for money laundering and terror financing. Some may argue that the same can be said of fiat currencies despite the onset of rigorous rules and regulations vested in the various versions of the AML directive, now in its fifth version. How- ever, as they say, better the devil you know. Indeed, the problems do not lie only with cryptocurrency but even more so with crypto exchanges. Mt Gix was one of the largest Bitcoin exchanges globally, when it filed for bankruptcy after just under 850,000 Bitcoins, worth around USD 450m at the time, were somehow lost. We have also seen a number of hacking incidents which have raised cybersecurity concerns on crypto exchanges. As I write, an Italian cryptocurrency exchange called BitGrail claimed that it was hacked late last week and lost roughly USD195 million worth of customers' cryptocur- rency. While the focus at this juncture is primarily centered around the risks, astounding returns, and corrections that these currencies are experiencing, few are giving value to the benefits that these digital currencies can actually ex- tend to the market if properly regulated. Bitcoin, one of the first cryptocur- rencies to appear on the market, is deemed as a faster, cheaper and more convenient alternative to existing payment mechanisms such as send- ing payments via banks, transferring money via money transfer operators or buying goods and services over the internet using a credit card. There are other exciting benefits that a regulated cryptocurrency market can deliver. For example, investors would not require any deposit guarantee schemes to be in place as these currencies are decentralised, which means that the investors own them. This means that no regulatory authority has control over such currencies, and so a bank, if it becomes bankrupt, can't take it away from you. Now how is that for investor protection? Equally so, in view that cryptocurren- cies are digital in nature, they cannot be counterfeited, which significantly al- leviates the risks of fraud. The unbank- able also come to mind. It is estimated that there are currently around 2.2 billion persons that have internet ac- cess but are not serviced through the banking system. It is interesting to note that in Kenya for example, the launch of the M-PESA system, which is in effect a money transfer system (apart from being used for micro-financing reasons), was ex- tremely successful where one in three Kenyans, (yes one in three) today own a Bitcoin wallet. As has been the case in the past, where technology outpaced and outstripped regulation, discussions are now revolving around the level of optimal legislation and regulation that should be in place without stifling the innovation brought about by cryptocur- rencies. It is very clear that cryptocur- rency operators have a strong case to make on the opportunities that a prop- erly regulated cryptocurrency market stands to deliver significant benefits to the economy. In conclusion, as cryptic as these currencies may be, and despite the infancy stage of their development, I firmly believe that these currencies will be inducing a fast-paced paradigm shift of traditional cash-based transac- tions to the digital space. So do watch this space very closely as I am sure that we will all, at some point in time, be a part of it. Few are giving value to the benefits that these digital currencies can actually extend to the market if properly regulated Kenneth Farrugia Chairman, FinanceMalta OPINION