This article first appeared in The Edge Malaysia Weekly on December 30, 2019 - January 5, 2020
THE cryptocurrency space has had an eventful journey over the first decade of its existence as what was initially perceived as a shady tool used for illegal purposes is now being considered by governments as a possible viable alternative to regular currencies.
The crypto craze began with the creation of Bitcoin (BTC) in 2009 by a party under the pseudonym Satoshi Nakamoto, and was listed on the now-defunct BitcoinMarket.com, the world’s first BTC exchange on March 17, 2010.
The current value of BTC is a far cry from its peak of close to US$20,000 per coin in mid-2017, but the cryptocurrency could be considered one of the best-performing assets over the past decade, given that it is worth US$7,580 at the time of writing, versus its initial value of 0.0025 US cents per coin when it was first listed.
While cryptocurrencies remain volatile, the past year has seen relatively more stable prices as more institutional investors make their entry.
The US$71 million pizza order
During the early days of BTC, the cryptocurrency was mostly held by programmers and developers, with many holders giving away BTC for free or much less than what they are worth now.
The first online purchase using BTC was done in 2010 — a 10,000 BTC pizza purchase by Laszlo Hanyecz on May 22, 2010, from Papa John’s pizza, translating into US$25 at the time.
Two years after the birth of BTC, the infamous deep web marketplace known as Silk Road commenced operations in 2011, driving a significant portion of the cryptocurrency in circulation onto the black market website.
The online marketplace, which was accessible only through special web browsers, provided an e-commerce platform for drug dealers to display their products, allowing an avenue to purchase illegal drugs using cryptocurrency. Other online markets soon surfaced, offering various other illegal products and services ranging from firearms to stolen credit card information.
Several of these websites have been shut down by the US Federal Bureau of Investigation, although many other underground marketplaces are still operational.
The rise of altcoins
BTC’s popularity in its early years had prompted others to follow suit and come up with their own cryptocurrency alternatives, dubbed altcoins.
These initial types of digital currencies were mostly doing what BTC could do but better. Coins such as Litecoin and Dash, for example, boasted faster transaction speeds than BTC. Others, such as Monero and PIVX — known as privacy coins — provided improved anonymity compared with BTC. Monero, for example, obscures nearly all details of transactions, making it one of the preferred currencies for use in underground marketplaces.
Later on, many new digital assets came onto the scene, which can be more than just digital currencies, such as Ethereum, which provides a platform for developers to build decentralised apps (DApps).
Ethereum was also partly responsible for the initial coin offering (ICO) craze, as it became the platform of choice for projects to issue tokens.
ICO mania
One of the main factors driving up the price of cryptocurrencies was the growing popularity of ICOs, an avenue for companies and projects to raise funds without the hassle of adhering to strict rules and regulations.
The first token offering was done by Mastercoin (now known as Omni) in 2013, which raised 5,000 BTC that was valued at about US$500,000 at the time.
In 2014, Ethereum, currently the second largest digital asset by market capitalisation, did a token sale as well, raising 3,700 BTC (about US$2.3 million) within the first 12 hours of the ICO.
Over the next three years, ICOs gained traction and attracted a wave of scammers.
Based on data compiled by ICOdata.io, a total of US$6.1 million was raised in 2015, which rose to US$90.25 million in 2016 before reaching a total of US$6.23 billion in 2017.
According to a 2018 report by ICO advisory group Satis Group LLP, about 80% of ICOs in 2017 were identified as scams.
Malaysia was not spared, with many questionable ICOs flooding the market. These include the ICO of LaVida Coin (LVC), which made headlines due to the personality behind the cryptocurrency — cosmetic millionaire Datuk Seri Dr Hasmizah Othman, better known as Datuk Seri Vida. The ICO was halted by regulators.
There was also Harapan Coin, which was endorsed by Federal Territories Minister Khalid Abdul Samad, used as a fundraising avenue to help the Pakatan Harapan coalition in its battle against Barisan Nasional. There have been no updates on the project since last year and its website has been shut down.
Since then, however, crypto investors have become more savvy and the hype surrounding ICOs has calmed down. As at Dec 19, ICOs had raised US$371.21 million in 2019, less than 5% of the US$7.81 billion raised in 2018.
The mining boom
As cryptocurrencies grew in popularity, many people began to mine them as well, ranging from individual hobbyists with a single mining rig in their bedroom to large-scale mining operations complete with a dedicated power supply and cooling systems.
With the help of their mining rigs, miners would compete to solve complex mathematical equations, which in turn confirm the authenticity of transactions recorded in the blockchain digital ledger. The miner who solves the equation gets rewarded with a small amount of cryptocurrency.
Solving the equations requires a significant amount of electricity and processing power, which has resulted in many miners finding creative and sometimes illegal ways to power their mining operations.
In August 2019, it was reported that Tenaga Nasional Bhd raided 33 premises around Kuantan, Pahang, which were suspected of running computer networks that used electricity directly from the distribution board, bypassing the metre. The unmetred use of electricity reportedly resulted in a loss of RM3.2 million to the utility company.
Exchange hacks
There have been numerous cases all over the world of digital asset exchanges being hacked, with the most recent being that of Upbit, which lost an estimated US$49 million in November.
The biggest breach to date was the hacking of Tokyo-based exchange Coincheck in January 2018, as hackers stole 500 million NEM tokens, which were valued at US$534.8 million at the time.
The exchange was taken over by a new investor and temporarily ceased operations. It resumed operations in the later part of 2018 and reimbursed those impacted by the hack, although at a rate lower than the trading price of NEM at the time of the hack.
In 2014, Mt Gox — the biggest crypto exchange in the world at the time — lost US$460 million worth of BTC due to a breach, along with another US$27.4 million that went missing from the exchange’s bank account.
The exchange faced lawsuits from its customers and later filed for bankruptcy protection in Japan and the US to halt legal action by traders. The exchange has yet to reimburse its former clients, as a Japanese court has issued an order to extend the deadline for submission of claims until March 31, 2020.
The road ahead
The International Monetary Fund has noted that several nations are exploring central bank digital currencies (CBDCs), saying that these central banks have highlighted a number of potential benefits, including lower cost of cash, financial inclusion as well as the ability to compete with privately issued cryptocurrencies.
However, the IMF also pointed out the challenges that may emerge as a result of the issuance of CBDCs, including the withdrawal of deposits from commercial banks if people decide to hold CBDCs in significant volume.
Central banks would also be exposed to risks such as technological glitches and cyberattacks, which could undermine their reputations.
“Each country will have to weigh the pros and cons of the case for CBDC depending on its particular circumstances,” says the IMF.
The private sector has been increasing its focus on cryptocurrency as well, such as Facebook Inc’s proposed Libra project, which is expected to be launched in 2020.
The social media giant has established the non-profit Libra Association, with members including prominent technology companies such as Uber Technologies Inc, Spotify Inc, digital asset exchange Coinbase as well as several venture capital firms and non-profit organisations.
Facebook’s proposition faced a strong backlash, especially from regulators and governments, which resulted in several members — including PayPal, Visa, Mastercard and eBay — leaving the Libra Association.
Luno, which has recently relaunched its cryptocurrency exchange platform in Malaysia, views Libra as a catalyst for regulators to come up with regulations for cryptocurrency.
“In October, the G7 group of nations outlined the need for stablecoin regulation, implying that guidelines or laws may be produced next year. Japan also passed a Bill in May that will reinforce its existing cryptocurrency laws, which come into force in April 2020.
“The specifics of how these regulations will impact the space are hard to predict. There will, however, be lessons to learn for best regulatory practices that other regions can emulate if successful,” it says.
The firm expects greater adoption of cryptocurrencies in 2020, carrying on the momentum gained in 2019.
Luno highlighted that Starbucks has announced it will be integrating crypto-payment service Bakkt in the first half of 2020, which may motivate other retailers to integrate their services as well.
“We started 2019 with Bitcoin at US$3,843 with a daily volume of US$4.3 billion and at the end of this year ,we are around US$7,200 with a volume of US$17 billion, having peaked at US$13,016.23 on June 25 with US$45 billion of BTC being traded. Next year will be a very important and exciting year for cryptocurrencies,” says Luno.
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