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DIGITAL ECONOMY & TECHNOLOGY

The Bitcoin Fountainhead

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By DARON ACEMOGLU

While it is clear that cryptocurrencies are here to stay, it remains to be seen what economic role they will – or should – play. In the case of Bitcoin, the technology’s success lies entirely in what it promises, rather than in what it can actually deliver.

With the price of Bitcoin reaching new highs, and El Salvador and Cuba deciding to accept it as legal tender, cryptocurrencies are here to stay. What implications will this have for money and politics?

Money depends on trust. It is accepted in exchange for goods and services only because people can confidently assume that others will accept it in the future. This is as true for the US dollar as it is for gold. To argue that cryptocurrencies like Bitcoin are merely a confidence game – or a speculative bubble, as many economists have emphasized – is to ignore their popularity.

And yet, cryptocurrencies lack the stable institutional foundations needed to bolster the public’s trust in them. Trust thus ebbs and flows, making them fragile and volatile, as Bitcoin’s wild gyrations have amply demonstrated.

Moreover, with Bitcoin and other cryptocurrencies that rely on “proof-of-work” mechanisms, transactions must be continuously verified and logged in a decentralized ledger (in this instance based on blockchain). This requires millions of computers to operate continuously to update and verify transactions – work that is incentivized by the opportunity to be rewarded with newly minted Bitcoin.

The energy consumed in these “mining” operations now exceeds that of a medium-sized country like Malaysia or Sweden. Now that the world has awoken to the dangers of climate change (and to the paltriness of our response to it so far), this massive waste should make Bitcoin highly unattractive.

And yet, despite its volatility, fragility, and massive carbon footprint, five factors have conspired to make Bitcoin an attractive proposition to many people: its political narrative; the criminal activities it enables; the seigniorage it distributes; the techno-optimism of the current age; and the desire to get rich quick at a time when few other economic opportunities beckon. Let’s consider each in turn, going in reverse order.

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We live in an era of dwindling economic prospects. Even workers with a college degree can no longer count on securing a stable job with good and rising pay. When economic opportunities are so scarce, get-rich-quick schemes become especially alluring. Not surprisingly, there is now an entire industry dedicated to telling people that they, too, can strike gold by investing in Bitcoin. Money has been pouring into the cryptocurrency because millions of people in the United States and around the world think they can realize significant returns from it.

The narrative of massive returns for amateur and retail investors from a cryptocurrency is in keeping with our technology-obsessed age. We are constantly being told that technological ingenuity is creating a brighter future. And on the surface, there is no denying that Bitcoin is a marvel of technological innovation. It took genuine creativity and mastery to create such an intricate decentralized system, capable of functioning without any oversight or government enforcement.

Seigniorage, or the additional purchasing power conferred (typically to governments) by control of the money supply, is another factor in Bitcoin’s appeal. When the US government puts new currency into circulation, it can use it to purchase services or pay its debt. The prospect of gaining seigniorage is very attractive, and probably helps to explain why there are now more than 1,600 listed cryptocurrencies. In the case of Bitcoin, the absence of a centralized authority means that seigniorage is distributed, thus providing an incentive for mining efforts (which are now being conducted by more than a million people around the world).

A dedicated source of demand can help a new currency establish a reliable footing. For cryptocurrencies in general, and for Bitcoin in particular, this anchor is planted firmly in the criminal world. In its early days, demand for Bitcoin was boosted by dark-web sites such as Silk Road, which enabled all sorts of illicit transactions. To this day, criminal activities account for almost half of Bitcoin transactions, by some estimates.

Each of these four factors has boosted Bitcoin artificially. Obviously, our society’s economic ills will not be solved by people making money from Bitcoin. Nor has the prevailing techno-optimist mood been borne out in the real world. And whatever benefits there are from distributing seigniorage via mining, they are more than offset by the massive waste of energy. That leaves the political argument for Bitcoin. Will it liberate us from undue state power over the economy? Not really.

True, the US Federal Reserve sometimes acts in mysterious ways, and the Wall Street bailout during the 2008 financial crisis was rightly seen as an inside job that benefited banks and bankers at the expense of ordinary people. The desire to reduce politicians and policymakers’ excessive power is thus understandable.

But Bitcoin is not the answer. It appeals to a puerile libertarian ideology in which a lone genius battles an overweening state to liberate individual excellence. Indeed, the real-world person – or persons – who designed Bitcoin and wrote its inspiring manifesto under the pseudonym Satoshi Nakamoto is even more deserving of the “visionary” label than the fictional John Galt (the hero of Ayn Rand’s Atlas Shrugged).

Yet the vision itself is pure fantasy. The risk of Western governments producing runaway inflation or undermining the international monetary system is vanishingly small. The real existential threat today lies in political polarization, the unraveling of democracy, and democratic political systems’ inability to keep economic elites and authoritarian politicians in check.

A new currency will not solve these problems. What is needed are measures to ensure that politicians, bureaucrats, and Silicon Valley and Wall Street tycoons act responsibly. This requires democratic participation and active civic engagement. Gimmicks like Bitcoin are a distraction from the real work that must be done.


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DIGITAL ECONOMY & TECHNOLOGY

The African Village Mining Bitcoin

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By Ian Birrell

Bondo is a scattered cluster of villages in a remote region of Malawi near the border with Mozambique. It sits in the foothills of Mount Mulanje, where residents rely on their feet for transport and a few crops to feed their families. Yet unlike in most places in this impoverished country, when night descends they can now switch on lights, stoves and televisions in their homes.

For electricity has arrived in Bondo. Three turbines were installed in a micro-hydro scheme exploiting the fertile region’s rainfall. And the impact has been life-changing for the 1,800 homes so far connected to a mini-grid. Children can study after dark, so now have a better chance of passing the exams for secondary school rather than having to leave aged 11. Drugs and food can be stored in fridges, so villagers do not have to make the 12-mile trek to the hospital and can produce batches of food or drinks to sell at market. Cooking the evening meal is three times quicker — and far less destructive to the environment — without the need to collect firewood.

One group of women giggled when I asked if they had televisions and watched football in their homes. “Before, our husbands would say they were going off to watch football when they were really walking out with other women. Now they can no long claim they are going off for football,” Bertha told me. The senior chief told me they had never dreamed of having energy supplied to the villages, with a dozen maize mills, many small enterprises, schools, shops and churches also connected to the grid. “When you move around Bondo you see happy people — and that’s because of electricity.”

Yet the big surprise in Bondo is not simply the supply of energy to such an isolated community, in a country where only one in eight citizens has access to grid electricity and on a continent where almost half the 1.2 billion population still lack this life-changing supply. The real eye-opener is the stack of 32 computers inside the concrete pump shed. This innovative mini-grid — located more than two hours from Malawi’s second city of Blantyre along bumpy roads and tracks that can become impassable in a torrential downpour — is mining Bitcoin to fund its operation.

It is a smart idea. The computers used to create valuable new Bitcoin tokens and validate transactions consume around the same amount of energy as a medium-sized country such as Sweden would generate. Hence the stinging critique of how this cryptocurrency wastes the planet’s precious resources. This initiative flips that narrative by using Bitcoin mining to fund energy in parts of Africa that are too poor or remote to merit connection to grids, but which do have plentiful supplies of potential power sources. Mining soaks up the excess energy of these renewable plants. And this delivers not just electricity but a powerful jolt to to drive development in the local economy.

The concept comes from a Kenyan firm, Gridless, set up in 2022, whose backers include Twitter founder Jack Dorsey. There are four other sites in Kenya and Zambia and plans for scores more across the continent. Its aim is to demonstrate how Africa could play a central role in countering the conventional belief that Bitcoin, now 15 years old, is used simply for risky speculation and dodgy transactions. Instead, it backs those who claim it will lead to more inclusive financial systems as it usurps the control of dysfunctional governments and manipulative central banks.

It will also release the community from reliance on foreign handouts to survive. The Bondo power plants were built by Mount Mulanje Conservation Trust, a local group trying to protect the mountain region’s unique bio-diversity, and were initially supported by finance from aid and development agencies — but now Bitcoin covers the running costs. This offers a commercial incentive that does not rely on altruism or subsidies to deliver power to remote regions, while exploiting energy waste at times of low use such as overnight.

Malawi, one of the world’s poorest nations, provides a powerful case study in the failures of aid. As former development minister Rory Stewart said in a lecture at Yale, Britain gave £4.5billion over half a century to this southern African country corroded by corruption and bad governance, yet it ended up “if anything, poorer than it was when we started”. “Bitcoin can prevent Bondo becoming the sort of white elephant that you see across Africa, built by aid groups and then abandoned,” said Erik Hersman, chief executive of Gridless. He admits that he is “not a big fan” of the sector. “They come in with low-cost loans and grants to finance all these schemes that they say will pay their way in 30 years but the sums never add up. This is a new way to finance development.”

Malawi also demonstrates another reason why there is rising interest in Bitcoin in Africa: people are seeking a safer home for their cash than local currencies. Prices rose sharply after its currency was devalued two months ago by 44% against the US dollar — the second decrease in value of the kwacha in 18 months. Many African countries on the continent have suffered also from catastrophic inflation, while official currency conversion rates can be significantly lower than street rates.

One Kenyan entrepreneur told me she turned to the cryptocurrency after seeing her savings constantly eroded even in a country with lower than average inflation for the continent. “I was trying to save to buy a house but kept finding my sums declining. I wanted more stability so tried Bitcoin, and then found it had other uses,” said Marcel Lorraine, founder of Bitcoin DADA. Her clients include a trader of alternative health products in a Nairobi street market, who found it much cheaper to use than changing currencies after being introduced to it by a Nigerian customer and is now hoping it will provide a stable platform for building her business to obtain a shop.

While Warren Buffet dismissed Bitcoin as “probably rat poison squared” and the economist Paul Krugman has compared it to a Ponzi scam fuelled by libertarian fantasies and “technobabble”, devotees see it as a liberating force due to the decentralised design created by its mysterious and pseudonymous creator, Satoshi Nakamoto. BlackRock, the world’s biggest asset manager, has even applied to launch a Bitcoin exchange-traded fund that may open up the market to the US wealth management industry.

Certainly Bitcoin, for all its fluctuations, can seem comparatively reliable if you live in Africa — or indeed many other parts of the planet, from Argentina to Lebanon. “This is what I have seen everywhere,” said Peter McCormack, who travels the world for a Bitcoin podcast. “Here is an alternative to gold and property for a middle class that has some money and patience, but is seeing expenses and costs rise while savings decline in value. And a strong middle class helps build a strong economy by driving consumer spending, reducing reliance on the state and driving innovation and entrepreneurship.”

Bitcoin has also become a helpful tool for activists and journalists in dictatorships, since it makes it far harder to track funds. In Togo, a West African state run by one despotic family since 1967, it is used to channel cash to opposition and civil society leaders despite the freezing of bank accounts. Bitcoin has been instrumental in delivering donations to Alexei Navalny’s Anti-Corruption Foundation in Russia and the pro-democracy movements in Belarus and Myanmar.

Alex Gladstein, chief strategy officer for the Human Rights Foundation and author of a book arguing that Bitcoin offers freedom from archaic monetary systems and political strifebelieves the cryptocurrency is especially exciting for Africans, since they suffer “all kinds of financial repression”. He points out there are 45 currencies on the continent — with 15 still controlled by France — with high transaction fees on conversion deals that are largely processed by Western firms with heavily-fluctuating rates. “Bitcoin provides an escape and an alternative for Africans while its use is less limited than some people think,” he says. “Entrepreneurs there have figured out how people without the internet can use Bitcoin, which is frankly remarkable.”

This agility is typical of the technological innovation exploding across Africa, driven by a young, rapidly growing and increasingly well-educated population. “The beautiful thing about Bitcoin is that it is a bottom-up technology and its adoption has been genuine at all levels,” said one key figure at the second African Bitcoin Conference in Ghana at the end of last year.

Only time will tell if Satoshi’s invention will turn out to be a bubble with bad consequences or, as optimists believe, a driver of profound change in the world. The fraud conviction of Sam Bankman-Fried, who ran one of the world’s biggest cryptocurrency exchanges, and admission of money-laundering by the boss of another major exchange has hurt the reputation of cryptocurrencies for many in the West. But Bitcoin certainly seems to offer something positive in societies scarred by autocracy, colonialism, military coups and woeful governance — as seen with those computers in a concrete shed in rural Malawi turning water into streams of cash to fund electricity.

Ian Birrell is an award-winning foreign reporter and columnist. He is also the founder, with Damon Albarn, of Africa Express.


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DIGITAL ECONOMY & TECHNOLOGY

Why are Indian Crypto Firms Making a Beeline for Dubai?

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Lured by a favourable regulatory landscape, an increasing number of Indian crypto companies are relocating to Dubai in an attempt to evade the high tax regime in their home country.

Crypto analysts see the exodus as a reaction to the stringent tax rules and ambiguous legal guidelines for digital currencies in India. In June 2022, the government introduced a 30 per cent tax on cryptocurrency trading profits and one per cent tax on transactions exceeding Rs10,000.

Juxtaposed with the harsh crypto ecosystem, low taxes, ease of business establishment, and dedicated regulatory framework for digital assets make the UAE, Middle East’s prime financial hub, an attractive destination for crypto firms. Dubai, in particular, excelled as a crypto innovation centre, thanks to strategic policies, and a supportive regulatory environment, crypt strategists said.

“A lot of Web3 founders prefer Dubai or Singapore as their hub because they have clarity and certainty around regulations and greater community support. When you’re setting up a business, investors are more comfortable investing in a jurisdiction where there are no last minute surprises. I am starting to see this trend on the ground and it must be reversed,” Sumit Gupta, CEO of CoinDCX, was quoted as saying by the media.

“We have seen a decline of more than 90 per cent in volumes. That’s a huge, steep decline. And what you have seen is that India continues to be number one when it comes to grassroots crypto adoption, but a lot of that activity is happening on alternative channels because of the high tax rates,” he said.

On top of 30 per cent tax plus applicable surcharge, India introduced four per cent cess on profits made from crypto trading. Last year, Indian crypto traders faced the introduction of a one per cent tax deducted at source on crypto transactions above Rs10,000. According to an amendment to the Income Tax Act, failure to pay TDS may result in a penalty equal to the unpaid amount, a 15 per cent interest on late payments and in certain cases even a jail sentence.

The UAE has been proactive in creating a regulatory environment that is both robust and flexible. Over the past three years, Dubai and Abu Dhabi have been driving most change by supercharging regulatory efforts to attract a global set of businesses focusing on digital assets, bringing significant talent, investment, and positive exposure to the region, crypto market experts said.

Dubai’s appeal as a crypto hub is fast growing because of its liberal initiatives in providing regulatory clarity with the launch of the Virtual Assets Regulatory Authority (Vara), putting out guidelines and policies about licenses to get. Businesses are coming in, predominantly from the UK, India, China, the US, Russia. Vara oversees cryptocurrencies and related activities in all free zones in Dubai except the Dubai International Financial Centre (DIFC). Abu Dhabi has a similar scope of work through the Abu Dhabi Global Market.

DIFC’’s independent regulatory authority, the Dubai Financial Services Authority, has been proactive in developing a regulatory framework that balances risk with innovation. DIFC has proposed to enact a new Digital Assets Law and new Law of Security regime, working closely with industry participants “to set out legal characteristics of digital assets, its proprietary nature, how it may be controlled, transferred, and dealt with by interested parties.”

The Dubai Multi Commodities Centre (DMCC), which houses over 23,000 companies, has a dedicated Crypto Centre featuring 550 Web3 companies out of which 50 are Indian.

Dubai also has gone out of its way to attract top crypto talent. The Dubai World Trade Centre has become a dedicated free zone for regulated virtual asset businesses. The specialised zone for virtual asset businesses allows for: foreign ownership; zero corporate tax; business start-up packages; co-working and office spaces, and access to a community of over 1,400 companies.

According to Chainalysis, the Middle East and Africa region has become the sixth largest crypto economy with an estimated $400 billion or 7.2 per cent of global transaction volume recorded between July 2022 and June 2023.


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DIGITAL ECONOMY & TECHNOLOGY

Blossom Finance: Leading Indonesia’s Islamic Fintech Revolution

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The fintech world is witnessing a significant paradigm shift, led by innovative platforms like Blossom Finance. Established in 2014, this visionary enterprise initially focused on Muslim entrepreneurs in the United States. However, recognizing the niche market limitations in the States, founder Matthew Joseph Martin, supported by influential investors including Boost VC and Tim Draper, astutely shifted focus to Indonesia, home to the world’s largest Muslim population. This strategic move highlights a global fintech trend: the rise of Islamic finance.

Blossom Finance’s Shariah-Compliant Model

Blossom Finance employs the mudarabah model, a shariah-compliant profit-sharing agreement that aligns with Islamic financial principles. This model is a departure from traditional interest-based financial systems, instead promoting equity and shared risk between investors and entrepreneurs. This innovative approach not only caters to religious adherence but also to a growing global demand for ethical financial solutions.

Why Indonesia?

Indonesia’s choice as Blossom Finance’s operational base is not coincidental. Southeast Asia, particularly Indonesia and Malaysia, houses a significant Muslim demographic and an already thriving fintech scene. Giants like Grab, GoTo, and Sea have laid the foundation for a diverse financial ecosystem, which Blossom Finance leverages. Indonesia, with approximately 231 million Muslims, presents a fertile ground for Islamic fintech innovation.

Islamic Fintech Landscape in Southeast Asia

The Islamic fintech sector in Southeast Asia, especially in Indonesia and Malaysia, is burgeoning. Notable Islamic fintech companies in the region include Hijra (formerly Alami), Bank Aladin, and LinkAja in Indonesia, and Ethis Ventures and Wahed in Malaysia. These startups offer a range of services from digital banking to peer-to-peer lending, all within the shariah-compliant framework.

Market Potential and Financial Inclusion

The World Bank reports that Indonesia leads the globe in the number of Islamic fintech firms. This growth is a testament to the immense market potential and the role of Islamic fintech in fostering financial inclusion. Traditional banking systems often overlook significant demographics, which Islamic fintech can effectively reach and serve.

Challenges and Opportunities

Despite the promising landscape, Blossom Finance and other Islamic fintech firms face unique challenges. These include navigating the complex regulations of Islamic finance, ensuring compliance with shariah law, and educating potential users and investors about the benefits of Islamic fintech.

Blossom Finance’s Impact and Innovations

Blossom Finance has not only connected investors with microbanks for shariah-compliant financing but also innovated in ways that transcend traditional financial models. For instance, it uses murabaha contracts for transactions, where goods are purchased and sold at a markup instead of charging interest, aligning with Islamic principles.

Collaborations and Partnerships

Blossom Finance’s growth is further bolstered by strategic partnerships. Collaborations with local financial institutions and fintech players have been instrumental in expanding its reach and enhancing its service offerings.

The Future of Islamic Fintech

As the Islamic fintech sector continues to grow, we are likely to see more innovative products and services. Blossom Finance’s journey from a U.S.-focused startup to a key player in Indonesia’s Islamic fintech scene exemplifies the sector’s potential. The future might see expansions into other markets with significant Muslim populations, like Malaysia, Saudi Arabia, and Turkey.

Role of Technology in Islamic Fintech

Technology plays a crucial role in the evolution of Islamic fintech. Digital platforms, mobile apps, and AI are being leveraged to enhance user experience, improve financial accessibility, and ensure compliance with Islamic financial principles.

Women in Islamic Fintech

An interesting aspect of the Islamic fintech boom is its inclusivity, particularly concerning gender diversity. Women are increasingly taking up leadership roles, as seen in companies like Hijra and PayHalal. This trend is not just about representation; it’s about bringing diverse perspectives to the table, which is crucial for the industry’s growth and innovation.

Global Perspective

Globally, Islamic fintech is gaining recognition as a viable alternative to conventional financial systems. Investors from non-Muslim countries are showing increased interest in Islamic fintech, recognizing its potential to offer ethical and inclusive financial solutions.

Blossom Finance’s strategic shift to Indonesia represents a significant milestone in the Islamic fintech sector. Its innovative approach to finance, grounded in Islamic principles, is not just a business model but a movement towards more ethical, inclusive, and sustainable financial practices. As the world becomes more interconnected, and the demand for ethical financial solutions rises, Blossom Finance and similar platforms are well-positioned


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