Wednesday 14 April 2021
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Cryptocurrencies could disrupt role of banks: FNB

WINDHOEK, 23 OCTOBER 2013 – Governor of the Bank of Namibia (BoN) Ipumbu Shiimi gestures during the monetary policy announcement on Wednesday. (Photo by: Pearl Coetzee) NAMPA

The country’s largest commercial bank says-although there is a need for cryptocurrencies-such a currency has the potential to disrupt the role banks traditionally played in terms of managing payments and currency.
While it’s been established that banks are lagging the rest of the world in terms of technological innovation, there are already several banks across the world that are working towards a “cashless” future, with some form of digital currency taking the place of banknotes.
But the seemingly lack of control and decentralised nature of the asset makes cryptocurrencies too much of an unknown quantity to integrate into the banking world proper it seems.
Responding to questions from this newspaper, First National Bank of Namibia’s Head of Digital Transformation, Sergio de Sousa, said cryptocurrencies/virtual currencies have enormous potential to disrupt the way payments are made and how currency is issued.
He added that “this is something that all financial institutions and especially regulators should be looking into.”
“The risks or negative impacts of this new technology lie more in how this currency will be used in Namibia. If it is used in its current form without regulation those using it carry all risks associated without any local protection. Unregulated virtual currency with no central bank backing is subject to highly volatile exchange rate fluctuations which can incur significant losses if the risks are not fully understood,” he said.
He further said: “However, non-government backed crypto currency can still be highly disruptive as it allows for people to transfer value by bypassing the formal financial system and its risk controls such Anti-money laundering and Combatting the Financing of Terrorism. The true benefit of virtual currency/crypto currency will be realized where it is issued and controlled by central banks as is currently the case with the Namibia dollar.”
Initially highly controversial, the best known is Bitcoin, though Ethereum and Litecoin are also widely used. Today, there are more than 800 virtual currencies in use around the world.
Virtual currencies emerged in the aftermath of the financial crisis. They allow people to bypass banks and traditional payment processes to pay for goods and services.
Banks and other financial institutions have been concerned about virtual currency’s early associations with money laundering and online crime, and it has not been adopted by any government.
De Sousa said the blockchain technology, on which cryptocurrencies are based, holds exponential benefits not only in terms of currencies but also for registered assets, identity management and host of other areas still being discovered.
Asked whether cryptocurrencies threaten the future existence of banks, he said: “This all depends on the way Central banks will view this technology. Some are starting to see it as an opportunity to be investigated. As mentioned the true benefit will be realized if central banks issue their currency on this new platform.
Cryptocurreny has the potential to disrupt the role banks traditionally played in terms of managing payments and currency. However, because the true benefit of cryptocurrency will only be fully realized if it is backed by trusted institutions, e.g. central banks and banking institutions, there will still be a critical role they will have to play. It’s just that this role will change.”
Regarding the lifespan of virtual currencies, De Sousa said: “There is definitely a need for this type of currency, which is why it has grown so rapidly in terms of participation and growth in the global community. Cryptocurrencies are expected to still be around for as long as they meet this need.”
Earlier this month, the central bank has made public its position on virtual currencies when it sounded the alarm on the secretive nature of virtual transactions.
In a paper titled “Position on Distributed Ledger Technologies and Virtual Currencies in Namibia”, the central bank is particularly wary of the anonymity of transactions and users thereof.
“These potential risks include exposure to greater anonymity or anonymous funding and transfers through virtual exchangers that do not properly identify the funding source, if the sender and recipient are not adequately identified. Decentralised systems are prone to greater anonymity risks as a result of how they are designed and function,” said BoN.
For instance, said the central bank, Bitcoin addresses which function as accounts, do not have names or other customer identification attached.
“Furthermore, Bitcoin protocol does not require or provide identification or verification of participants. Generation of historical records which can be tied back to an individual’s true identity is also a challenge.
Virtual currency systems can be accessed via the internet and can be used to make cross-border payments and funds transfers also increase potential AML / CFT risks. Virtual currencies commonly rely on complex infrastructures that involve several entities, often spread across several countries, to transfer funds or execute payments. This segmentation of services means that responsibility for AML/CFT compliance and supervision/enforcement may be unclear. Moreover, customer and transaction records may be held by different entities, often in different jurisdictions, making it more difficult for law enforcement and regulators to access them. Components of a virtual currency system may be spread across various jurisdictions which may not necessarily have adequate AML / CFT controls,” BoN explained.

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