Bitcoin, which last week soared to a new record high of more than $8,000, is the monetary equivalent of Uber, since it bypasses central bank regulation and could be attractive for financially fragile countries, economists say.
Nevertheless, it is precisely the lack of oversight that opens up the users of cryptocurrencies such as bitcoin to risks and dangers, analysts warn.
"Bitcoin? It's about 'Uber-ising' currency, about not having a central bank that decides the price," says Ludovic Subran, chief economist at credit insurer Euler Hermes, referring to Uber, the ride-hailing app that has set the cat among the pigeons in the taxi sector in recent years.
"Yes, it's exactly that: it bypasses a central regulatory authority. That's the genius of this invention," agrees Yves Choueifaty, founder of the Paris-based asset management firm Tobam, which this week launched the first European fund investing in bitcoin.
Bitcoin is not regulated, but is traded on specialist platforms. It has no legal exchange rate and no central bank backing it. Launched in 2009 as a bit of encrypted software written by someone using the Japanese-sounding name Satoshi Nakamoto, bitcoin is controlled and regulated by its community of users.
Investors are already referring to it as "digital gold", as the bitcoin soared to a new record high of more than $8,000 this week, a staggering rise in value from just under $1,000 at the beginning of the year.
"We have no need for central banks," says Yves Choueifaty, suggesting that institutional investors may be behind the recent sharp gains, even if insisted that there was "no bitcoin bubble."
The growing interest in bitcoin is catching mainstream attention: the CME Group of Chicago, one of the world's biggest exchanges, has decided to launch a bitcoin futures marketplace. And prestigious US universities are offering courses in blockchain technology, on which cryptocurrencies are based.
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Virtual currencies could also prove attractive to economic players in countries such as Zimbabwe or Venezuela, whose fiat currencies have been ravaged hyper-inflation. Caracas, for example, has had to issue a new 100,000-bolivar bill (US$9,733), when just a year ago, the biggest-denomination banknote was 100 bolivars.
"Think of countries with weak institutions and unstable national currencies. Instead of adopting the currency of another country - such as the US dollar - some of these economies might see a growing use of virtual currencies. Call it dollarisation 2.0," said the head of the International Monetary Fund, Christine Lagarde, recently.
Economists also suggest bitcoin could be of interest to developing countries where individuals often find it easier to access the internet than traditional bank accounts.
Nevertheless, central banks and the big financial institutions are concerned that virtual currencies can be used for illicit purposes and are highly speculative by nature.
"It's the exact definition of a bubble," the head of Swiss banking giant Credit Suisse, Tidjane Thiam, warned recently in comments that immediately sparked an uproar on social media among bitcoin's supporters.
The head of the French central bank or Banque de France, Francois Villeroy de Galhau, warned in the summer: "People are using the bitcoin today are clearly doing it at their own risk and at their own peril."
Nobel laureate, Jean Tirole, also insisted that the current bitcoin boom was a "bubble".
"It's something that has no intrinsic value," he said on the sidelines of a conference in Paris last week.
"It could collapse from one day to the next. I would be completely against French banks, for example, investing in bitcoin."
Euler Hermes economist Subran called on the financial authorities to make potential investors more aware of the risks.
"There's a lot of money to be made. And a lot of money to be lost," he says.
"We're seeing more and more people wanting to venture there, but they're not fully aware of the risk."
Bitcoin has regularly suffered abrupt falls, for example, in cases of friction between the members of the community who oversee it and the members who produce it, when the regulatory authorities issue any warnings, or if there are data hacks.
But more often than not, bitcoin quickly makes up any losses and some investors are predicting it will soon top the $10,000 level. Back in 2011, it had struggled to pass $1.
The alternatives
• Founded in 2014, Telr is a payment aggregator and gateway with an office in Silicon Oasis. It’s e-commerce entry plan costs Dh349 monthly (plus VAT). QR codes direct customers to an online payment page and merchants can generate payments through messaging apps.
• Business Bay’s Pallapay claims 40,000-plus active merchants who can invoice customers and receive payment by card. Fees range from 1.99 per cent plus Dh1 per transaction depending on payment method and location, such as online or via UAE mobile.
• Tap started in May 2013 in Kuwait, allowing Middle East businesses to bill, accept, receive and make payments online “easier, faster and smoother” via goSell and goCollect. It supports more than 10,000 merchants. Monthly fees range from US$65-100, plus card charges of 2.75-3.75 per cent and Dh1.2 per sale.
• 2checkout’s “all-in-one payment gateway and merchant account” accepts payments in 200-plus markets for 2.4-3.9 per cent, plus a Dh1.2-Dh1.8 currency conversion charge. The US provider processes online shop and mobile transactions and has 17,000-plus active digital commerce users.
• PayPal is probably the best-known online goods payment method - usually used for eBay purchases - but can be used to receive funds, providing everyone’s signed up. Costs from 2.9 per cent plus Dh1.2 per transaction.
Like a Fading Shadow
Antonio Muñoz Molina
Translated from the Spanish by Camilo A. Ramirez
Tuskar Rock Press (pp. 310)
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- Technology expert in robotics and automation: Dh20,000 to Dh40,000
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
