BACKGROUND OF CRYPTOCURRENCIES

In 1998, Wei Dai published a description of "b-money", an anonymous, distributed electronic

cash system. Shortly thereafter, Nick Szabo created "bit gold”. Like bitcoin and other crypto
currencies that would follow it, Bit Gold was an electronic currency system which required
users to complete a proof of work function with solutions being cryptographically put together
and published. A currency system based on a reusable proof of work was later created by Hal
Finney who followed the work of Dai and Szabo. The first decentralized crypto currency,
bitcoin, was created in 2009 by pseudonymous developer Satoshi Nakamoto.

TYPES OF CRYPTOCURRENCIES

Bitcoin

Bitcoin is a crypto currency, a form of electronic cash or a digital currency that you can send
to other people but it is not a unit of account and a store of value, and thus cannot be considered
as a money. Bitcoins may be a gift or payment for services or for a product. With Bitcoin, each
transaction happens directly between users that is why it may be called a peer-to-peer network
(Dirk.G 2019). According to Böhme, Christin, Edelman and Moore 2015 Bitcoin is an online
communication protocol that facilitates the use of a virtual currency, including electronic
payments. The idea of Bitcoin was revealed in 2008, this idea was developed by an anonymous
group of members called Satoshi Nakamoto and released as an open source software in 2009.
It is a decentralized digital currency without a central bank or single administrator that can be
sent from user to user on the peer to-peer bitcoin network.

Bitcoin is based on the technology called Blockchain using cryptographic protocol. The
quantity of units in circulation is not controlled by any central authority or government but by
a software algorithm. Bitcoins are created by a “mining” process done by the users of the
Bitcoin network. The participants of this network called miners provide their computing power,
verify and record payments into a public ledger called Blockchain. In return of this service they
receive transactions fees and newly mined Bitcoins (Guegan D 2018). This blockchain ledger
can be seen by the public thus every transaction is visible to everyone and the ledger is
automatically updated after every transaction.

Litecoins

Most of the Alternative coins do not survive for long duration with few exceptions. One of the
exceptions is Litecoin, which was one of the first Altcoin developed. Litecoin is treated as a
leading rival for Bitcoin currently and the main purpose of designing Litecoin was to process
smaller value transactions fast. Litecoin was founded in Oct. 2011created by former Google
engineer Charles Lee with a goal of being ‘silver’ to Bitcoin’s ‘gold’. The difference between
Bitcoin and Litecoin is that for mining Bitcoin heavy processing and fast computing is required
unlike, Litecoin which can be mined by a normal desktop computer with comparatively lesser
processing power.

About 84 million Litecoins are there in circulation in comparison with 21 million Bitcoins and
Litecoin transaction processing time is about 2.5 minutes compared to about 10 minutes for
that of Bitcoin Apart from using a different hashing algorithm than Bitcoin, Litcoin is said to
have a higher number of currency units. When considered transaction, Litecoin handles a
higher volume of transaction speed (or faster block time) and confirmation speed compared to
Bitcoin because of its faster block generation (Jaysing Bhosale 2018). Litecoin leverages the
best parts of Bitcoin and also uses Scrypt mining algorithm to improve decentralization thus
Litecoin is just a better version of Bitcoin.

Ethereum

Ethereum is a platform that allows people to build dApps, tokens and smart contracts. Ethereum
is also termed as Ether as this cryptocurrency is generated on Ethereum platform. It is public
platform with open source, block chain based computing. It has a smart scripting facility. It
works on the modified version of Nakamoto’s cryptocurrency with transaction based payment
system. Ethereum was first introduced in 2013 by Vitalik Buterin, who was a computer
programmer and researcher in cryptocurrency. Software Development related to Ethereum was
funded by an online crowdsale between July and August 2014 and developing a system that
went live on 30 July 2015. It initially had 11.9 million coins "premined" for the crowdsale.
This circulation was almost 13% of the total circulating currency. The price of the Ethereum
currency grew over 13,000% from 2014 to 2017. (Sushil Mavale 2018)

Ethereum supports the state of the transaction, as well as several other improvements over the
blockchain structure. Ethereum represents a blockchain with a built-in Turing-complete
programming language. It provides an abstract layer enabling anyone to create their own rules
for ownership, formats of transactions, and state transition functions. This is done by involving
smart contracts, a set of cryptographic rules that are executed only if certain conditions are met.
(Sanisa Radic 2018)

Ripple
Ripple was launched in 2012 by a company called OpenCoin with its founder, a technology
entrepreneur Chris Larsen. Ripple is a currency as well as a payment system like Bitcoin. The
payment mechanism for Ripple is very fast enabling the transfer of funds in any currency to
another user on the Ripple network within seconds. (Jaysing Bhosale 2018). According to
Sauer 2016, Ripple is a blockchain that is designed to be used by banks to make their payments
faster. It is known as the banker’s coin, and there are many partnerships with global banks
currently being worked on.

Advantages of cryptocurrencies
There are different and confronting opinions regarding the future of cryptocurrencies in general
and bitcoins in particular (Bryman, 2014). Whilst, those with libertarian views of life are
optimistic and embrace the cryptocurrency system, other authors, economists, and scholars
from this field are not enthusiastic about the use of cryptocurency in the system of payments
and financial transactions. Ivaschenko, (2016) noted that the optimistic view of
cryptocurrencies use is backed by the fact that they make it easier to transfer funds between
two parties in a transaction; these transactions are facilitated through the use of public and
private keys for security purposes.
These fund transfers are done with minimal processing fees, allowing users to avoid the steep
fees charged by most banks. In addition, many countries have started to accept bitcoin as a
valid currency. Especially, countries that aim to get rid of cash have a very friendly approach
to cryptocurrencies. An argument that promoters of bitcoin use is Market Capitalization of
bitcoin, ethereum and other cryptocurrencies, claiming that cryptocurrency market has become
very large and powerful so banning it would be costly for any country (Bryman, 2014). On the
other side the opponents of cryptocurrencies claim that cryptocurrencies are very volatile, can
be used for money laundry or financing illegal activities. In this regard, Tymoigne (2015) for
example, is not enthusiastic over cryptocurrency use, providing reasons why he believes
bitcoins are not a viable electronic currency. He notes that bitcoins are illiquid and have shown
high price volatility, and that the discounted cash value of a bitcoin is zero. He further observes
the currency lacks a central issuer, and that there is no financial or economic basis for its
creation. Ivaschenko (2016) provides the advantages and disadvantages of bitcoin as stated
below.
ZIMBABWE’S CHALLENGES
Zimbabwe has not been able to maintain its own fiat currency for over a decade. As of 2018 –
ten years after the country’s first hyperinflation – the country has been experiencing a second
great inflation period with its bond notes. Stores are empty and fuel supply has been
intermittent. There is diminishing trust in the current monetary environment. With the currency
problems, the banking system is effectively insolvent. People and businesses face extreme
difficulties in making international payments. There is capital flight resulting in a money
printing spiral. Ordinary people on the ground have very little money. Since the 2008
hyperinflation, the population has traded with US dollars, British Pounds, South African Rands
and other currencies on the street and lately, the country uses bond notes. Foreign currency
notes in Zimbabwe are constantly perishing. The country has had to import foreign currency
notes in exchange for real goods and services – only to replace notes that have already been
destroyed
The established cryptocurrencies such as Bitcoin, Ethereum and Monero are already playing a
very small role in Zimbabwe but have several weaknesses.
Weaknesses
1. National security threat
Adoption of crypto currencies have some challenges like threat to national security since the
government will not be able to influence economic activities through conducting monetary
policy and issuing out of treasury bills to finance budget deficits. There will be loss of national
sovereignty and the government will lose power to control the payment system in the country
since transactions will be mainly controlled through the internet.

2. Scalability
Crypto currency can only handle a few transactions each second which is far below what would
be required on the economy. In December 2017, the system reached its transacting limit and
over 220 000 transactions backlogged in the queue. Miners started to charge high transactions
fees for people to jump the queue. This scalability problem has not been solved to any major
degree and still is a major weakness on crypto currency as a banking system.
3. Substantial size of database
Crypto currency database can only increase in size and after 10 years is currently almost 200
gigabytes. The cost of carrying this large database by the thousands of miners translates into
increased transaction costs and in reduced decentralisation.

4. Very costly to run

Proof of Work has been exceptionally powerful in establishing an immutable ledger. However,
the processing power required is prohibitive and translates into transaction costs.
 5. Limited security
Crypto currency database keeps a record of all payments in and through all accounts. If anyone
were to find out what account numbers you used, they would have a complete record of all
your transactions and balances.

6. Long private keys

Whenever you receive bitcoins, you get a new private key which is long and complex. This
makes it cumbersome to receive and record and ultimately reduces the quality of bitcoin as a
banking solution.

7. Centralised holdings
According to Bit Info Charts, 87% of all mined bitcoin is held by just 0.5% of the wallets. This
means that the price of bitcoin is very exposed to a few individuals/exchanges.
Background to the loss in value of Zimbabwe currency and the effect of adopting crypto
currencies as a panacea to the challenges.

The major constraints for the Zimbabwe economy emanates from structural challenges being
met in implementing economic reforms, hyperinflation, foreign currency shortages, power
outages, political instability and the prevailing drought among other things. The symptoms of
a recession in Zimbabwe have mainly been visible on loss of value for the local currency which
affects real incomes for labor and business. A recession is a period of reduced economic activity
spreading across the entire economy, lasting more than few months and normally visible as
negative real GDP growth during two consecutive quarters, drop in real income, consumer
demand, employment, industrial production and company closures.

Zimbabwe’s last economic recession cycle was from year 2000 to 2008. During this period
there was massive deindustrialization, company closures, foreign investor flight, job losses,
and decline in agricultural productivity and rise in poverty levels. The sanctions imposed by
the United States of America had also a major effect on the Zimbabwe economy during this
period. The country could not access international lines of credit for borrowing funds to finance
the budget deficit and to boost the industrial production capacity, hence the government
resorted to printing more money to cover for the deficits. This had an effect of affecting the
value of the Zimbabwean dollar to be valueless since there was too much money chasing too
few goods on the market. The prices of goods and services was changing for at least two times
per day. The sanctions has also caused the government to borrow from local financial
institutions to finance its budget deficits and this had resulted in a crowding out effect, where
the private sector faced serious challenges to borrow funds to finance their business operations.
Hence a solution was needed to have stable currency to assist the country to move out of this
crisis.

In 2009 the economic activities started to stabilize after the introduction of the multi-currency
system with United States Dollar as the function currency of trading by businesses. This
boosted private sector investment and stabilized inflation since the central bank was no longer
able to continue printing more money to finance government budget deficits. However the
major reasons for improvements in economic activity during the 2009 to 2013 period was that
there was confidence, political stability, and prudent public funds management , and all these
are key to the growth of the local economy. The dollarization of the economy was a short term
measure which failed to yield sustainable benefits to the nation. This was evidenced by the
liquidity crunch which affected the country up to the present day. The financial sector faced
serious challenges to access cash to facilitate cash withdrawals, due to factors like shortage of
foreign currency, sanctions, and lack of confidence in the economy as people where no longer
depositing their cash takings.

On 24 June 2019, the Zimbabwe government gazette a new regulation that outlawed the use of
multiple currencies for local business transactions and introduced the Zimbabwe dollar that
was abandoned as a currency of trading a decade ago. The government gazette statutory
instrument 142 of 2019 for the introduction of Zimbabwean dollar as the only legal tender
accepted for local transactions. The existing bond notes and rtgs values were converted to
become the new Zimbabwean dollar. The new Zimbabwean dollar has been losing its value
since its introduction as evidenced by the rapid price level increases of goods and services.
This is mainly due to shortage of foreign currency, lack of confidence in the economy and
government itself since other countries are not willing to offer assistance because of the
sanctions imposed by USA which have some negative consequences to those who open up
international lines of credit to Zimbabwe, and also the lack of adequate foreign currency
reserves to back the new Zimbabwe dollar. Hence a solution is needed to deal with these issues
affecting our economy which has led to the loss in value of our local currency.

The use of crypto currencies in Zimbabwe can act as a panacea to stabilize our economy and
hence help to preserve the loss of value of our local currency. The crypto currency can act as
an alternative to the existing intermediaries and payment systems. The lack of confidence in
the Zimbabwe government internationally and also in the local financial institutions can be
reduced through the use of crypto currencies such as Bit coin, Etherium and others. This is
because crypto currencies experience more widespread adoption in countries with higher
degree of mistrust of existing systems. A person may mistrust the Zimbabwe financial
institution for a number of reasons. He may be concerned that the institution will go bankrupt
and lose his money without adequately apprising him of such risk or while actively misleading
him about it. For example like what happened when bond notes were introduced, people lost
their United States dollar deposits that were in the bank accounts which was later converted to
the new Zimbabwean dollar. This had a negative effect on the perception of the local banking
system by the public. This mistrust will cause our local currency to continue loosing value as
people will be looking for foreign currency to act as a store of value of their money. Crypto
currency can help to reduce this lack of confidence in the economy.

Also some investors may also mistrust the Zimbabwe government’s willingness or ability to
maintain a stable value of our local currency. This is because the Zimbabwe currency is not
backed by sufficient foreign currency reserves and historically incidents of hyperinflation have
seen the Zimbabwean dollar loosing most of its value. Hence they may judge the probability
of losing their money to be high if they are to receive our local currency as a form of payment
for their goods and services. These investors may place greater trust in a decentralized network
using cryptographic protocols that limit the creation of new money which has the effect of
causing inflation and hence loss in value of the fiat currency.

There will be no inflation using the crypto currencies. For example using the Bit coin, the
maximum number of coins is strictly limited to 21 million, as there are neither political forces
nor corporations able to change this order, there is no possibility for development of inflation
in the system. This will help to stabilize the prices of goods and services in the economy and
also will help the country to avoid the issue of sanction since they will be able to carry out
international transactions without hindrances from the ZIDERA law from United States of
America. Also adopting the use of crypto currencies will help to reduce the demand for foreign
currency which is currently is short supply due to low production by our local industries and
also low exports. Using crypto currency will help to boost production in our country and
increase exports. This will help to improve the economic activities in the country, which has
an effect of restoring value of our local currency.
However the adoption of crypto currencies have some challenges like threat to national security
since the government will not be able to influence economic activities through conducting
monetary policy and issuing out of treasury bills to finance budget deficits. There will be loss
of national sovereignty and the government will lose power to control the payment system in
the country since transactions will be mainly controlled through the internet. To avoid some of
these challenges the government will have invest in understating how crypto currencies
functions and also the ability to come up with a way to regulate the transactions for the purposes
of collecting tax revenue on the gains on investments, the same way like the Zimbabwe stock
exchange operate.