Cryptocurrency is trendy, but is it smart?

Huge hydro rates and big risks are among the hassles that aren’t deterring some Windsorites.

The bank did it again. Raised their costs. Transactions take ages and cross-border transfers are riddled with regulations and hidden costs. Isn’t there a better way?

An increasing number of people are questioning the banking industry. This has given rise to the emerging private monetary system of cryptocurrency.

Currently, its training wheels are just coming off. Its usability is more like having gold than money. It’s anonymous, quick or quicker than normal online transactions and operates on basically incorruptible software called “blockchain.” It’s regulated by users and not the bank or government and, up to now, it’s not taxed.

The allure to most has been that it’s hip and trending.

Using open source (free) technology, something was created out of nothing. Through crowd funding campaigns, more than 1,400 cryptocurrencies are in existence to date — as many disappearing as fast as they were hatched.

In Canada, the government has taken a “soft-hands approach,” creating what’s referred to a “sandbox” so as not to stifle the technological development and innovation of this fledgling industry.

Trading of these speculative, stock-like assets already caps US$800 billion (gold is almost nine times that), which means the long arm of regulators won’t remain a mere spectator much longer. Most governments have classified it as owning property.

This rapidly evolving industry, backed by the seemingly endless potential of blockchain technology that underpins it, is playing its part in what disruptive industries such as Facebook, Uber, Airbnb and Netflix started.

Uber is a good comparison. It bit off a US$68 billion share of the taxi industry without a single taxi in their fleet. It’s powered by an app and un-vetted drivers using their own cars. No professional accreditation. No common insurance scheme in case something happens.

Muharem Kianeiff, an associate professor of law at the University of Windsor, has become an authority on cryptocurrency and is writing a book on it. On the matter of a parallel economic system emerging, he has several concerns as an academic and proponent of consumer rights.

“My difficulty, as an academic looking at this, is that there really isn’t much discussion of previous efforts at regulation or trying to draw analogies between previous disruptive technologies and what effect they’ve had on the market place.”

Proponents of cryptocurrency are banking on this yet unregulated industry doing the same to the banking industry than other disruptive industries have accomplished.

In Windsor, Ont. — a city of about 220,000 people in the province’s southwest — three such libertarian-minded entrepreneurs have entered cryptocurrency’s world-wide mining, selling and blockchain technology race in what they hope will be a digital goldmine.

What is Bitcoin and are you protected?

Bitcoin is a brand (like Kleenex), and it is considered the gold standard of cryptocurrency. All cryptocurrencies dream of becoming Bitcoin. Bitcoin dreams of becoming an actual currency. The billionaire Winklevoss twins from (Facebook failure fame) call it gold 2.0. It was created by someone — or perhaps more than one person — only known as Satoshi Nakamoto, who wrote a computer program or algorithm that now trades US$5 billion a day.

How it works:

It’s complicated to understand, because it’s so unlike how we think of money. Whole books and long videos have been created to explain it, but here’s a brief explanation.

A number of bitcoins are released by its maker. Users set up a “wallet” with a private key and username that pairs with a public key and anonymous user name. As they trade, the transactions are encrypted onto a ledger. This process of encryption is performed by “miners” whose computers solve these encryption problems called “hashes.” The computer that solves the transaction block first is rewarded for its efforts with predetermined amounts of bitcoin. It’s currently 12.5 bitcoins (around $100,000).

This ledger forms a single chain of transactions called the blockchain and is maintained by everyone solving equations or mining. The longest chain would be the legitimate chain, being the one the most computers solving hashes agree as being true. A predetermined amount of time to solve a block (about 10 minutes) prevents a corrupt chain from overtaking the legitimate one.

And it’s finite. Only 21 million bitcoins.

There’s no central server. Everyone can see all transactions from the very first one. Its existence derives from and relies on a majority consensus of the one true ledger.

And there it is. A private fiat currency for the digital community, by the digital community.

Cryptocurrency however is not the first private currency by a long shot.

“The government didn’t get into the money business because they wanted to, but because they had to,” said Kianeiff.

There was too much economic uncertainty involved in private currencies in the past. “Unfortunately, we risk repeating those mistakes now,” he continued.

Kianeiff fails to see improved value and functionality offered by cryptocurrency to the ordinary consumer that the national fiat currency doesn’t already offer.

“It would be best for the public to have consumer protections that are offered by the Securities Act to give them the information they need to make sound business decisions.”

They call it “mining for profit”

“Back in 2013, I started mining bitcoin. Not very much. I put my Graphics Processing Unit (GPU) on. It was making two dollars of bitcoin a day,” said Kevin Roy, one such Windsor miner who solves these hashes with a small but continuously running GPU farm. (If he mined the same amount in 2013 with bitcoin’s current value, he would have made $200 per day.)

Since then, mining bitcoin has for the most part been hijacked by large companies that set up large storage containers filled with hardware specifically developed to solve the currency’s hashes.

For the small-time miner, the game can be tumultuous.

“You could buy a mining rig, make 50 per cent of your money back in one week and then the other 50 per cent … (in) six months,” said Roy. “That’s the kind of game you play.”

He’s currently making around $30 per day on an undisclosed number of machines.

He runs dedicated machines, some designed for specific coins — for himself and investors. He gets paid in whichever coin he mines. He keeps an eye on trends and “the talk” on currencies and directs his machines at which ever one is trending and would give the best returns.

Running these machines takes its toll on his electricity bill. Nearly a quarter of his earnings are spent on overhead. It’s also noisy and generates a lot of heat.

“It takes $10,000 of electricity to get one bitcoin. That gives it its value, because it’s tied to a real-world entity, which is power,” Roy said.

More transactions mean more computing power needed to add them to the blockchain. The influx of transactions raises the complexity of the hashes that need to be solved which in turn raises transaction costs and the time to process them. Adding a small transaction could cost anything from $30-$40.

“The general rule that economists tend to follow is that anything that is accepted as money by the public is money,” Kianeiff said.

Big-ticket currencies like Bitcoin, Ripple or Euthereum can be used to purchase many things online, “because (an increasing number of) businesses believe in their long-term value,” said Roy.

Roy didn’t agree with Kianeiff’s claim that Bitcoin is a vendor-centric model, making it of little value to the average consumer.

Roy goes to coincards.ca where he buys gift cards with cryptocurrency for just about anything, from Tim Hortons to Best Buy.

Roy knows he’s playing with fire. “It’s a tough, fluctuating market where a coin can just disappear off the face of the earth,” he said.

Right now, profitability of mining crypto has taken a massive dip, and some of Roy’s investors want out. Roy is thinking of switching his machines off until it’s profitable again. He’s in it for the long run and believes in the system’s longevity.

And he’s not opposed to government regulation.

“I don’t mind being legitimate at all, just no one knows how yet. As soon as they figure it out, sure. Why not?”

Making a coin profitable

Ian France, a businessman in Windsor, has been frustrated with the banking industry for years. This led him straight to cryptocurrency.

He recalled once trying to send real money from his cross-border account in Delaware to Idaho.

“It took me eight tries and 45-65 minutes on each one. It took me about 8 days to get the money.”

Eventually he had to transfer the funds back to his international TD Bank account in Canada first.

“But it just proved to me how ridiculous it is that the banks control our money,” France said. “They tell us how we can spend it, where we can spend it and even how much we can spend.”

For a cryptocurrency to become consumer-centric, it needs to stand out among the masses. It needs to be popularised. An online personality would do the trick. If hard-sell is their calling card, you might just succeed.

France drops the name Kevin Harrington, on whose back the business, iProNetwork and PRO-currency (PROC) rides. Mister infomercial and shark in the Shark Tank himself.

France hosts workshops in trading in crypto. Often in Las Vegas. Here, he was approached by iProNetwork, and he bought in. His business, Ian France Entertainment and Events “covers whatever the hot topic is at the time.”

Unlike most cryptocurrencies, which are primarily speculative trading tokens, the iProNetwork sells incentivised investor packages ranging from $100-$6,000. Half of the value of your investment is “given back to you” in the form of PRO-currency (PROC), a coin designed specifically for their platform. The other value is provided in the form of educational videos that help investors set up an online shop for their ibuyrite storefronts and an online cryptocurrency trading app.

Investors are rewarded with PROC rebates when they buy or sell in designated digital storefronts. This steady release of rewarding PROC is aimed at driving up its usability and, subsequently, its value.

“So, they’ve developed this ecosystem to keep people there, utilizing the coin,” said France.

Educating vendors to build online storefronts coupled with their “Canadian Tire Dollar 3.0” incentive sounds ingenious compared to most cryptocurrencies.

In the long term the problem that might arise in a scenario where online-storefronts only accept PRO-currency is monopolization, where the store, is the bank, is the user’s online wallet and the exchange.

Kianeiff was also concerned about this. “Are we just replacing one set of intermediaries with another?”

All that could remain is blockchain

Kianeiff advocates the need for unconstrained innovation in the field while keeping consumers from “unintended consequences of these activities.”

“Whether cryptocurrency will survive the short or medium term is impossible to know. Can you predict what Facebook will look like in 10 years from now? We don’t know,” said Kianeiff.

“What does have staying power is the development of blockchain technology, which is something quite apart from the cryptocurrency aspect,” Kianeiff added.

The potential of this digital innovation was embraced by Joshua Ndolo, a Kenyan who came to the University of Windsor on an athletics scholarship to study economics.

After Ndolo tried to send money back to his parents in Nairobi, he was driven to seek an alternative to the conventional banking system. It took three to four business days, $80 in conversion and bank costs as well as needing to show banks his passport.

Not much was happening on the crypto scene in Windsor back in 2013. He started attending cryptocurrency conventions in Toronto and soon met up with a couple of Waterloo University graduates “who came up with this company Ethereum.”

As economics major, Ndolo was sold. He bought some crypto and set up his online wallet. His parents back in Kenia couldn’t make head or tails of it, but this didn’t dissuade him. He wisely invested some money when Bitcoin and Ethereum crashed in 2014. He received a handsome return on his investment when the value skyrocketed — enough to start his business, Amani.

“It’s this investment and the early success which really glued me into this space,” Ndolo confessed.

Ndolo started using another technological innovation from the Ethereum currency called “smart contracts” to distinguish his business.

Smart contracts are self-executing coded contracts stored and replicated on a blockchain. It provides feedback in the ledger of transferring money and receiving a product or service.

“It’s very economical,” said Ndolo. “At a bank, it (a transfer) might cost $80. We do it for three dollars. It takes about a day where at a bank it would take three to four business days.”

Amani uses a biometric thumbprint verification to initiate payments between two parties with their own customized blockchain at the back-end.

“The blockchain makes it seamless and faster,” said Ndolo. “It is the best-use case for blockchain we have available right now.”

His business Amani transacts in real money, because transacting with cryptocurrency carries significant dangers to users.

“If I’m buying something with cryptocurrency, I’m essentially sending cash in the mail. I don’t necessarily know who I’m doing business with,” Kianeiff argued. He highlighted how a history of consumer bodies challenging and changing the credit card system to include regulatory protection clauses was the reason the system functioned today.

For Kianeiff, the industry would benefit from having consumer protection laws set in place.

“There’s accountability,” he said.

Ndolo disagrees.

“The ledger of transactions is available to everybody. If you act immoral, or unethical in your transactions, we’ll be able to spot you. The community is alerted and we stop doing business with you.”

Ndolo said, until now, the banks were responsible for policing monetary transactions but now, “they don’t need to, because we can do it for ourselves.”

“It’s 10-times over the massive reduction in fees that attracts people, rather than the reduction in the time transactions take,” Ndolo said of the business clients he and his partners have drummed up over the past two years.

The biggest hurdle to his business had been paying for regulatory financial compliance and legal fees to make it all happen.

What does the future hold for cryptocurrency?

Ndolo is the only one of the three entrepreneurs who has made the cryptocurrency field his full-time vocation. France and Roy say they are both on the cusp.

Neither Ndolo nor France will say exactly how much money they’re making. For Roy, his crypto income adds up to around $900 per month.

The anonymity and absence of a central regulator are what make investing and using cryptocurrency attractive. It’s not impossible that this libertarian utopia can come crashing down in a wink.

The blockchain encryption technology was designed and initially used by the U.S. military. Once the government does decide to intervene, its specialists could easily track and pinpoint users and miners to enforce regulations in the industry.

Even following the route of “offshore wallets” would not help in evading pending regulations.

“After all, we do have tax treaties between countries and they do have reciprocal agreements that way as well,” said Kianeiff.

Something called quantum computing is on the horizon, and it makes freakishly complex and secure encryption a reality. It allows for reliable and lightning quick transactions, which might serve as catalyst for mass buy-in and attract users previously repelled by security concerns. The original reasons for wanting to regulate and safeguard consumer interests might even be unnecessary.

The nature of the internet and blockchain is open source and self-regulated, with instantaneously evolving platforms for sharing. Their very existence is wholly dependent on an inclusive and active participatory user community.

Despite looming legislation and extreme fluctuations in the value of cryptocurrency, there is money to be made, whether mining, trading or buying shares in cryptocurrency businesses.

Ndolo has some cautionary advice.

“It’s new, exciting, hip and it’s trending. But it’s nowhere near the other financial tools. It’s got a really long way to go.”