The Effect of Cryptocurrencies on the

Banking performance
“An Applied study on the Egyptian commercial
Banks”

Omar Kemeha

2022

i
 Acknowledgment
We thank God for being our sources of strength in all that we
do, it is for his will that we have been able to complete this project.
The Lord be praised and we thank him so much.
It has been a long and tough journey but blessed with good
health, giving us strength and resources to complete our courses.
Our sincere gratitude also goes to our university Badr University
in Cairo (BUC), fraternity for the availability to us an opportunity to
purse Bachelor of Business Administration Degree (Major of
Finance).
We appreciate all academic staff in general and our supervisor
Dr. Amr M.Sany specially for his exemplary guidance, support and
availability despite his busy schedule.
A very special appreciation to our parents, and finally we would
like to thanks Mr. Ahmed Y.Tallat for everything he helped us in.
Without you all this project would not have been a success.

i
 Abstract
The study aims to find out the “Impact of Cryptocurrencies on
the Banking performance with the application on the Egyptian
Banking System”. The new entrant of cryptocurrencies has been there
since 2010 but has become mainstream since the price of Bitcoin, the
most prominent cryptocurrency, skyrocketed in December 2017. The
researchers try to investigate if the use and probable mass adoption of
cryptocurrencies will impact banking products or not. It was not
feasible to choose all the banking products and services in the study
as dependent variables to the independent variable, namely,
cryptocurrencies; therefore, the researchers have selected a sample,
such as remittances, online payments, trade finance services and
lending which have closer proximities to cryptocurrencies in their
features of transferability, investment and innovation. The study also
tries to shed some light and recommends the future dealing on the
matter of cryptocurrencies by citing some the best practices
worldwide.
The researchers have got a qualitative nature due to the relative
newness of the cryptocurrencies phenomenon and due to the fact that
there has been no previous studies that quantitatively measured this
relationship between banking products and the use of
cryptocurrencies. A questionnaire will design and give to senior
managers in 5 Egyptian banks with different sizes and portfolios of
customers. To seek an international perspective and to juxtapose both
approaches, the questionnaire will send through the E-mail to 5
banking professionals, Bitcoin enthusiasts, existing and potential
Bitcoin users in 5 European countries, the USA and Canada (If
possible).

ii
 List of Abbreviations
NBE National Bank of Egypt
BMIS Banque du Misr
BCAI Banque du Caire
CIB Commercial International Bank
QNB Qatar National Bank
FINTECH Financial Technology
ATM Automated Teller Machine
FATF The Financial Action Task Force
Fin Tech Financial Technology
BTC Bitcoin prices

iii
 List of Tables
Table (1) Risks of Laundering Cryptocurrencies in the 3 86
stages of Money Laundering

iv
 List of Figures
Figure 1: Private and Public Block chains 21
Figure 2: Hash rate per second 24
Figure 3 Bitcoin Ecosystem 30
Figure 4 Distribution of Bitcoin Wealth 41
Figure 5 Top Cryptocurrencies by market capitalization 44
Figure 6 BTC JAM now defunct website 51
Figure 7 Bitbond Loan request 53
Figure 8 Comparison between Bitcoin and other payment 57
means
Figure 9 Remittances costs in many corridors 59
Figure 10 Costs of Remittance comparison by medium 61
Figure 11 Comparison between cryptocurrencies and other 63
remittances means
Figure 12 Settlement Cycle of regular transfer 68
Figure 13 Settlement Process using Ripple 69
Figure 14 Size and number of ICOs in 2017 and 2018 78
Figure 15 Highest Facebook usage in the world 91

v
 Table of Contents
Acknowledgement i
Abstract ii
List of Abbreviation iii
List of Tables
List of Figures
Chapter 1: Introduction
1.1. An over view 1
1.2. Research Problem 4
1.3. Research Objective 4
1.4. Research Hypotheses 5
1.5. Limitation of the Research 5
1.6. Research Plan 5
Chapter 2: Literature Review
2.1. Theoretical Back Ground 6
2.1.1. Introduction 6
2.1.2 Evolution of Money 6
2.1.2.1. What is Bitcoin? 9
2.1.2.2 Early Trials of Bitcoin 11
2.1.3 Differences between Digital Currencies, 13
Cryptocurrencies and Virtual Assets
2.1.4 Reasons for Inventing Alternative Currencies 14
2.1.5 The Mechanics of the Block chain 16
2.1.5.1 Public Block chain’s 19
2.1.5.2 Permissioned Block chain’s 20

vi
2.1.6. Mining 21
2.1.7. Transaction fees 25
2.1.8. Bitcoin Eco System 26
2.1.9. Advantages and Disadvantages of Bitcoins 30
2.1.9.1 Advantages of Bitcoin 31
2.1.9.1.1 Relatively Low Transaction Costs 31
2.1.9.1.2 Reducing Inflation 32
2.1.9.1.3 Speed, Cost and Convenience 33
2.1.9.1.4 Replacing Trust by Mathematics 34
2.1.9.1.5 No Single Point of Failure 35
2.1.9.1.6 Transparency 36
2.1.9.2 The Darker side of Cryptocurrencies: the 36
disadvantages
2.1.9.2.1 Crime Enabler 37
2.1.9.2.2 Easy to Lose 38
2.1.9.2.3 Volatility 39
2.1.9.2.4 Lack of Acceptance 41
2.1.10. Altcoins 43
2.1.11.Functions of Money 46
2.1.12. Disrupting Lending Activities 47
2.1.12.1 BTCJAM 49
2.1.12.2 Bitbond 51
2.1.12.2 Online Payments 54
2.1.12.3 Cryptocurrencies as Means for Remittances 57
2.1.12.4 Trade Finance 70

vii
 2.1.12.5 ICOs 75
2.1.12.6 Financial inclusion 80
2.1.12.7 Combating Money 82
2.1.12.8 Another Type of Stable Cryptocurrencies 88
2.1.13.Libra Effect 94
2.2. Previous studies 95
Chapter 3: Field Study
3.1 Introduction 97
3.2 Research Sample 98
3.3 Study Construction 99
3.4 Analyzing Questionnaire Results 100
3.4.1 Section One: Knowledge and Awareness 100
Chapter 4: Conclusion and Recommendations
4.1 Conclusions 105
4.2. Recommendations 106
Appendix 108
References 116

viii
Chapter 1

1
1.1. An over view
It has been 20 years since Bill Gates said: `Banking is essential,
banks are not' (Peters, 2015)(1). Milton Friedman once mentioned in an
interview “The one thing that’s missing but that will soon be
developed is a reliable e-cash, a method whereby on the internet you
can transfer funds from A to B without A knowing B or B knowing A,
the way in which I can take a twenty-dollar bill and hand it over to
you and there is no record of where it came from and you may get that
without knowing who I am” (2012). This has ushered the term
“fintech” and it seems that this new vogue term is here to stay as it is a
fusion between financial services and technology. During the past
decade, various types of payment systems have emerged as
alternatives to traditional mechanisms for conducting financial
transactions and have been used by millions of customers worldwide.
For consumers and businesses alike, the development and
proliferation of these systems will continue to positively enhance
global commerce. Many financial inventions have appeared to
streamline financial services and shift people from traditional banking
services to cashless and branchless services. Electronic money has
been on the rise since the early 2000s, payment processing companies
such as Paypal, Skrill and others have mushroomed to provide people
with cashless services yet bank dependent.
In the recent years, a major shift has happened in how people
can do business and make transactions. The financial technology
1
Peters, G. W. (2015). Trends in crypto-currencies and Block chain technologies: A
)
monetary theory and regulation presepective. London: Department of Statistical
Science, University College London.

1
(fintech) companies have disrupted financial transactions and
suddenly, value has started to be exchanged outside of the traditional
banks in the flash of a mobile phone (Tarud, 2017)(1). People no
longer have to go to a traditional bank if they need financing. Peer-to-
peer networks, including those based in cryptocurrencies are
becoming more common and those who might be turned away by
traditional banks now have another way around financing. Traditional
banks now may feel threatened by these new cryptocurrencies. A UK
Banking Report concludes that cryptocurrencies definitely represent a
threat to traditional banks, most especially if they ignore new
consumer behaviors and preferences and not approach younger
generations when it comes to how they transact and transfer money
(Barty & Kirk, 2015)(2). The report states: “Bitcoin users can handle
many of their daily payments needs themselves, without the need for
interaction with banks, and avoiding the need to incur bank fees. In
the same way, value stored in PayPal accounts moves outside of the
bank’s payment systems, depriving banks of valuable payments
revenue.” Traditional banks are becoming very much aware that they
are losing some ground to the new wave of cryptocurrencies.
As already mentioned, the digital currency market is in its early
stage of development, and, compared to traditional currencies, its
range and size do not exceed a monetary base of a small country. As
the share of digital currencies in the monetary system grows, they will

1
) Tarud, J. (2017, July 03). https://www.koombea.com. Retrieved May 25, 2018, from
https://www.koombea.com/blog/cryptocurrency/
2
) Barty, J., & Kirk, P. (2015). Digital Disruption: UK Banking Report. London: BBA,
Pinners Hall.

2
probably have an impact on bank-issued money. However, in
assessing a potential impact of these currencies on bank-issued
money, researchers identify factors determining the supply and the
demand, as well as the interrelations between digital currencies and
traditional money.
An increase in the demand for cryptocurrencies can be related to
the possibility of the immediate conversion of such money into digital
currencies, caused by a trend to possess and pay with
cryptocurrencies; a rapid growth of those currencies and the
availability of their infrastructure (ATMs, portals, exchangers); rising
exchange rates of these currencies; money laundering and other
criminal activities; lack of attractive saving and investment offers on
the national financial market; a need to have money that is
independent of states, crises, wars or inflation; a comfort of effecting
transactions in cryptocurrencies; and low transaction costs
(Łukasiewicz-Kamińska, 2015)(1).
While the advent of decentralized cryptocurrencies such as
Bitcoin has dominated the headlines, a broader set of changes by
advances in technology are likely to eventually have a more profound
and lasting impact on central banks. While it is early to speak of
disruption of cryptocurrencies to central banking, it is worth
considering if the looming changes to money, financial markets, and
payments systems will have significant repercussions for the operation
of central banks and their ability to deliver on key objectives such as

1
) Łukasiewicz-Kamińska, A. (2015). Digital currencies and their impact on monetary
systems. (397).

3
inflation targeting and financial stability. New forms of
cryptocurrency and new channels for moving and settling funds within
and between economies could also have implications for international
capital flows and exchange rates, which are of particular relevance for
emerging market central banks (Prasad, 2018)(1). However, this will
not be the focus of this study .

1.2. Research Problem

Financial Innovation is an ongoing process in the banking
industry. Cryptocurrency is a form of financial innovation that has
developed in the last few years. Also, the awareness of
cryptocurrencies has risen among Egyptian youth and some estimate
that the number of those involved is in thousands.
So the study problem try to answer the following question:
What are the impacts of cryptocurrencies on banking , How can
banks adapt with cryptocurrencies?
1.3. Research Objectives:
This study aims to :
1. Seeks to close the gap in addressing the phenomenon of
cryptocurrencies in the Egyptian business and regulatory
environments.
2. Seeks to see the impact of cryptocurrencies, (i.e. mainly Bitcoin)
on some banking services and products.

) Prasad, E. (2018). Central Banking in a Digital Age: Central Banking in a Digital

1

Age: Central Banking in a Digital Age: Central Banking in a Digital Age: Central
Banking in a Digital Age: Central Banking in a Digital Age: Central Banking in a
Digital Age: Central Banking i. Hutchins Center on Fiscal and Monetary Policy at
Brookings.

4
3. Determine the impact will be cascaded over commercial banks in
an effort to see if they need to respond to this new financial
phenomenon.

1.4. Research Hypotheses

This study was based on the following hypothesis:
H1- There is no impact of cryptocurrencies on banks in Egypt.
H2- There is no impact of banking and financial services and products
on the new entrant: cryptocurrencies.
1.5. Limitation of the Research
1. The period selected for this study is between 2016 and 2020 .
2. The sample of the study will be 5 banks (3 governmental banks,
“NBE, BMIS, BCAI”) and (2 private banks, CIB , QNB)
3. 5 banking professionals, Bitcoin enthusiasts, existing and potential
Bitcoin users in 5 European countries, the USA and Canada (If
possible).
1.6.Research Plan
This study consists of the following chapters :
Chapter 1: Introduction
Chapter 2: Literature Review
Chapter 3: Field Research
Chapter 4: Conclusion and Recommendations

5
Chapter 2

1
2.1. Theoretical Back Ground
2.1.1. Introduction
Bitcoin as the newest technology to serve the function of money
(Ammous, The Bitcoin Standard: the Decentralized Alternative to
Central Banking, 2017), is an invention leveraging the technological
possibilities of the digital age to solve a problem that has persisted for
all of humanity’s existence: how to move economic value between
people, and across time and space. In order to understand Bitcoin, one
must first understand money, and to understand money, there is no
alternative to the study of the function and history of money which Mr
Ammous has brilliantly outlined in his book the Bitcoin Standard
(2017).
2.1.2 Evolution of Money
Ancient human societies recognized barter as a way of fulfilling
their needs. Nevertheless, the more expansive the current market, the
higher the chances for exchange and specialization, but also greater
the dilemma of lots of wants; as what you would like to obtain will be
made by somebody who does not desire what you need to sell. There
are 3 different dimensions to this issue.
Primarily, There's the shortage of coincidence in scales: everything
you would like might not be equal in respect to which you need and
dividing these to smaller components might well not be practical.
Imagine needing to sell cheese to get a residence, you can't purchase
your house in bits equal in value into a cheese, nor will the
homeowner wish to purchase massive sums of cheese of which value
is comparable to the home. Second, there's the absence of coincidence

6
in timeframes: everything you wish to sell can be perishable but that
which you would like to buy is stronger and valuable, which makes it
tough to collect enough of your perishable good to swap in return for
the durable goods in one point over time. Thirdly, there's the absence
of places: one might choose to get a home in a spot in return for a
house in some other location, and this is a dilemma per se. These three
issues show that exchange is exceptionally impractical and lead to
people the need to resort to performing more layers of money to fulfill
their economical needs (Ammous, 2017)(1).
The only way around this is through indirect exchange, the
seller would try to find some other merchandise that the person wants
and find someone who will exchange it with you for what the other
wanted to sell. That intermediary good is a medium of exchange, and
while any good could serve as the medium of exchange, as the scope
and size of the economy grows, it becomes impractical for people to
constantly search for different goods that their counterparty is looking
for, carrying out several exchanges for each exchange they want to
conduct (Ammous, 2017). Being a medium of exchange is the main
function that defines money but primarily for the sake of being
exchanged for other goods. Throughout human history, many things
have served the function of money: gold and silver, most notably, but
also copper, seashells, large stones, salt, cattle, government paper,
precious stones, and even alcohol and cigarettes in certain conditions
(ibid).

1
) Ammous, S. (2017). The Bitcoin Standard: the Decentralized Alternative to Central
Banking. Wiley.
7
Over time, people mastered metal manufacturing into standardized
coins and bars that became recognizable exchange media of consistent
quality, eliminating the need for daily weighing and checking when
payments were made. The three metals most commonly used for this
function are gold, silver, and copper, and their use as coins, from the
time of the Greek king Croesus, who was the first to mint gold coins,
to the 19th century, was the predominant form of money for about
2,500 years (ibid). Britain was the first to introduce a modern gold
standard in 1717, under the influence of mathematician Isaac Newton,
the Royal Mint's warden, the gold standard would play a major role in
promoting its trade internationally throughout its empire. Britain
would remain under a gold standard until 1914. The concept behind
the gold standard was that people could exchange for real gold with
their paper money (Cheun, 2015)(1). The gold standard came to an end
in 1930, but began again after World War II ended. The U.S. replaced
the gold standard permanently in the 1970s. From that moment on,
money became fiat money, based solely on the confidence in the
government that issued the currency; as long as people believe that
money has value, it does.
Today, credit and debit cards have replaced paper money. Some
people don't even want any more real paper money. Plastic cards
facilitate every purchase. We can shop via the internet. You can buy a
product from the other side of the world and have it all shipped in a
matter of clicks and keystrokes to your home. Some countries are
increasingly using electronic payment channels, such as mobile and

1
) Cheun, D. L. (2015). Handbook of Digital Currency . London: Elsevier.
8
internet banking. Smart wallets are opened for digital money. For
example in Egypt, businesses provide smart wallets to fill them with
cash and then pay for all the transactions (Fawry, 2018)(1).
Amid the 2008 financial crisis, which started in the United States,
housing markets crashed and rates of unemployment increased. In
2011, the European Central Bank was forced to decide on bail-outs to
countries throughout the European Union that have failed in banking
system (Douma, 2016)(2). Because of these public financial rescue
packages, people started to mistrust their governments and their
confidence in finance began to decline. Then enters Bitcoin in a new
chapter of the world financial history.
2.1.2.1. What is Bitcoin?
Bitcoin is a network that facilitates digital payment between its
members without third-party intermediation (Ammous, 2015). The
European Central Bank defines cryptocurrencies “as unregulated,
digital money, issued and usually controlled by its developers, used
and accepted by the users of a virtual community” (European Central
Bank, 2012)(3). Fin CEN (Financial Crimes Enforcement Network) –
the financial intelligence unit of the United States of America –
describes cryptocurrencies as “currencies having no centralized issuer
or administrator, which can be acquired by providing computing
capacity by computer users or thanks to their processing effort”.

1
) Fawry. (2018, 08 24). Retrieved from Fawry Website: https://fawry.com/aboutus/
2
) Douma, S. (2016). Bitcoin: the pros and cons of regulation. Leiden: Leiden
University.
3
) European Central Bank (2012). Virtual currency schemes – a further analysis.
Frankfurt: European Central Bank.
9
Back in October 2008, as mentioned above, an unidentified person or
persons using the pseudonym ' Satoshi Nakamoto' published an online
paper on the idea for Bitcoin. The proposal of Nakamoto provided for
a full' peer-to-peer' payment network users would be enabled to trade
in the 'new money' directly, without any government, financial sector
intermediary or third party administrator interfering or participating.
In this way, the Bitcoin network is analogous to an open platform
database like Wikipedia, as Ammous believes (2017). Bitcoin does
not rely on a central authority but on the active involvement of its
network participants.
There is an anecdote that Ammous presents in his book the Bitcoin
Standard (Ammous, 2017) about an earlier form of money that bears
resemblance to Bitcoin: the Rai Stones in the Pacific Island of Yap.
The stones of the Rai are large circular disks with a middle hole
weighing up to four metric tons. They did not come from Yap but
were carried from nearby Palau or Guam. The uniqueness and quality
of the stones made them attractive and revered in Yap, but it was very
difficult to acquire them, because they required a laborious process to
transport them on rafts and canoes. Some of these rocks required
hundreds of people to transport them and, once they got to Yap,
everyone could see them in a prominent position. The owner of the
stone would use it as a method of payment without having to move.
All that would happen was that the owner announces to all cities that
the property of the stone has now moved to the beneficiary. The entire
city will recognize the property of the stone and the recipient can then
pay for it whenever they like. It was not possible to steal the stone

10
because its ownership was known to everyone. This is an absolute
resemblance to Bitcoin stored in the Block chain .
2.1.2.2 Early Trials of Bitcoin
The theory of cryptocurrencies was for a long time part of the
"cypherpunk" group of technologists who sought to undermine
government and major banks' control over the financial system by
specifically putting financial resources into the hands of individuals.
Other developers had tried to create viable decentralized
cryptocurrency but Nakamoto was the first to develop one
cryptocurrency that proved viable on a significant scale (Carlisle,
2017)(1). Regarding early forms of electronic money, the concept of
electronic cash was almost developed at the beginning of the 1980's
by David Chaum. He has developed such a digital cash as a
complement to the current web-based RSA encryption protocol which
led to the establishment of DigiCash. Due to the complications caused
by DigiCash's central bank in Amsterdam, the decision was taken that
such currency was only sold to banks as a product.
The effort to provide e-money had many hopes, but unfortunately it
could not achieve mainstream acceptance due to political and business
issues. The proliferation in small risk investment companies to
develop e-money platforms led to the introduction of a crucial initial
regulatory reaction to such e-money, the 1994 EU study by the
European Union Payment System Working Group to the Board of the
European Monetary Institute. Following the publication of this report,

) Carlisle, D. (2017). Virtual Currencies and Financial Crime Challenges and

1

Opportunities. London: Royal United Services Institute for Defence and Security
Studies.
11
three influential front runners emerged: PayPal, Liberty Reserve and
E-gold, which was founded by former DigiCash employee and
innovator Nick Szabo (Peters, 2015). In the mid 1990s, an internet
network developed that allowed people to pay in gold and other
precious metals, instead of in domestic currency such as dollars or
pounds sterling. The brand was called "e-gold" and reported to have
been supplied by genuine gold and silver from warehouses in London
and other cities. The e-gold platform was payment choice for robbers,
fraudsters and pornographers and was easily and domestically
provided for secure transfers of funds. In April 2007 e-Gold Ltd. and
its owners were charged with money laundering and running an
unregistered cash transmission (Middlebrook & Hughes, 2016)(1).
In the first years of the 21st century, online games have emerged,
allowing large numbers of players to reside in virtual worlds and
communicate with each other. Second Life is one of the most
common, with 26 million subscribers in 2011(Hartley, Ludlow, &
Duff, 2015). Owned by Linden Lab, Inc., Second Life provides a full
virtual economy where inhabitants create avatars of character,
maintain and help virtual businesses, buy and sell virtual land and
objects, and theoretically acquire virtual assets and resources. The
payments are performed in the currency of the virtual universe known
as 'lindens,' which users may trade real money on official exchanges
for lindens, according to a particular set of rules defined by the Game
Terms of Service (ToS) agreement (Harris, Bailenson, Nielsen, &

1
) Middlebrook, S. T., & Hughes, S. J. (2016). Substitutes for Legal Tender: Lessons
from History for the Regulation of Virtual Currencies. Indiana: Maurer School of Law,
Indiana University.
12
Yee, 2009). World of Warcraft is another popular game that allows
users to buy virtual goods in the game using a cryptocurrencies known
as World of Warcraft Gold (Middlebrook & Hughes, 2016).
2.1.3 Differences between Digital Currencies, Cryptocurrencies
and Virtual Assets
The Financial Action Task Force (FATF) tried to define the mayhem
of new terminology of this new technology (2018) as per the
following:
- Fiat currency: Currency issued by a national central bank, typically
in the form of currency banknotes and coins
- Digital currency: Broad term that encompasses any form of currency
that is not tangible.
- Central Bank Digital Currencies (CBDC): Fiat currencies issued by
central banks in place of, or as a complement to, physical currency
(banknotes and coins).
- E-money: A simple version of an electronic currency, wherein the
central bank in effect manages a centralized payment system linked to
electronic “wallets”.
- Official cryptocurrencies: Cryptocurrencies issued by a government
entity, although not considered the equivalent of fiat currency; could
in principle count as legal tender if the government were to decree
this.
- Nonofficial Cryptocurrencies: Digital currencies that are virtual,
typically not backed by a government, and do not constitute legal
tender. Key characteristic is the ostensible anonymity of transactions
conducted principally using Block chain technology (this aspect is

13
similar to cash, but cryptocurrencies are easier to scale than cash and
do not require physical transfers of currency notes). Cryptocurrencies
can either be decentralized (wherein any economic agent with enough
computing power can verify only in digital or electronic form and it is
intangible, unlike a dollar bill or a coin. Often commonly referred to
as digital money or cyber cash are digital currencies, which can only
be owned and exchanged using electronic wallets or designated linked
networks. Virtual Currencies on the other hand are a form of digital
currency that is usually regulated by its developers, used and approved
by members of a particular virtual group, for example, online game
platforms such as Second Life have their own currencies and can be
exchanged between their communities for fat currencies. Therefore,
all cryptocurrencies are digital (they only exist online), but not all
digital currencies are virtual, since they reside outside a specific
interactive environment. Finally, Cryptocurrencies like Bitcoin and
Ethereum are known as cryptocurrencies. The' crypto' in'
cryptocurrency' refers to the use of multiple encryption algorithms and
cryptographic techniques to ensure network-wide security. Such level
of security also makes it difficult to counterfeit cryptocurrencies.
Many cryptocurrencies operate as decentralized systems based on
Block chain without the need for a trusted third party like a central
bank or credit card company. In this case, the use of private and public
keys to facilitate peer-to-peer transfers.
2.1.4 Reasons for Inventing Alternative Currencies
It seems that in the history of mankind the concept of alternative
currencies has been explored for a long time and various types of

14
alternative currencies are usually discussed in two categories: physical
and electronic (Douma, 2016)(1). Tangible currencies, closely
associated with 'commodity money,' derive their worth from relative
scarcity and non-monetary use: (a) currencies with inherent
usefulness, minerals and tobacco in post-WWII Berlin, with prepaid
phone cards being more contemporary examples. Even in Egypt, top
up phone cards issued by private telecommunications companies are
either used as a regular currency or to pay for small-time offences. On
the other hand, there are centralized virtual currencies, examples being
financial, telecom or retail loyalty points; airlines are miles away;
Second Life's Linden Dollar and Warcraft Gold's World are closed-off
transactions systems. Eventually, the digital currency is distributed
and/or decentralized and contains the coins Bitcoin, Litecoin and
Dogecoin. There is no legal entity responsible for the activities, so
they are not governed by traditional rules.
Satoshi was thinking about inventing Bitcoin to circumvent any
monitoring by central banks and allow cryptography to replace trust
(Nakamoto, 2008). On the demand side, there are numerous
socioeconomic forces that drive the need for alternative currencies:
Technology: advanced technology and low-entry barriers that lead to
network effects have been much easier to use. (b) Inefficiencies:
Financial services are priced too high and the entire financial system
is too expensive. (c) financial liberty, where regulation is low on
such cryptocurrencies such as cryptocurrencies have the advantage of
exchanging assets via the web. Such digital currencies can enable

) Douma, S. (2016). Bitcoin: the pros and cons of regulation. Leiden: Leiden
1

University.
15
users to circumvent capital controls and can provide safe havens
during a fiat currency crisis. (d) Investment: digital currency
consumers including bitcoins expect a price appreciation because of
their eventual wider acceptance (Yat et al., 2015).
2.1.5 The Mechanics of the Block chain
In this section, it is beneficial to explain how Block chain works
under the hood. It is not possible to talk about cryptocurrencies and
not explain Block chain . A useful way to picture the Block chain is as
a giant book, with each new block a page added to the top. Each new
page contains all the transactions in the network that have been
completed since the last page was added. All the Bitcoin miners are
competing in a race to solve a complex math problem that will add the
next page (block) on top of all the older pages on the public ledger.
Whichever miner successfully adds the next page is rewarded in
Bitcoins by the Bitcoin protocol.
This analogy is helpful in understanding what makes the Block chain
a secure public ledger. For a bad actor to falsify the Block chain , they
would have to write all the old pages of the “book” as well as new
false counterfeit pages at a speed faster than all the honest users in the
network. This task is nearly impossible, as the attacker would have to
guess the hashes enough times to look like the rest of the system,
matching the combined processing power of the entire network, and to
continue guessing faster than the current block chain. The protocol
accepts the block chain with the higher degree of difficulty. Thus an
attacker would have to guess more hashes, faster, and at a greater
degree of difficulty than the rest of the network and if a major

16
technological breakthrough occurred that allowed a bad actor to
contribute colossal amounts of computing power, it is more efficient if
they add this power honestly (Antonopoulos, 2015) (1) and benefit from
the resources they have in creating wealth to themselves, as bringing
down the network will plummet the value of the Bitcoin and their
investments will be null (Ammous, 2017). Application of all that
computational power to Bitcoin mining would allow that actor to
prove blocks at a faster rate than the rest of the network and would
create a more predictable source of income. This decentralized
mechanism for guaranteeing the security of the system is what makes
the Block chain revolutionary. Rather than having a trusted (and
hackable) intermediary to verify transactions (such as a bank or credit
card company), while imposing large fees for their trouble, the Block
chain is a trustless public ledger with substantially lower transaction
fees. Put another way, the Bitcoin protocol has created a system that
incentivizes good behavior without the need for oversight from a
central authority (Tsukerman, 2017)
Each user’s account has two cryptographically related keys, a “public
key” and a “private key.” The keys are mathematically related, but it
is not possible to use the public key to derive the private key. The
public key, essentially a string of letters and numbers approximately
twenty-seven to thirty-four characters long, is best thought of as an
address listed on the Block chain that anyone in the public can see. It
acts as the destination at which a user receives Bitcoins (Dion, 2013).
Only the owner of the Bitcoin knows the “private key” and can use it

1
) Antonopoulos, A. M. (2015). Mastering Bitcoins. New York: O'reilly.
17
to authorize or “sign” a transfer of Bitcoins to a different account’s
public key address. If a malicious actor were to discover another
user’s private key, that malicious actor would be able to steal that
user’s Bitcoins.
Digital currencies can be easily acquired: (1) in person or online in
exchange for traditional money; (2) in exchange for goods or services;
and (3) by mining. Mining uses the processing power of a computer to
solve complex math problems to keep the public leader Block chain
and "mint" new Bitcoins. The Bitcoin protocol attempts to address the
dual-spending question in non-cash payment processes and to
determine the need for a trusted third party (such as a bank or credit
card company) to check the validity of the transaction. There are no
double costs on cash because the physical cash bills have to be turned
over. A trusted intermediary, for example, bank or credit card
company, maintains a private account leader to track account balances
and prevent double spending in a traditional non-cash payment
system.
The question of replication arises when an owner of a digital asset
such as an MP3 or an online text file will easily copy the file at almost
zero cost (apart from the expense of running the computer) and
moving the data without lost possession. A could reimburse all B and
C with Bitcoin X before the introduction of cryptocurrency. Every
Bitcoin transaction is transmitted to the entire Bitcoin network, and
the actual Bitcoin transaction is transferred to a new owner on the
public directory.

18
2.1.5.1 Public Block chain’s
There are two types of Block chain s, permissioned and permission-
less. Open and permission-less Block chain networks are built on the
premise that everything is easily compromised, and that cash is the
least common denominator. The function of the native token is to
enable a diverse community of people who don't know or trust each
other, without central authorities, to unite themselves around the intent
of a single Block chain or transfer of value (Voshmgir, 2019) (1) .
Therefore, the token is an integral part of the incentive system. Run a
complete node and be a participant on your local computer, verify
transactions on the network, simply download the application from the
internet, without permission of any centralized body. Then the miner
would verify transactions and broadcast the verified data to a Block
chain . It is the same analogy of an auditor who verifies the veracity
and authenticity of transactions. At the time of writing, Bitcoin and
Ethereum can handle only less than a twelve transactions per second,
but Visa and similar settlement solutions would take hundreds of
thousands of transactions at peak time (Voshmgir, 2019). However,
various technological solutions to solve these scalability problems are
currently being proposed. Public networks need algorithmic assurance
secured by consensus processes as "Proof-of-Work" due to lack of
legal relationships. All nodes participating in the consensus process
are untrustworthy because they are anonymous.

1
) Voshmgir, S. (2019). Token Economy . Berlin: Blockchain Hub Berlin. Retrieved
from https://blockchainhub.net/blockchains-and-distributed-ledger-technologies-in-
general/
19
2.1.5.2 Permissioned Block chain’s
On the other hand, private and permissioned ledgers have a federated
system of mutual contractual arrangements. It's a club for invite-only
guests. The network can not be accessed by arbitrary participants.
Members respect each other because they have bilateral agreements
with each other and know who to blame if anything goes wrong.
Therefore, permissioned ledgers do not need a token to stimulate
coordinated action, whereas they are essential to unauthorized
networks. The fact that all participating nodes (computers) identities
are previously known provides natural protection against "sybil
attacks" (attacks to falsify transactions and insert false transactions)
(Leon Perlman, 2017). Private and permissioned ledgers therefore
have to deal with an unknown number of known-beforehand nodes
and can settle many more transactions per second. These also offer
greater security than state-of-the-art Block chain s.
Authorized Block chain s are mainly used by industry consortia. A
pre-selected number of participants, including 60 financial
institutions, conduct a transaction check, each with a node, and 40
sign every block, to enable the block to be valid. The right to access
data from the ledger may be public, partially public or restricted to the
participants, depending on the industry and the use case .

20
 Figure 1: Private and Public Block chain s
Source:https://Block chain hub.net/Block chain s-and-distributed-ledger-technologies-in-general/

2.1.6. Mining
The process of minting new Bitcoins is called “mining” and this is a
purely an online mathematical process (Mullan, 2014)(1). To transfer
an amount of Bitcoin, User A needs to know a Bitcoin address
(equivalent of a bank account number) of the desired recipient, User
B, and sign the transaction with his or her private key (signature
form). The private key functions as a password or a signature form

) Mullan, P. C. (2014). The Digital Currency Challenge. New York: Palgrave

1

Macmillian.
21
that is cryptographically associated with the Bitcoin address. To make
sure that a transaction is processed the sender includes a variable
transaction fee (Ohnesorge, 2018).
The transaction fee is determined by supply and demand. Thus, User
A signs the transaction, which signals User B address, plus the
transaction fee and broadcasts it to the network. Afterwards, miners
(auditors) individually would collect all valid transactions that are in
the memory pool (the queue of ready transactions waiting for being
verified and broadcasted) that they would like to process, according to
the fee attached to them and bundle them into a new block proposal.
Blocks should not exceed the maximum block size, which is currently
1 megabyte for Bitcoin
Afterwards, all miners transform their block proposal into hashes (a
cryptographic representation of data of the block), competing to be the
first miner to create a hash that fulfills a certain rule: that needs a
strong computing power to generate. To make this problem difficult to
prevent bad actors, there is a requirement that the hash has to start
with a certain number of zeroes. The only known way to calculate the
hash of a block in accordance with the required number of zeroes is to
calculate the hash and repeat the procedure until the hash meets the
requirement. Every time you hash the same data, you will get the
exact same hash value as a result (What is Cryptographic Hashing?
MD5, SHA, and More, 2014). This difficulty is adjusted every two

22
weeks and it is said that the change of difficulty is 56% more in the
last 90 days (Coinwarz, 2018)(1).
When the answer to the mathematical problem is found, a valid hash
of a new block is found, the miner then broadcasts his or her new
block to the whole network of miners, currently approaching ten
thousand (bitnodes.com, 2019), and the other miners would accept the
block, if it satisfies all the rules. The successful and lucky miner
receives a reward that is made up of newly “mined” bitcoins, as well
as the combined fees of all the block’s transactions.
Each miner commits processing power toward maintaining the
integrity of transactions needed to efficiently operate the Bitcoin
network. All of this computing power is used to verify transactions. In
the early days of Bitcoin, anyone with a computer could have been a
miner. As the Bitcoin network began in 2009, everyday computers
could have been used to mine and collect new bitcoins. In September
2018, the level of difficulty involved in hashing is much higher
compared to that in the early days (Mullan, 2014). Bitcoin mining
now is a business and a very competitive one that takes place today
for the purpose of investment and profit. About every two weeks the
system recalculates the difficulty factor in creating blocks and sets it
to match the ten-minute intervals (the period necessary to create new
block).
As more coins are mined, the amount of bitcoin compensation gets
smaller. The reward for mining a block is halved every 210,000
blocks which is approximately every four years. In 2017, the reward

1
) Coinwarz. (2018, 09 01). Retrieved from www.coinwarz:
https://www.coinwarz.com/difficulty-charts/bitcoin-difficulty-chart
23
for mining a block dropped to 12.5 Bitcoins, down from 50 bitcoins in
2009. Mining is projected to be exhausted around the year 2140. Once
the available Bitcoin compensation is finally gone, the only incentive
for miners will be a transaction fee (Mullan, 2014).
Security expert Andreas M. Antonopoulos likens Bitcoin mining to a
giant game of competitive Sudoku that resets every time a player
solves the puzzle (Antonopoulos, 2015). It can take a lot of work to
solve the puzzle, but checking the solution is quite simple. Invoking
the example of Sudoko, these problems require a great deal of
computation to prove, but very little computation to verify the result is
true.

Figure 2: Hash rate per second

Source (Block chain , 2018)

24
2.1.7. Transaction fees
2140 is the predicted date the last “satoshi,” or 0.00000001 of Bitcoin
will be mined (Tsukerman, 2017)(1). Transaction costs is predicted to
rise to allow mining to continue to be profitable. Although transaction
fees typically represent a tiny fraction of 0.5% or less of a Bitcoin
miner’s income, the rest comes from newly minted Bitcoins, these
fees still play an important role as they affect the prioritization of
which blocks are processed first, since parties to a transaction can pay
higher fees to incentivize miners to solve their block before other
blocks. This allows transaction parties to influence the speed at which
a transaction is verified. The minimum transaction fee is currently
fixed at 0.0001 Bitcoin, according to Bitcoinfees.com (2018) or a
tenth of a milli-Bitcoin per kilobyte, but if a user wants their
transaction processed more quickly, they can include a higher fee to
incentivize miners.
Transaction fees are included with the bitcoin transaction in order to
have the transaction processed by a miner and confirmed by the
Bitcoin network. The volume of the block for transactions in a block
is currently limited to 1 MB in the Bitcoin network. It is worth
mentioning that transactions price is not based on the transfer amount,
but on the transaction’s size, so it does not matter if one sends one
bitcoin or thousands bitcoin, but it matters the kilobytes of the
transaction per se. This should be compared to the fees taken by
SWIFT network which takes around 15 to 30 US dollars (How Can
Bitcoin Compete with the Money Transfer Market ?, 2019). Also, a

1
) Tsukerman, M. (2017, 09 19). Social Sciences Research Network. Retrieved from
ssrn.com: ssrn.com
25
major determinant in the price is the timing, an expedited transaction
is more expensive. If one demands their transaction in the coming
block, then they have to pay at least 0.11 USD, if they can delay it to
the sixth block, one can pay only 0.04 USD (bitcoinfees, 2018).
Transactions appear for the recipient immediately and can be sent for
free, theoretically; as the sender will have to wait till a miner includes
his or her transaction into the block. The average transaction
confirmation time for the period from January 2012 through June
2015 was 8.32 minutes, while the average transaction fee was
0.000412 bitcoin, or $0.0753 (Ammous, 2015).

2.1.8. Bitcoin Eco System

Cryptocurrencies systems are not working in silo from the society.
They interact with the infrastructure that exists and that was innovated
to help this nascent industry. Therefore, in this section, the researcher
will provide a look into the other constituents of the cryptocurrencies
system and its value chain, i.e. the enablers and feeders. The ECB
states that the “ecosystem” of cryptocurrencies schemes consists
mainly of specific, new categories of actors which were not present in
the payments environment before. Below, the researcher will provide
a description of the most relevant ones (Virtual currency schemes – a
further analysis, 2015)
Inventors program cryptocurrencies and develop the technical part of
its design and network. In some cases, such as Litecoin, these
individuals or organizations are known, whereas in other cases, as in
the case of Bitcoin, their identity (i.e. Satoshi) remains unknown

26
(Ponsford, 2015). To maintain the health of the Bitcoin program,
researchers may propose solutions to a problem, and share their
proposed changes with other protocol developers. This proposal could
be in the form of an email to a mailing list, a formal white paper,
and/or a Bitcoin Improvement Proposal (BIP) on a technical blog.
This proposal would endure the test of voting by miners, the matter
which supports that Bitcoin is “a miner democracy” governed by the
mutual benefit of people who do not know one another, and that the
miners only decide on these proposals (Rochard, 2018)(1).
Secondly, miners and as aforementioned, they are persons, and
sometimes working as a group, who voluntarily combine computer
processing power available in order to validate a set of transactions
(i.e. “block”) and add this to the Block chain ; without this entity, the
decentralized Block chain would not run smoothly, since double-spent
or false units could easily be introduced. As a reward for their work,
miners normally receive a specific number of cryptocurrencies.
Thirdly, there are users or investors who like the idea and decide to
support it by choosing to obtain cryptocurrencies in return for fiat
currencies and who hold this cryptocurrency hoping for price
appreciation. In some cases, they use this new form of currency to
purchase virtual or real goods and services from specific merchants,
for making person-to-person transfers (e.g. cross-border) or getting
lending, or for investment purposes, including speculation as shown in
the next sections.

1
) Rochard, P. (2018, 09 11). Medium. Retrieved from Medium website:
https://medium.com/@pierre_rochard/bitcoin-governance-37e86299470f
27
Fourthly, there are some enablers such as wallet providers that offer a
digital wallet (that’s a computer or mobile phone application) to users
for storing their cryptocurrencies cryptographic keys (signature
forms), initiating transactions and providing an overview of their
transaction history, just like any application for banking services.
There are basically four types of wallets: online wallets, that are PC
and mobile phone wallets and offline wallets, i.e. paper wallets and
hardware wallets (devices resembling flash drives that contain all the
keys while not connected to the Internet). Some services (including
Block chain .info, StrongCoin, and CoinPunk) let the user maintain
control over private keys, meaning that the service is incapable of
spending the user’s bitcoin (nor could hackers do so even if they fully
infiltrated the wallet service). For such firms, the user must keep and
present the private key when needed, and a user who loses the key or
allows it to be compromised is at high risk. There are many anecdotes
of people forgetting or losing the private keys of their wallets and thus
cryptocurrency is lost altogether. Alternatively, other services (such as
Coinbase and Xapo) require users to let the provider store their private
keys, which increases risk if the digital wallet service is compromised
(Böhme, Christin, Edelman, & Moore). Other types of wallets include
hardware wallets, and finally there are paper wallets, where both the
public key and the private keys are printed on a piece of paper,
however the private key should be concealed lest it should be revealed
and thus stolen .
Fifthly: Exchanges offer trading services to users by quoting the
exchange rates by which the exchange will buy/sell cryptocurrencies

28
against the main currencies (US dollar, renminbi, yen, euro) or against
other cryptocurrencies. They generally accept a wide range of
payment options, including cash, credit transfers and payments with
other cryptocurrencies. Moreover, some exchanges also provide
statistics (e.g. volumes traded and volatility), act as wallet providers
and offer (immediate) conversion services for merchants who accept
cryptocurrencies as an alternative payment method (Kapoor, 2016).
One branch of exchanges could be marketplaces such as
localbitcoins.com that does not engage in the buying and selling
themselves but act as a broker for almost every country to trade some
well-known cryptocurrencies.
Since the Block chain is of Bitcoin is immune to hacking until the
writing of this dissertation, hackers target the gatekeepers that enable
conversion between cryptocurrency and fiat currencies, namely,
exchanges. For these reasons, the number of Bitcoin exchanges has
remained modest since it requires a huge investment in security
infrastructure. In spring 2012, the Japan-based Mt. Gox exchange
served over 80 percent of all Bitcoin transactions. However, Mt. Gox
collapsed in early 2014 and reported in its bankruptcy filing “losing”
754,000 of its customers’ bitcoins worth approximately $450 million
at the time of closure (Böhme, Christin, Edelman, & Moore).
Finally, there are other stakeholders who are crucial to the
technology; e.g. merchants, payment facilitators (allowing merchants,
mainly in e-commerce, to accept cryptocurrencies as a payment
method), software developers (developing user interfaces for trading
and storing), computer hardware manufacturers (building specific

29
equipment for mining) and ATM manufacturers, regulatory bodies,
and legal firms. From a financial investment perspective, there are
also providers of investment vehicles and brokers which facilitate
investment in start-up companies and design specific financial
products, such as exchange- traded funds (ETFs) or derivatives. In
addition, there are financial services providers using Bitcoins, such as
lending services (Johnson, 2015) and cross borders transfer services
(wirexapp, 2018).
Banks also are considered an important stakeholder by many
researchers, Hardwin Spenkelink sees that banks are due to the nature
of cryptocurrency as a possible replacement for fiat currency an
important stakeholder.

Figure 3 Bitcoin Ecosystem

Source: (Moser, Bohme, & Breuker, 2014)
2.1.9. Advantages and Disadvantages of Bitcoins
Since its inception in 2008, the Nakamoto paper has caused so much
ink to spell, all scientific research engines such as Scopus, Web of
Science, SSRN and others have papers that tackle this phenomenon,
30
whether economically, technologically, or even in the fields of social
sciences. All this show that this newcomer has many facets, each one
can interpret it due to their stance whether a supporter or an opponent.
Therefore, the title of this section is a bit misleading, as the benefits
and disadvantages of Bitcoin is a matter of perspective to the speaker,
be them a cryptocurrencies investor, regulator or even a mere
observer. Therefore, in this section, the researcher will try to include
the most common features that are believed to be true on the
“advantages” of Bitcoin as well as the mutually agreed
“disadvantages”. It is believed that the advantages of Bitcoin have
transformed it from a “game” for geeks into a household name few
years later.
2.1.9.1 Advantages of Bitcoin
2.1.9.1.1 Relatively Low Transaction Costs
The ability of Bitcoin to lower transaction costs is particularly
important for users and is one of its characteristics that drives its
popularity today. Bitcoin is particularly attractive to small companies
finding ways to reduce their transaction costs. Although credit cards
make transactions much easier and faster for consumers; merchants
must pay various fees, transaction fees, statement fees and customer
service fees. These fees are 2 to 3 percent of the transaction. For
businesses with a profit margin of 5 percent, transaction fees are
reduced by 1 percent of their revenues .
Bitcoin also has a great potential to reduce transaction costs needed to
return remittances to family members in developing countries.
Remittances to developing countries is estimated at $454 billion in

31
2015 (Maloumby-Baka, Kingombe, & others, 2015). The transaction
fee for wire services such as Western Union and MoneyGram for
transactions in third quarter 2014 was an average of about 8 percent.
But the transaction fee for Bitcoin was less than 0.0005 Bitcoins, or
almost 1 percent.
2.1.9.1.2 Reducing Inflation
Inflation occurs when commodity and/or service price levels rise
(Investopedia, 2018)(1). Inflation is calculated annually on the basis of
increases in percentages. When prices go up, money purchases a
smaller portion of an inflation-related good or service. During this
inflation period, the value of money may fluctuate. A governing body
(such as a central bank) has total control over the rate of issuance with
a traditional currency. However, "Bitcoin should, according to its
founders and proponents, solve the shortcomings of traditional
currencies (for example inflation) resulting from monopolistic central
banks supply and control" (European Central Bank, 2012).
There is no single regulating body for Bitcoin to regulate the prices.
Bitcoin is created through its peer-to-peer network and the Bitcoin
Protocol has specified how money is created, the speeds at which the
currency is distributed and the sum of Bitcoin each (controlled
supply). There are more than 18 million Bitcoins (Block chain , 2019)
and only twenty-one million Bitcoins in existence in 2140, so inflation
is always kept under control.

1
) Investopedia. (2018, 11 04). Retrieved from www.investopedia.com:
https://www.investopedia.com/terms/i/inflation.asp
32
2.1.9.1.3 Speed, Cost and Convenience
Digital currency can transcend national borders and facilitate capital
free movement (Cavialli, 2019). "In a world increasingly focused on
the integration of technology into our lives, software-based financing
users can create long-lasting and worthwhile effects" (Plassaras,
2013). A financial transaction using Bitcoin is now faster and cheaper
than any conventional transaction. It takes several days to send wire
transfers around the world and receive a payment using fiat currencies
and the payer would end up paying a small percentage of transaction
fees. In a matter of few minutes, a person can pass Bitcoin worldwide
with little transaction fees or any other costs incurred.
Another positive effect is that an individual can use Bitcoin globally
without needing to swap currency (i.e. dollar to euro) and without
transaction fees. "Digital currencies may escape these costs because
they are intended to be used across the internet transnationally. Digital
currencies are 'universal' because they can work outside a system that
uses multiple currency, eliminating currency exchange transaction
costs " (Plassaras, 2013) (1).
As long as there are places in any country where a user accepts
Bitcoin, they can pay using their cryptocurrencies, which means that a
banking fee and an ATM fee will not be payable. This is not possible
in conventional currencies; when a person enters a foreign country and
the bank charges and/or ATM charges associated with them, he is
required to exchange currencies. For contrast, PayPal is accepted
globally, but there are fees associated with it when you buy something

1
) Plassaras, N. A. (2013). Plassaras, N. A. Regulating digital currencies: bringing
bitcoin within the reach of the IMF. 14, 377-407. 14.
33
in another currency. Bitcoin is cheaper than PayPal, according to
“Crypto Michaël”, a trader from Amsterdam who has published a
tweet with some data: “Transferring abroad $100,000 in $BTC
through the Block chain : fees of $5-50. Transferring abroad $100,000
of value through Paypal: fees of $1,500-4,000 + PayPal is able to lock
the amount for some period” (Cavialli, 2019). Thus, Bitcoin could
also be a power that changes the way we use currency in our culture
and makes cash free. Credit and debit cards began the move to a
cashless society, but Bitcoins could ultimately eliminate all fiat
currency. "The cryptocurrencies is one step towards a cashless society
and it is an ecosystem that not only develops in terms of payments but
also the way that we value activity (Chahal, 2012).
2.1.9.1.4 Replacing Trust by Mathematics
In a typical Bitcoin transaction, no individual person or institution has
to be trusted in making transaction; miners compete with one another
to verify it, because the verification of transactions involves receiving
new coins. Cryptography replaced trust, since every single transaction
depends not on a single person or process approving the transaction,
but on a cryptographic proof. Ammous (2015) believes that all other
existing payment services require trust in several non-transaction
parties: a financial institution, possibly more than one; a credit card
processing company; and central banks issuing the currency in which
the transaction is denominated. In the same way, privacy can be one of
the benefits of Bitcoins; because you can verify that the recipient is
not cheating, you don't have to deal with them directly, and therefore
show your real identity. Alternatively, bitcoins can be sent and

34
received with confidentiality which is also pursued by criminals. This
will, however, be addressed in the next section.
2.1.9.1.5 No Single Point of Failure
Bitcoin is often criticised for not having a centralized body, however
many researchers believe this is the core advantage of Bitcoin.
Ammous (2015) sees that without a central server that manages all
transfers, the process is not collapsing at all and is extremely resilient
to attack or technical failure. A physical or electronic attack that
destroys a single network computer will not dent digital transfers
technology, currency or Block chain . Such an attack could kill a
fraction of Bitcoin's processing power but leave the Block chain intact
as an asset database and transaction record. An attack may damage the
individual computer owners, but it does not affect the credibility of the
bitcoin code or the currency. Until two computers in all parts of the
world communicate, the Block chain can survive as a record of all
transactions and coin ownership. In addition, the Bitcoin network has
survived various types of attacks and remained resilient. The attacker's
economic advantage is to frankly join the network rather than break it,
as stated in the Mining section above.
Ammous sees that Bitcoin embodies the concept of distributed
knowledge. The work of Hayek was influenced by Wikipedia
(Mangu-Ward 2007) whose strength lies in the fact that it depends not
on centralized authority but on decentralized information. Distributed
knowledge makes Wikipedia robust, advanced, up-to-date and
incredibly inexpensive to run and access, as well as the fact that it is
easy to revise it.

35
2.1.9.1.6 Transparency
One time it was said that the bitcoin system was like a crystal-clear
box with an invincible padlock on it; that is, the contents can be
viewed, but not broken and the contents stolen, at least to this date. All
transactions are recorded on the Block chain and all miners verify that
they are sound blocks, so that nobody can claim that there has been
double spending in the future. Moreover, it is purely consensual to use
bitcoin: everyone who traded Bitcoins in goods, services or other
currencies and everyone who has dedicated hardware to network
maintenance has done so freely (Ammous, 2015). Anyone who, for
whatever reason, does not like the concept will completely isolate
themselves from it and do not suffer adverse consequences. Everyone
recognizes that it is a volatile investment that could lead to loss of
money.
2.1.9.2 The Darker side of Cryptocurrencies: the disadvantages
Bitcoin has been associated to some nefarious characteristics, it has
been perceived as the method of choice to hackers, online black
markets and money launderers. This did not come as a surprise as
Bitcoin was associated with the online black market Silkroad which
sold all types of drugs, firearms, contraband materials. The researcher
believes that the Bitcoin is as equally dangerous as cash; both have
comparative advantages, Bitcoin can be transferred around the world
in minutes while cash needs no medium of exchange. However, many
cite other reasons for having such notoriety; this could include high
volatility, enabling crime, and lack of acceptance, among others.

36
2.1.9.2.1 Crime Enabler
Until 2013, cryptocurrencies, mainly Bitcoin, were not universally
known "currency" or software, although it was in operation since
2009. Bitcoin was the preferred payment option in the Silk Road
Market. It was active as a deep web black market platform between
February 2011 and October 2013 (Tsukerman, 2017)(1). Users may
order drugs and other illegal goods via mail using the anonymized
network TOR (the Onion Router), the alias for Bitcoin, plus additional
services that hide payments called tumbling. It is estimated that Silk
Road transactions were $1.2 million monthly while operational.
But on 1 October 2013, investigators and federal prosecutors in New
York, Federal Bureau of Investigation (FBI) arrested Ross Ulbricht,
the master mind of the Silk Road, also dubbed Dread Pirate Roberts,
in a San Francisco library with an Open Laptop. The FBI was able to
shut down Silk Road and capture almost 30,000 Bitcoins. Following
the fall of the Silkroad, other parallel nefarious websites followed,
other versions of Silk Road 2.0 emerged in November 2013 (and shut
down by the federal authorities in November 2014) (Tsukerman,
2017).
Cryptocurrencies can also be a tool for evading taxes and financial
sanctions and even terrorist financing (Manheim, Johnston, Baron, &
Dion-Schwarz, 2017). In many countries, retailers trading across
cryptocurrencies are responsible for reporting their income to tax
authorities, which gives way to tax evasion. The pseudonymous nature
of cryptocurrencies can also help businesses to hold as many

1
) Tsukerman, M. (2017, 09 19). Social Sciences Research Network. Retrieved from
ssrn.com: ssrn.com
37
unreported wallets as they want, likely without any identifying
information. Thirdly and most notably, Bitcoin and other
cryptocurrencies are not based on financial intermediaries such as
banks which can be compelled to submit documents. (Tsukerman,
2017). Even worse, thanks to their anonymity and easy access,
cryptocurrencies are linked to terrorist groups although there is little
confirmed linkage on this.
2.1.9.2.2 Easy to Lose
Another key threat to cryptocurrencies’users is that their wealth could
be stolen by hackers, as the cryptocurrencies exchanges and other
based businesses may have inadequate protection. Consequently, these
businesses may not have the resources to protect themselves from
hackers compared to larger institutions like banks. Mt. Gox, one of
Bitcoin's oldest exchanges, acts as a wake-up call on this. In 2013, it
was responsible for nearly 80 percent of all Bitcoin activity
(Trautman, 2014)(1). Hackers robbed around 850,000 Bitcoins on
February 25, 2014 (Mochizuki & Warnock, 2014). Mt. Gox could
eventually recover about 200,000 of the Bitcoins that were stolen. Mt.
Gox customers lost their money for good, and they could not complain
to or reimburse them from any central agency. The collapse of this
exchange is a cautionary tale, on not the security of the Block chain
itself, but the frailty of intermediaries who are not subject to the same
standards of capital flows as regular banks and exchanges.

) Trautman, L. (2014). Lawrence Trautman, Virtual Currencies; Bitcoin & What Now
1

After Liberty Reserve, Silk Road, and Mt. Gox? Richmond Journal of Law and
Technology.
38
If cryptocurrencies are stored on computer hard drives, computer
hackers may also have access to them; many people have reported that
they lost millions of dollars in Bitcoins, for instance, because of
computer hackers and lost hard disks. In 2013, a British man threw
away a computer hard drive holding 7500 Bitcoins, worth seven
million and a half dollars at the time (Cheun 2015). The European
banking regulator has given this alert to its people that they will be as
vigilant of digital wallets as they are with traditional wallets and
further encourages the holders of Bitcoins "to not store large quantities
of bitcoins for an extended period of time in their digital wallets"
(Presse, 2013).
2.1.9.2.3 Volatility
Bitcoin was created more than 10 years ago, and never was a
household name until it hit its all-time high of around USD 20000 by
the end of 2017 before dropping to around USD 7000 by the
beginning of 2018 (Block chain , 2018). This can make bitcoins a
volatile asset because the future price of bitcoins is difficult to predict
or to conclude business agreements with bitcoins. One can think of an
importer using bitcoins to buy/import products, this will entail a huge
risk margin, which could erode their resources and not just their
income.
Investing in Bitcoins can be highly risky, so a user can never be sure
of his investment. The explanation why the price fluctuates so
strongly is that a Bitcoin's value depends on its demand. The Bitcoin
market is still very small; it does not take much to increase or decrease
market prices, which makes the Bitcoin price unpredictable, or as the

39
European Central Bank puts it that the development of the bitcoin
exchange rate reveals that in a matter of minutes an unstable and
illiquid currency will vanish almost entirely, panicing tens of
thousands of users (2012). Bitcoin's price fluctuates on the basis of the
cryptocurrencies market. In August 2017, after China's government
declared that it would no longer deal with bitcoins, the price dropped
by more than 20%. And even before that, when the US Congress
requested a "friendly" hearing in 2013, prices rose to the then
astronomical USD 700 (Jeffries, 2013)(1). The price then fell back
when Bitcoin exchange like Mt. Gox went offline and customers lost
their money.
In addition, the wealthiest Bitcoin wallets are concentrated in the
hands of few addresses or probably people, because no one knows
who owns what. Roughly 3.13% bitcoin addresses (accounts) have
roughly 95 percent of the total balance (Bitinfocharts, 2018). Small
investors are therefore at the hands of Bitcoin Whales, who can induce
price decreases or raises by buying and selling large amounts of
bitcoins.

1
) Jeffries, A. (2013, 11 18). The Verge. Retrieved from www.theverge.com:
https://www.theverge.com/2013/11/18/5119062/senate-committee-hearing-on-bitcoin
40
 Figure 4 Distribution of Bitcoin Wealth

Source: bitinfocharts.com
2.1.9.2.4 Lack of Acceptance
This leads us to the comparable nature of cryptocurrencies to cash, a
100 USD bill is usable almost everywhere on this planet. It is
desirable, exchangeable and investable. Bitcoin has been of payment.
The 99bitcoins website has a modest list of retailers who welcome
Bitcoins for their products / services (Chokun, 2018), and it was
believed that they would consider the cryptocurrencies as a marketing
rather than a serious business payment option for their consumers. The
problem with embracing Bitcoin commodities in exchange of goods
and services is that dealers have to change their selling prices
temporarily to Bitcoins, instead, items of traditional currency have a
price tag and the quality is paid in cryptocurrencies. It is even
problematic in Egypt as the use of bank products such as payment
cards and mobile wallets is not sufficiently saturated, which makes
cryptocurrencies something for most people from the future. For
example, in a hobby-based forum such as Reddit or a bitcoin facebook
41
page, you can meet someone who advertises his flat or vehicle, but
that is not common still for everyday uses.
Having stated all of the advantages and disadvantages of Bitcoin, the
researcher believes that it is a multi-faceted phenomenon, where users
and investors see that it has more advantages to them, while regulatory
bodies in different countries are more skeptical about them, as will be
delineated in the next chapter. However, the researcher believes that
this new fad of cryptocurrencies has more advantages than
disadvantages; it is true that any sort of money can be used in crime,
starting from airtime recharge cards issued by the Telecom companies,
shares, assets of different type and shapes. The Egyptian Law related
to combating money laundering for instance defines money in a broad
form whether it is a property, shares, contracts, or in any digital or
electronic form (Central Bank of Egypt, 2018). Therefore, making
cryptocurrencies, especially Bitcoin as synonymous to crime is a
fallacy and should not be propagated. Not all cryptocurrencies are
equal, some are more vulnerable to use in crimes, such notorious ones
are like Monero, Dash and Z-Cash (they will be tackled in the next
section), which allow for total anonymity.
In this vein, the researcher believes that cash remains the ultimate
anonymous currency. The U.S. $100 note is particularly popular for
laundering the profits of illicit activities. It is anecdotal to use the
figure of the Drugs Tycoon in the 80s, Pablo Escobar who had
colossal stacks of cash, and rumor has it that rats ate 2.1 billion USD

42
(Britannica, 2018). Professor Edgar Feige (Feige, 2011)(1) estimates
that U.S. currency is the preferred medium for facilitating clandestine
transactions, and for storing illicit and untaxed wealth. It can be hard
to track the movements of a briefcase full of $100 bills in a direct
transaction between two parties and it is less difficult to track it in a
transaction involving Bitcoin, as there are free services that try to
scrutinize and search the Block chain (the general ledger where
transactions are recorded) such as blockeer.com, and there are more
sophisticated tools such as the paid service of the Chainalysis Reactor
or the Bitfury Crystal Software. While Cash needs the two involved
parties to exchange hands with cash, Bitcoin needs a whole lot more,
it needs an internet connection, a wallet and an exchange house that
turns this virtual sort of money into a liquid cash state. On the flip
side, Bitcoin can be transferred into any place on earth in a matter of
seconds, and it can be sent from anywhere. Ukraine protestors in 2014
raised banners requesting donations in bitcoins, showing off their
barcodes representing their wallets (Sothurst, 2018), therefore, if
anyone was watching this scene on TV anywhere on the world, and
sympathetic to their cause, they can, using their bitcoin wallets on
their mobile phone, transfer money to those protestors.
2.1.10. Altcoins
Bitcoin is the first decentralized, but not the only digital currency.
Since the launch of Bitcoin, hundreds of alternate digital currencies,
commonly called "altcoins," have been launched. In 2009, Bitcoin was
released. It wasn't until mid-2011, that the first Bitcoin-like based

) Feige, E. L. (2011). New Estimates of U.S. Currency Abroad, the Domestic Money
1

Supply and the Unreported Economy. Munich Personal RePEc Archive.

43
platform was introduced, Namecoin. The Altcoin currencies
mushroomed in 2013, followed by hundreds (Narayanan, 2016).
Today, according to the outstanding exchange house Coinmarketcap,
they have risen to 2080 in November 2018. There was a website
called coingen.io, which had offered off-shelf coins following a
simple installation process. Each of these coins claim to have a certain
promise, Zerocoin, for example, promises complete anonymity;
Litecoin promises faster processing of transactions and Peercoin
claims to distribute new coins based on coins possession rather than
power accumulation which is supposed to enable the early adopters to
accumulate fewer wealth. Peercoin is also expected to continue to
increase its supply indefinitely by 1 million a year.
Figure 5 Top Cryptocurrencies by market capitalization

Source: Coinmarketcap.com
Altcoins may often involve a lot of fraud from their developers as
well. When the makers of an altcoin build a coin and a real trading

44
market for it, they are very wealthy. Since they definitely own a
significant number of coins because they are the early explorers before
the mining issue rises, creators will be able to sell their coins if they
choose. It has drawn many investors, whether they are true
businessmen or small investors to try their luck with cryptocurrencies.
This potential also prompted scammers who would like to have some
new coins (Jhonsa, 2018). Pressure sales tactics may include massive
returns and/or guaranteed profits, statements on how to convert
cryptocurrency / token functions of a major industry, a White Paper
full of questionable or mistaken points, a lack of a clear plan and a in
social and cryptocurrency forums of a previously unknown business.
The consequences of this resulted in multiple theft occasions; the
greatest in history, was the stealing by Japanese exchangers of about
USD 526 million NEM (a newly introduced cryptocurrency) in
January 2018 (Devoe, 2018). That comes second to the grand theft of
Ethereum, where a hacker looted nearly USD 150 million from the
group known as the DAO. A hacker discovered a software backdoor
allowing him to drain the DAO funds (Falken, 2017).
Compared to bitcoin, altcoins seem to lose. Bitcoin has the benefit of
the first mover. As a first digital currency, Bitcoin's credibility and
popularity of the brand are far greater than that of other altcoins, the
market capitalization surpasses that of the next ten coins together on
22 November 2018 according to Coinmarketcap information (2018).
A myriad of utilities and feeding sectors such as exchanges, online
wallets and payment providers support Bitcoin. Few of these services
accept few altcoins, mainly the big and well-known ones, like

45
Ethereum, Ripple, Bitcoin Cash, and Monero. In contrast, Bitcoin acts
as a means of exchange for many, and a number of websites have
started to use it as a means of paying while using other coins is still
challenging.
Altcoins gained a certain popularity to many people's minds. This was
because some of them, such as Monero, Zcash, and Dash, had intrinsic
appeal to criminals. These "Privacy" coins have many technical
features which make the tracking of transactions almost impossible for
senders. The Block chain of these coins simply shreds transactions
from various senders into smaller amounts, thereby obstructing the
source of the funds (O'driscol, 2018).
2.1.11.Functions of Money
Several researchers examined whether or not cryptocurrencies,
particularly bitcoins, bear money functions. There are several
questions here; why would anyone use cryptocurrencies instead of
established banking products? For many, cryptocurrencies are self-
satisfactory, they are good money and can live accordingly (Krypto,
2018)(1). In ancient times, Aristotle suggested four properties required
to be a "good form" of money (Tasca, Aste, Pelizzon, & Perony,
2015):
1. It must be durable. Money has to survive the time test and the
weather, too. It should not weaken, corrode or change over time.
2. It needs to be portable. Money must have a high "worth" of its
weight and size.

1
) Krypto, B. (2018, 01 13). Cryptoincome. Retrieved from Cryptoincome.io:
http://cryptoincome.io/can-survive-cryptocurrency-yes-im-now/
46
3. It must be broken. Money should not change its basic
characteristics and should be fairly easy to separate and recombine.
4. It must be of inherent or intrinsic value. This money value should
be free of any other item and included in the currency itself.
The question here rises if cryptocurrencies is consistent with these
criteria. Some researchers, including Ammous (2017) may argue that
Bitcoin is a long-lasting example: its security feature is iron-clad and
its life is eternal on the Block chain information system. It is also
portable available from any computer or mobile device connected to
the Internet. It is divisible one bitcoin can be divided to 8 decimal
places (the least unit known as a satoshi). It has an inherent value.
Some have claimed that Bitcoin has absolutely no intrinsic value
(Hayes, 2015), but it has been shown that Bitcoin has some kind of
intrinsic value, directly related to its production cost. In other words, it
is like a product generated in a competitive market: energy enters, and
Bitcoin emerges, (Ammous, 2017).
2.1.12. Disrupting Lending Activities
Banks were created to be an intermediary between those who have
excess funds and those who do not. They act as a pump to the
economy by providing entrepreneurs with their necessary cash to start
their small-scale projects or even securing the needs of international
conglomerates with their big financial operations worldwide. The
lending process by banks are lengthy and cumbersome and could take
weeks to approve. Technology and telecommunications boom have
benefitted the lending scene either through mobile technology or
through cryptocurrencies. Financial technology (fintech) has brought

47
the idea and practice of “Crowd funding” which means according to
Investopedia “a way to source money for a company by asking a large
number of backers to each invest a relatively small amount in it. In
return, backers receive equity shares of the company. Investment
crowdfunding may also entail obtaining debt as well as equity stakes”
(Investopedia, 2019). This term is more specific than the more general
term crowdsourcing, which is the acquisition of any resource
(services, creative content, funds, etc.) from a large group that is
typically online (Investopedia, 2019)(1).
As commerce evolves from analog to digital, lending arrangements
tend to follow suit. This evolution is visible in the growth of person-
to-person (P2P) on-line lending. According to the Federal Reserve
Bank of Cleveland, such P2P lending has experienced rapid growth
averaging 84 % a quarter since 2007:Q2, during which traditional
consumer finance loans have declined by about half. In the same vein,
the P2P website LendingClub founder, Renaud Laplanche, believed
that credit card companies levied high interest to their consumers on
unpaid balances (Tasca, 2015). Given the minute rate of interest
earned on bank deposits in many jurisdictions, the very wide spread
has provided an opportunity, and LendingClub seized it. Since its
beginning in 2006, over $9 billion of loans have been provided by
their website. These loans charged a lower interest rate than
comparable loans made by banks, but the platform also paid a higher
interest rate than banks. As a result, the overall spread between

1
) Sherry, B. (2019, June 25). Investopedia. Retrieved from investopedia.org:
https://www.investopedia.com/news/what-ico/
48
borrowing and lending rates come closer, resulting in a win-win
beneficial situation for borrowers and lenders alike.
The researcher will cite the experiences of BTC Jam and bitbond to
show how they managed to operate using bitcoins only especially in
this turbulent hikes and nosedives of bitcoin prices. BTC Jam, in just
over a 2 year history, has been the intermediary for over 52,000 BTCs
(Tasca, Aste, Pelizzon, & Perony, 2015), or roughly $15 million of
loans.
All these activities and optimistic past have paved the way for
cryptocurrencies loans, which was the essential ingredient necessary
to enable a true change in the lending and borrowing paradigm.
Interestingly, digital currencies can be the necessary ingredient for a
more decentralized credit and borrowing environment. The new P2P
credit and lending system, which is directly focused on Bitcoin, marks
a major step in absolute decentralization. However, this opportunity is
not widely provided, yet. Small actors up to now: BTCJam, Bitbond
and Bit Lending Club, this idea is almost brand new. These lending
platforms operate much like LendingClub, but they use Bitcoin
instead of relying on USD. The researcher will quote the experience of
both BTC Jam and bitbond findings to demonstrate how they only
succeeded in using bitcoins in these increases in bitcoin prices.
2.1.12.1 BTCJAM
According to (Tasca et al, 2015). BTC Jam has been intermediary
over 52,000 BTCs ( 2015) or about $15 million in loans over just over
two years. These numbers are remarkable for a startup company
operating in completely uncharted waters. Perhaps the most

49
impressive part of BTCJam's lending experience is its scope: 16,342
loans have been served in 121 countries, many of which have been
loans in areas normally deemed unbanked. Therefore, for this new
BTC banking platform a vast majority of the world population, which
remains unbanked, could be potential customers. Bitcoin's
transnational scope is impressive, as BTC Jam is the first P2P loans
platform to successfully cross domestic borders. Using BTC as a
backbone of the network, BTC Jam (and other companies in this
space) transcend national borders in a new revolutionary step for
banking services.
As a result, one might expect such P2P lending firms to enable
smaller-sized loans. Under traditional banking lending arrangements,
it’s unprofitable to launch a financial business in many areas of the
world that are mostly rural and lacking the financial resourceswhich
creates the preconditions for remaining unbanked. But the size of the
loan is irrelevant to BTC Jam. The majority of their costs are fixed,
namely maintaining and developing the platform. They only collect a
closing fee, which is a percentage of the loan amount. So, this
platform has a strong incentive to spread their fixed costs and close as
many loans as possible, which allows them to accommodate small and
short duration loans.
The average size of a BTC Jam loan during its first year of service
was about $400 to $600. On the other hand, Prosper had a total loan
amount of nearly ten times greater than $4800 in its first financial year
(Tasca, Aste, Pelizzon & Perony, 2015). Nevertheless, the BTC Jam
financial journey came to a close when they posted on their website:'

50
The legal issues around Bitcoin and our problems in applying Bitcoin
software to poor communities worldwide are clearly beyond our
ability ' (btcjam, 2017). They note on the same site that they provided
more than 20,600 loans from 2012 to 2016 in 122 countries, totalling
more than 64,000 Bitcoin loans and allowed a time of grace to
borrowers who kept bitcoins with them to withdraw.
Figure 6 BTC JAM now defunct website

Source: https://www.ccn.com/bitcoin-lender-loanbase-sees-atleast-8-stolen-btc/

2.1.12.2 Bitbond
The other P2P lender bitbond, on the other hand, is still running. Its
modus operandi is to draw up a loan agreement for a certain number
of Bitcoins between one borrower and one or more loan providers
(Marionow, 2016)(1). Bitcoin loans can last from 6 weeks to 5 years.
The fee is either a onetime refund equivalent to a zero coupon
mortgage or a quarterly payout similar to an amortizing loan.
The rating requires an identity check and is based on a financial
evaluation. A loan request is published on the Bitbond marketplace to

) Marionow, M. (2016, 02 21). Banking hub. Retrieved from www.bankinghub.eu:

1

https://www.bankinghub.eu/innovation-digital/bitbond-p2p-lending-by-means-
of-bitcoin-technology-no-bank-account-needed
51
receive funding and lenders can place offers during an auction. The
loan application remains on the market for up to 14 days. The data
sent to the borrowers are anonymized. All borrowers and creditors are
shown a payment schedule after an auction has been successfully
completed in their private section of the site (Bitcoin Wiki, 2019)
Bitboard CEO Marcus Marionow elaborated more on the value added
his company gives to lenders and lenders. He stated, "Classic" P2P
lending platforms still use banks for the processing and execution of
payments (Lo, 2018). Bitbond varies, though, because it is totally
independent of the banking system. They use Bitcoin as a payment
and technology network. This allows them to cut costs by the
advantages involved. Banks charge a large fee for any payments they
support to process if they first accept conventional P2P lending sites
as customers; such charges do not extend to consumers of Bitbond.
The lenders pay no charges and a nominal one-time payment of 1-3
percent, which is substantially lower than any other p2p lending
platform.
The idea behind Bitbond is to solely depend on bitcoin in their lending
transactions, and that would not have been possible working with any
of the world’s fiat currencies; if, for example, investors (lenders) from
Europe wanted to lend money to a small business owner located in
Argentina, then the costs of the bank transfers and compliance costs
alone would make it an unprofitable investment and eat up all the
lending amount. With bitcoin however, anyone can send
cryptocurrencies around the world in seconds, for an almost negligible
fee.

52
Bitbond relies solely on Bitcoin in its borrowing operations, which
would not have been possible to work with Euros or Dollars; for
example as investors from Germany, America and Asia would have
lent the capital to a Argentinian-based small business owner, the loans
between banks and the cost of compliance alone would turn the
investment into an unprofitable venture. But with Bitcoin anyone can
submit virtual money around the world for an almost meaningless
payment in seconds.

Figure 7 Bitbond Loan request

Source: https://www.bitbond.com/fixed-income-investments

53
2.1.12.2 Online Payments
Cryptocurrencies have many potential uses, such as money, payment
system, insurance, and financial products such as derivatives, and
credit and debit cards denominated by them, especially Bitcoin. With
the number of alternative ways of payment increasing, conventional
online payment systems, including credit cards, are declining as they
compete with a rivalry that offers greater ease of use, greater security
and reduced costs. As Koley (Baur, Bühler, Bick, & Bonorden, 2015)
states, while Visa and MasterCard's digital duopoly still have healthy
growth rates (9.5% and 9.6% respectively) and are the favored
(offline) point of sale (POS) process, companies such as JCB and
Union Pay are dramatically outperforming them (20.7 and 44.8%
respectively). It gives an indication of rising consumer behavior
including a perceived viable solution for credit cards and a progressive
change in the demand for transactions. PayPal, originally intended for
eBay transactions, is now one of the main players in online payment.
Furthermore, major companies, including Google and Apple, which
have completely different businesses than banking, have already
achieved tremendous recognition and outreach among societies and
enterprises. All these solutions remain linked to the user's regular bank
account and the traditional concept of the money. The technology in
this area that can be much more disruptive usually is attributed to
cryptocurrencies. If used to settle online payments, supporters of these
new payment systems cite various benefits, such as a fully open, peer-
to-peer transaction system, elimination of chargeback risks, lower
associated transaction costs, increased safety, smoother use and full

54
support for mobile devices (Baur A. , Bühler, Bick, & Bonorden,
2017). The only thing that a user needs to receive and send bitcoins is
an internet connection. This is different in the traditional system,
where banks can resort to derisking and prevent some sectors, denies
some clients from having a bank account, hence a payment card
(Spenklink, 2014). One can see that the actual transaction rates are
comparatively much smaller than online payments. As
aforementioned, Visa and Mastercard can get about 3% of the
transaction money as a fee, which erodes retailers’ profit; Bitcoin
transaction fees are about $0.05 USD for Bitcoin sending, the cost of
sending big sums of money is far lower than the alternatives like
PayPal, credit cards, and banks transfers which charge a percentage of
the value of the transaction. Therefore, Bitcoin is believed to be a
viable option for micropayments.
Also, there is plenty of room for increasing profit margins, if the risks
of fraud / chargebacks can be reduced or eliminated through digital
currencies. Retail payments could also be cheaper if charges were
substantially reduced from one currency to another (Bass, Bault, &
Ghose, 2014)(1). However, the only drawback with paying
micropayments by cryptocurrencies is the speed by which these
transactions are carried out; the normal block takes about 10 minutes,
at least, to be broadcasted to the network and thus verified. So, while
buying a cup of coffee, it is difficult to keep customers waiting that
long to get their transactions verified. As a result, many projects are in

1
) Bass, E., Bault, T., & Ghose, R. (2014). Disruptive Innovations II. CitiGroup.
55
the making now to create off-chain transactions, e.g Lightening
Networks for these types of transactions.
There is no statistics on the value and volume of retail transactions via
cryptocurrencies, however, they are not likely to be comparable with
transactions done by payment service providers so it is believed that
this new payment method will need very long time to be competitive
with the credit card companies. However this will not be the same in
the future, as Bitcoin (BTC) is expected to usurp current global
payment systems over the decade, a recent DataLight tech start-up
report concluded on April 2 (Datalight, 2019). In a study on Bitcoin
network transactions versus those with Visa, MasterCard and PayPal,
the company estimated that if the current rate of network growth of
Bitcoin persists, it will wipe out competition from incumbents of the
sector. "Bitcoin has been able to compete with the payment system
industry leaders in just 10 years. The production of Bitcoin occurs
exponentially, "reads the conclusion of the study. It continues: "If it
maintains this rate, it will overtake all competition in another 10
years." The reason for this statement is, among other technological
factors, the already much larger number of nodes, lower fees and
average transaction size. In 2018 an average Bitcoin transaction
volume was 450 times higher than Visa’s average, while the total of
$3.4 trillion transferred with Bitcoin in 2018 is 5,8 times higher than
such of PayPal.

56
 Figure 8 Comparison between Bitcoin and other payment means

Source:https://datalight.me/blog/researches/longread/bitcoin-becomes-the-main-method-of-
international-payment/ At the same time, in line

with its only ten-year period on the market, Bitcoin has fewer users;
Visa and MasterCard debuted in the 1950s and 1960s, while PayPal
followed in 1998. There are about 25 million Bitcoin wallets currently
in circulation, while the number of Visa and MasterCard credit and
debit cards has exceeded 5.3 billion, the report notes. Nevertheless, to
DataLight, these are signs of an ongoing work. According to the
report, innovation would make Bitcoin an enticing proposal for
mainstream consumers in the near future, eliminating it from its
technological niche setting. However, while the Block chain can
perform only about seven transactions per second compared to the
65,000 Visa currently, scaling strategies for the Bitcoin network
(mainly the Lightning Network: an offline network for low value
transactions) have more than enough time to turn the usefulness of
Bitcoin, DataLight reports.
2.1.12.3 Cryptocurrencies as Means for Remittances
The transfer of money from migrant workers into their own countries
increases all official development aid as well as foreign direct
57
investment (not including China) to developing countries as a source
of income as researched by Tasca et al (Tasca, Aste, Pelizzon, &
Perony, 2015)(1). With this scope, their strengths for the beneficiary
communities are well known, including promoting poverty reduction,
improving innovation, access to traditional financial services,
connectivity and IT technologies, and adding to medical and academic
spending.
The World Bank reports that annual payments to low-and middle-
income countries have officially recorded 529 billion dollars in 2018,
a 9.6 percent increase over their previous record high of 483 billion
dollars in 2017 (World Bank, 2018). In 2018, foreign payments
including those to high-income countries, hit 689 billion dollars, up
from 633 billion dollars in 2017.
Regional increases in remittances inflows varied from almost 7% in
East Asia and the Pacific to 12% in South Asia. The overall increase is
attributed to a better US economy and jobs and a revival of foreign
flows from a few members of the Gulf Cooperation Council (GCC)
and the Russian Federation. In 2019, the investment flows to middle-
and low-income countries are expected to reach $550 billion, making
them their main external funding source (World Bank, 2018).
According to the World Bank Remittance Prices index, the global
average cost of sending $200 remained high, at approximately 7% in
the first quarter of 2019. Reducing transfer costs to 3% by 2030 is a
global goal under the 10.7 Sustainable Development Goal (SDG).
According to the World Bank, remittance costs rise over 10% in many

) Tasca, P., Aste, T., Pelizzon, L., & Perony, N. (2015). Banking Beyond Banks and
1

Money. Springer.
58
African corridors and remote Pacific islands as in the figure below
(Maloumby-Baka et al., 2015). The bulk of the investments, about 80–
90 per cent, were spent on basic supplies including food, clothes,
housing, healthcare and education, thereby playing a major role in
reducing poverty.
Figure 9 Remittances costs in many corridors

Source: (Maloumby-Baka et al., 2015)

Usually, migrants use both formal and informal communication

networks. Amongst other issues, remitters select their platforms on the
basis of price, confidence, trustworthiness and availability (UNCTAD,
2012)(1). The financial or non-financial nature of the Remittances
Service Providers would affect the costs of transactions due in part to
the different administrative expenses and processes needed. The cost
will also rely on the product by which the recipient wants to send

1
) UNCTAD. (2012). Least Developed Countries Report 2012: Harnessing Remittances
and Diaspora Knowledge to Build Productive Capacities. Geneva, Switzerland:
UNCTAD.
59
money, i.e. currency, bank account, payment card, etc (Kingombe,
2016). For instance, because of the large fixed costs associated with
their network of branches, and regulatory compliance requirements,
financial institutions tend to have higher overhead costs than Money
Transfer Offices (UNCTAD, 2012). This may explain why banks
were the most costly among remittance service providers RSPs to
move funds to and from Africa with an average overall cost of 13.34%
of moved funds, while Money Transfer Operators MTOs were the
least expensive at an average cost of 7.13%. The banks were still the
most expensive RPSs
in the third quarter of 2015 with an average cost of 15.54%, while the
post offices had the lowest cost, with an average cost of 7.03%,
followed by MTOs (7.42%). In terms of the financial industry, postal
systems have a number of comparative advantages (scale savings,
affordable prices, good network externalities and advantages of being
the incumbent on a questionable market) (Arcand, 2013)(1).

1
) Arcand, J.-L. G. (2013). Transferts de fonds et services financiers sur mobile : les
modèles d’affaires pour les Postes. Global Migration Research Paper, No 3. Graduate
Institute of International and Development Studies. Geneva.
60
 Figure 10 Costs of Remittance comparison by medium

Source : African institute for Remittances (2019)

Digital currency space advocates are enthusiastic about the ability for
Bitcoin to change the transfer industries as a way of cross-border
value transfer. Sending money across long distances, oceans or even
around the globe, bitcoin and Block chain technology provides
potential value-chain opportunities over existing money exchange
solutions. As a distributed, peer-to-peer platform, the Bitcoin Block
chain will replace traditional trust exchanges financial services
providers by exploiting a worldwide network of users, known as
"nodes," who process and validate transactions 24 hours a day, 7 days
a week. The process passes these values in real time, usually with a
standard 10-minute payment processing period. The process is
basically' trustless,' because no central authority regulates the network
and transactions on a virtual ruler, the Block chain itself, are
registered freely and immovably. All this is nearly zero-cost, usually

61
just 0.0001 bitcoin (BTC) per transaction (Bitcoin Wiki, 2019). Such
properties reflect substantial efficiencies and cost-saving compared to
traditional forms of value transfer, based on the nature of the product
itself, and the absence of gradually and expensively controlled third
parties.
most popular recipient countries in Bitcoin to date (Tasca, Aste,
Pelizzon, & Perony, 2015). The Philippines is consistently one of the
four highest recipient countries for overall payments worldwide, due
to the high number of foreign employees who give their wages back
home to their families. The Philippines is also a country at the
forefront of online financial services, partially due to the strong
smartphone adoption level of the country and to a liberal regulatory
environment . There are two main service providers in the Philippines,
Coins.ph and Rebit.ph, and several less successful Bitcoin remittances
services. The presence of two strong products, including marketing
campaigns, interaction with regulators and general market awareness,
helped to fuel demand for services and promoted ecosystem growth.
But the results of these offers are not yet visible. All firms in the USA,
including those who use bitcoin or cryptocurrency, must possess a
Money Service Business or Money Transmitter permit. A Money
Transfer Operator (MTO) license is required for many other countries.
Rebit.ph, according to coingecko website (Chan, 2019)(1), helps
migrant workers and immigrants their target market to send money
from countries like Australia, Germany, Hong Kong, Malaysia,

1
) Chan, C. (2019, 12 29). Bitcoin vs Western Union: How Low Fees Are Disrupting the
Remittance Industry. Retrieved from coingecko:
https://www.coingecko.com/buzz/bitcoin-vs-western-union-low-fees
62
Singapore, the United Kingdom and the United States to the
Philippines. Only about 10 percent of all Filipino adults have bank
accounts, according to Luis Buenaventura, co-founder and Business
Head at Rebit.ph. For this reason, Rebit.ph pays about 75% of the
remittances of migrant workers via pawnshops, a feature not
commonly found in other remittance services.
Figure 11 Comparison between cryptocurrencies and other
remittances means

Rebittance.org is another example. The network helps senders

worldwide to locate and exchange cashout partners (Rebittance,
2018). For the exchange, the recipient receives bitcoins in the country
which the cash is to be sent and is able to transact if there are partners
in that country. This would allow consumers to first swap fiat
currency for Bitcoin for dollars or euros. Rebittance.org shall forward
the issued Bitcoin to the recipient within 60 minutes of the verification

63
of the payment network. Partners shall be liable 0.3 percent (one-third
of a percentage point) of the overall refund fee (Rebittance, 2018)(1).
According to Diane Biggs (2016), three choices for the efficient flow
of funds are available in bitcoin remittance strategies in her article
“Why Nonbanks improve financial inclusion and remittance?”
1. Bitcoin-only onboarding and offboarding
2. Bitcoin-only onboarding and both fiat and bitcoin offboarding
3. Onboarding and offboarding in both fiat and bitcoin
In each of these instances, bitcoin Block chain is extended in
intermediate price exchanges, and the service provider, in Options 2
and 3 at one or both ends of the value chain, is responsible for
transferring fiat to cryptocurrency. On the recipient hand, in every
alternative the sender will send money directly as cryptocurrency,
using his own cryptocurrency investments, either from a Bitcoin
exchange, an ATM or from a single seller (Biggs, 2016) (Biggs,
2016).
Option 3 provides for another form of payment from the remittance
service provider, i.e. by credit or debit card transactions, bank
transfers or cash. This fee is then used by the service provider to buy a
similar amount of bitcoin from its bitcoin exchange of selection
(Biggs, 2016).
On the other hand, money transfer companies contend that the high
costs of current remittance services are mainly the result of
administrative and compliance costs levied by public authorities and
financial regulators on the industry. Some attribute some of this

1
) Rebittance. (2018, October 20). Retrieved from https://rebittance.org/:
https://rebittance.org/how-it-works
64
expense to the operating cost of on-and off-boarding demand in
developing markets, where facilities and operation may be minimal.
On the other hand, almost every Bitcoin remittance service vendor has
the same, if not greater, compliance criteria as financial institutions as
Know Your Customer (KYC) and Anti-Money Laundering (AML)
KYC and AML.
Moving across the value chain, many Bitcoin-based payment
approaches use a web-based system. This digital platform retains low
costs while ensuring greater regional reach and 24/7 services. Based
on the provider, a recipient may have to pay an upfront fee or buy the
currency at a price with an additional fee for supplying the service
provider with sales that may differ in compliance with the chosen off
boarding process.
The majority of the cost savings and efficiencies of Bitcoin-based
transaction services comes from the use of Block chain as the
international payment mechanism for the transfer of money across
geographies. This removes the need for banks to serve as
intermediaries. In a standard transaction time of 10 minutes, the price
will enter the destination country. When sent by the sender, bitcoin is
typically sold as quickly as possible to protect the transfer value given
the constant uncertainty of the bitcoin price. This is also often the
source of income for the company, which earns from margins from
foreign exchange trades. Bitcoin's local selling also offers the leverage
required for off boarding. In order to reach local users, Bitcoin
remittance services must either create a network of local agents or
build relationships with existing networks and money service

65
providers, such as ATM networks, mobile payments, traditional banks
and cash transfers.
The process of cash collection and distribution locations is the most
significant cost factor for transfer companies. These costs may be
charged to local agents or salaries and rents, depending on the
business model (Ohnesorge, 2018). Although a Block chain -enabled
money transfer can operate without branch, digitized transfers that do
not use a Block chain can also do this. In reality, incumbents like
Western Union and start-ups like Transfer Wise and World Remit
provide cashless services, which completely rely on money being sent
online or over a mobile phone. However, Block chain solutions offer a
further benefit compared to conventional digital solutions. Remittance
systems, which operate on the internet or are used to settle cross-
border transactions, use the worldwide banking system. As a result,
transactions take several days to settle. Cross-border payments made
via Block chain do not rely on the banking system to transfer money
across borders, so that transactions can be completed within minutes
or even seconds rather than days. It reduces the cost of capital and
eliminates entry barriers to start-ups, which increase competition.
The Circle peer-to-peer payment service reveals that cross-border
transfers for zero fees and zero exchange rate premium on a Block
chain basis are possible today. The service is currently available only
in the US, the UK and various euro area nations, but the company
plans to expand the network to China. Circle notes that it can sell its
Ethereum service free-of-charge (through its crypto-currency treasury
and trading operations they give its clients the mid-market rate)

66
(Allaire, 2020). This is useful if you take into account the fact that
currency treasury and trade require the ability to buy and sell currency
as cheaply as possible. Circle thus benefits from the possibility of
buying / selling money from / on its consumers because they would
have to pay higher / sell lower prices otherwise. Cashaa has a similar
business model in 141 countries and provides its low-cost
cryptocurrency service.
The example of Ripple is also interesting in this case, as it is a
medium ground between brick-and-mortar banking solutions and the
use of cryptocurrency for remittances and trade finance. In a regular
correspondent banking transaction, a small or medium sized bank may
prefund or create a credit line with a corresponding bank for
international payments (Ripple Inc, 2016). The broker offers liquidity
for such international payments in local currency accounts overseas
either by itself or through its partnerships. This arrangement
eliminates the need for smaller respondent banks in many currencies
to hold individual accounts, but often requires a number of
corresponding relationships. A nostro account is a bank account held
by a domestic bank in a foreign country, in the foreign currency and
used for cross-currency settlement purposes.
Correspondent banking came up as a stopover in the early mid-20th
century to the lack of a global cross-border payment network. As
demand for cross-border payments rises, this system is cost-
prohibitive and ineffective, particularly for low-value payments.

67
 Figure 12 Settlement Cycle of regular transfer

Source: https://ripple.com/files/xrp_cost_model_paper.pdf

In particular, the system has four inherent problems: In most cases, it

is too expensive for financial institutions to fund cross-border
transactions around the world. Alternatively, they rely on a few banks
to provide access to global corridors. Limited access means non-
competitive FX, charges and liquidity. Secondly, the method results in
often delays, erratic processing times, and confusion on the
distribution of funds with many possible defects. In addition, banks
have poor visibility of individual liquidity and transactions. Thirdly;
depending on the currency corridor, international payments may take
up to a week. Every phase of the transaction needs the receiving
bank's ledger to be "online" and this is really problematic in the
different time zones. Fourthly; banks incur substantial costs associated
with treasury activities, processing of payments, liquidity, FX and
enforcement.
The trade parties (banks or third parties ' market makers on behalf of
banks) can hold XRP on their own balances rather than holding local
68
currency in nostro accounts around the world to make markets in any
other currency. However, with the advent of Ripple, banks and
actually the use of fiat currencies can have some competition; as
digital assets are cryptographically secured tokens which hold a value
and can be transferred without a central counterparty between two
parties. As an asset without counterparties, they can make FX liquidity
easier and scalable without expensive operating costs, such as opening
and maintaining many accounts for banks .

Figure 13 Settlement Process using Ripple

Source: : https://ripple.com/files/xrp_cost_model_paper.pdf

In this example, the respondent banks are providing less of the total
liquidity to serve the same amount of global payments. They must
only keep their domestic currencies and have one XRP account, which
should only have enough XRP to support its largest anticipated
transactions.

69
While it is still early in the development and adoption lifecycle of
Bitcoin, Ripple and Block chain based remittance offerings, the
potential impact on the ability for financial services to reach those
without access to traditional banking is clear. These technologies
represent significant cost reductions, reduce the barriers of geography
and enable new channels for interoperability of services and product
offerings. The growth and evolution of these services will depend on a
number of factors, including interest and adoption by the markets they
are addressing, regulatory enablement and investment, and
collaboration across both industry and policy markets, to help ensure
accessibility, ensure trust and security and reduce costs.
2.1.12.4 Trade Finance
Trade finance is the lubricant of the world economy machine that
enables smooth international trade. Different instruments such as
letters of credit and bank guarantees have been adopted over the years
to minimize the risks between unfamiliar parties in order to promote
the smooth exchange and reduce market tension due to a lack of trust.
In the simplest case, these mechanisms offer guarantees that
transactions are made until goods are traded for compliance with
certain laws. Commercial finance not only seeks to reduce risk but
also to develop instruments in order to enhance agents' reputation in
trade in order to achieve better deals. Reliable information about the
flow of goods and the history of transaction is important.
Today’s products usually only start at the end of the supply chain of
trade when invoices are approved although risks start much earlier
when the purchase order is made early in the beginning. Solutions are

70
fragmented; but it is difficult and expensive to link vendors with the
proprietary networks of banks. Studies conclude that a liquidity loss of
up to $1 billion per year is due to a lack of liquidity or tying it up for
long and unnecessary periods (Wood & Steiner, 2016)(1).
Trade is a simple transaction between businesses. On the one side,
there are farmers who wish to sell their goods worldwide. On the other
hand, consumers import goods from all over the world to keep their
businesses going. The business carries a lot of risk, however. Whereas
the purchaser has the risk of paying without the goods being obtained,
the vendor would not be willing to deliver the goods until payment.
This is where banks are playing. They serve as guardians to guarantee
the delivery of goods and payments. As such, their main task is to
build confidence among untrusted parties. They charge their
customers money for their services as trustworthy associates. Export
finance is a significant source of revenue for lenders, totalling about
$50B a year globally (Landerer, 2016).
How can banks adapt to such changes? They must improve their value
proposition, increasing their time-to-money and offer their services at
a lower price to attract customers. There are many manual and labor
intensive processes involving various stakeholders and documents
with regard to trade financing. A typical example of a trade
transaction is pictured below. If two parties wish to execute a
transaction, the purchaser approaches his bank for a letter of credit
(LC). The bank will send the letter of credit to the seller’s bank. It is

) Wood, G., & Steiner, J. (2016). Banking Beyond Banking and Money. In P. Tasca, T.
1

Aste, L. Pelizzon, & N. Perony, Banking Beyond Banks and Money (pp. 139-150).
London: Springer.
71
only when the seller receives this letter that they will ship the goods
which again includes several external parties and the signing and
exchange of documents. If banks excel in reducing the costs of these
labor- intensive operations, operating as a collection agent, taking
responsibility for the exchange of goods and services and significantly
reducing time-to-money, they would be well positioned to increase
their market share.
Cryptocurrency
Bitcoin has also the potential to facilitate international small-scale
trade. Local traders in poorer countries can have difficulty accessing
international payment systems to sell their goods abroad. For instance,
an Egyptian rural crafts cooperative may find it difficult to build a
website with an established credit card payment network, but
providing a Bitcoin address will enable them to sell products in return
for bitcoins, thus replacing conventional e-commerce systems (often
requiring set up a business account with a formal bank). If a market
exists for trading in such bitcoins exchanged later to a local currency,
this could prove useful (Scott, 2016). For instance, one can imagine a
scenario in which a small-scale independent manufacturer of organic
strawberries in Egypt market it to US clients in return for
cryptocurrency tokens, which later can be changed into Egyptian
pounds.
Since every payment is registered in Block chain and each distributed
ledger receives a copy of the transaction, counterfeiting is extremely
difficult. Each step of the transaction in a Block chain is recorded in
unalterable blocks in a smart contract. For example, a bank might

72
issue letters of credit to a customer, while a supplier and its bank
might issue an invoice, all of which were included with a smart
contract in a Block chain . The shipping company would then report
the delivery digitally, where inspectors were, if necessary, check the
value of the product and approve it in the smart contract. A bill of
lading, containing details on the delivery itself, acts as a certificate of
origin for shipping transactions. The purchaser will pay and be given
the name of the product after checking several documents in the smart
contract in the Block chain after the shipment of the goods.
Nesbitt (2018) believes that cryptocurrency provides a variety of
opportunities to people who purchase and sell goods and services
across borders. The problem with exchange rates includes:
1) As the seller negotiates with many foreign distributors in a variety
of countries, they will have to deal with endless exchange rates.
Nevertheless, if everyone uses Bitcoin, one will be concerned with the
same price in the same currency, without the endless difficulty of
financial adjustment (Nesbitt, 2018)(1)
2) Fast money movement: transfers in cryptocurrencies are almost
instantaneous. Transfer itself posts immediately, and payments in the
Block chain take only about 10 minutes .
3) Secured payments: the cash you get is also secure once you make a
Bitcoin payment. Consumers must have money available early, so
there are no risks of chargeback fees or cancellation of credit
transactions .

1
) Nesbitt, J. (2018, 01 08). Tradeready. Retrieved from www.tradeready.ca:
http://www.tradeready.ca/2018/topics/international-trade-finance/how-bitcoin-could-
shake-up-international-trade/
73
4) Reducing taxes and penalties: since bitcoin is a peer-to-peer
monetary system, in many countries there is no tax and transaction
costs are practically non-existent .
5) Detailed records: Crypto-currency-based Block chain s generate
clear, secure records that are trackable and verifiable. Processes can
become more effective, simpler and open by means of cryptocurrency-
backed Block chain technology.
Smart Contracts
Smart contracts can replace the long-term avalization process. A smart
contract is a software component that contains rules that must be met
before a transaction is carried out. Only when these rules are properly
checked will the transfers be executed. The search is carried out in a
short period of time, thus significantly reducing the time and costs
(Frankenfield, 2019)(1). Every step in the process requires multiple
checks, paper exchanges, signatures and other steps generally carried
out in a slow, opaque manner, subject to delays and falsification.
Block chain wraps it into a single system where, for example, each
barrel of oil has an electronic hash (cipher), each point of sale is
registered and the database can be encrypted then checked by various
counterparties (Arias, Buckland, Furr, & al, 2017).
This could have led to the impression that the Block chain constitutes
a major threat for existing banks because its role as central leader is
jeopardized. Nevertheless, because banks are a network provider that
links existing counterparties to the internet based on Block chain
technology, they have a good chance of even growing their market

) Frankenfield, J. (2019, April 26). Invesopedia. Retrieved from

1

www.investopedia.com: https://www.investopedia.com/terms/s/smart-contracts.asp
74
share. This would also provide the means to provide fast-track
information and increase transparency .
Block chain has the power to substantially reduce a number of trading
costs. By enhancing transparency and automating payments and
processes, Block chain can significantly reduce trading costs,
including verification, networking, processing, coordination, transport
and logistics, and financial intermediation and exchange rates.
Although it is difficult to assess how much trading prices are impacted
by the use of Block chain technology, preliminary evidence tends to
point to a significant impact. Estimates of cost reductions in the
financial and shipping industries range between 15 and 30 percent of
the total costs (Ganne, 2018)(1). According to the World Economic
Forum, eliminating Block chain barriers could result in over one
billion US dollars in new trading in the coming decade (Forum, 2018)
2.1.12.5 ICOs
Initial coin offerings or token sales are a modern way to raise money
for new projects by trading of a "free" digital asset for Bitcoin,
Ethereum or even fiat currencies (Sherry, 2019). Imagine having a
new Uber-like ridesharing service in Egypt with the Block chain ; so
they're going to have a new coin named Ride Coin, for instance and a
white paper to promote the product; or a detailed description of the
project. ICOs have suddenly shook the whole credit and investment
process, encouraging everyone world-wide to invest in a start-up made
up of team members who live in several countries with offices leased,
for example in Singapore and licensed legal entities in Switzerland

) Ganne, E. (2018). Can Blockchain revolutionize international trade? Geneva: World

1

Trade Organization.
75
and ICO prosecutions under the jurisdiction of the British Virgin
Islands. Through social media, forums, web-based networking and
online platforms in general, businesses have been able to obtain
funding from outside, without having to sell a large part of their
company to a venture capitalist, outside of the constraints of the local
financial system. Entrepreneurs do not have to spend significant sums
on marketing and promotion of the issuance of equity and broker fees
(Boreiko & Sahdev, 2018).
In a market economy, businesses strive for continuous growth which
is only possible when the firm expands and invests in new projects.
This, in turn, creates a need for capital. The most conservative method
to obtain capital is internal financing, i.e. accumulating the needed
resources through retained earnings. Otherwise, businesses may sell
part of the company by providing shares to new investors. Instead,
businesses may receive foreign funding in a banking-based financial
system mostly through bank lending rather than on the capital
markets. However, severe financial crises and high interest rates in
many countries have led to a tightening of loans. Smaller-scale public
debt financing is either inappropriate for early funding or too
expensive and over-regulated for small-scale enterprises (Boreiko &
Sahdev, 2018)(1). Therefore, ICOs represents a powerful strategy to
avoid selling part of the firm to outside investors or gearing up.
The primary and sometimes only source of financial capital for
potentially high-growth small and medium-sized companies is venture
capital. A foreign investor offers additional funding, experience,

1
) Boreiko, D., & Sahdev, N. (2018, June 27). ssrn. Retrieved from
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3209180
76
guidance and support in return for stakeholder interest. Due to
increased use by young potential entrepreneurs from the 1980s for
venture investment, Venture Capital became a proven and fully global
funding source, with Venture Funds raised capital by 2016 totalling
US$ 41.6 billion and globally by US$ 77 billion (National Venture
Capital Association, 2017). However, little evidence exists on the
share of entrepreneurs in the Arab region.
However, actors were most recently proliferating, as shown in the
above sections, to some degree as financial intermediaries between
borrowers and financial markets. Crowdfunding and peer-to-peer
(P2P) platforms connect debtors with creditors via online platforms,
followed by initial offerings of pillars which completely circumvent
financial intermediaries, which led to the creation and explosive
growth of what is known as the Alternative Finance (AF). This field is
a feasible alternative to traditional funding sources.
According to Boreiko (2018), the first recorded and proven effort to
use Block chain to finance a start-up business was in 2013 at J.R.
Willet, a Block chain enthusiast at the San Jose Block chain
conference, proposed to the crowd that mutual support should be
given to build a new and more flexible protocol layer on top of
bitcoin. The contributors would be given new coins in exchange for
bitcoins that de facto represent a stake in the new technology. With a
bitcointalk.org platform launch, no advertisement, legal or financial
brokering, or social media campaigns, the creator succeeded in
drawing up the new Mastercoins, which were later renamed Omni
coins in return for 4740 BTC from 551 anonymous contributors to the

77
crypto-community. The financing was used to turn the original idea
into usable technology and tokens were then traded first on the unique
marketplace that was managed by the creators (buymastercoin.com)
and then other markets that gave investors the chance to buy leverage
or investment.
The Mastercoin ICO has made it possible for many more people to
come with such lightning speed, anonymity, low transaction costs and
low administrative cost. The trend of Block chain fundraising has
declined in growth with comparatively few ICOs taking place in 2013
(with 2 ICOs raising USD 630k), 2014 (with 11 ICOs raising USD 33
million) and 2015 (with 14 ICOs raising US$ 11 million). The number
rose to a record high of USD 7.5 billion in 2018 (Initial Coin
Offerings in 2018, 2019).
Figure 14 Size and number of ICOs in 2017 and 2018

Source: (Floyd, 2018)

Considering the investors' anonymity and the lack of restrictions on
trading and use in cryptocurrencies, they did little to comply with the
laws on enforcement of anti-money laundering (AML) and Know
78
Your Customer (KYC), and thus those first ICOs were not supported
by legal support nor were concerned with complying with the
securities legislation in developers' or shareholders' jurisdictions. As a
result, most ICOs were scams that defrauded investors and
disappeared in so-called exit scam. The white papers were borrowed
from previous projects in some cases. One of the biggest scams ever
has been carried out by a Vietnamese crypto-monetary company
known as Modern Tech, which launched an ICO for its Pincoin token,
which earned $660 million out from around 32,000 individuals. The
organization initially ran the Pincoin ICO, which gave investors
regular dividends, and then launched a new iFan Token. Investors
from Picoin got money first, and then the team began paying Pincoin
investors bonuses in iFan Tokens (Coinbundle Team, 2018). Much to
the investors ' deception, they all stopped receiving cash returns and
were left with valueless iFan tokens.
With a volume of around 22.5 billion USD on 31 October 2018
(Coindesk ICO Tracker, 2018), the ICO market seems to be too small
to compete with other forms of finance as far as systemic risk is
concerned. However, the overall market volume of cryptocurrencies is
estimated to be USD 269 billion on the 26 August 2019 according to
Coinmarketcap.com, this leads us to support the assumption that the
bubble builds itself up much fast, and thus the risk of overpriced ICOs
is much greater when compared with other overoptimistically priced
asset classes (Zetzsche, Buckley, Arner, & Föhr, 2017)(1). It is

) Zetzsche, D., Buckley, R. P., Arner, D. W., & Föhr, L. (2017, 11 30). The ICO Gold
1

Rush: It’s a scam, it’s a bubble, it’s a super challenge for regulators. Law Working
Paper Series.
79
difficult to draw a meaningful and accurate comparison between ICOs
and other forms of finance, be them bank-led or market-led given the
lack of the details of contributors to the ICOs, who are presumed to be
concentrated in specific places in the world. Having said that, it could
be safely said that ICOs, although a new entrant, may pose a threat to
the traditional venues of fund raising.
From a business perspective, the creation of Initial Coin Offers
(ICOs) has somewhat influenced investment banks and stock
exchanges around the world. ICOs allow firms to raise capital to fund
start-ups in general at the earliest stage of their establishment. Many
market participants are now unregulated and consider ICOs as an
alternative means of circumventing controlled capital raising
processes. Although, ICOs only attracted approximately $4 billion of
capital worldwide in 2017 (Damak, 2019), which is less than 15% of
total capital raised in IPOs at the New York Stock Exchange and
around 2% of the total capital raised in IPOs globally. However, the
pace of ICOs accelerated in the last quarter of 2017. Some countries
such as China or South Korea have prohibited ICOs, while others have
embraced it such as Malta, Gibraltar and Isle of Man.
2.1.12.6 Financial inclusion
Although this is not a part of the variables in the research, however,
the researcher thought that it is worth having a quick investigation on
the relationship between cryptocurrencies and financial inclusion. But,
it is to be noted that this area of research merits further analysis.
According to the World Bank Worldwide Index (2014 information),
two billion peopleequal to 38 % of the world’s adult populationdo not

80
use regular financial services (The World Bank Gather 2015). For the
largest part of it, these are poor populations who are deprived from the
ability to spend, the ability to store, and the ability to contribute. The
World Bank estimates that 73 % of poor individuals are unbanked
because of costs, travel and the frequently burdensome paperwork
included in opening a bank account (The World Bank, 2015).
Also, financial inclusion means providing banking services at
affordable costs to segments of poor and low-income segments of
society (Wikipedia 2015). It is understood that this money goes to
education, wellbeing, lodging and other necessities to development.
Some specific benefits of cryptocurrencies are fairly understood
easily. Cryptocurrencies seem to have greater benefits for small
businesses and people more than credit cards although, credit cards
are easier for customers to use but paying different fees is considered
to a crucial drawback for merchants, transaction fees, statement fees
and customer service fees. Also, merchants may have access to
payment facilities regardless of their credit history. Another benefit
could be the irreversibility of a cryptocurrency transaction that can
stop any type of fraud since all the transfers are irreversible (Christian,
2015). Also we could mention that Professor Susan Athey, Financial
matters of Innovation Teacher at the Stanford Graduate School of
Business accepts that these benefits would permit the world’s
unbanked poor population to get to worldwide markets (Karch, 2015).
The use of bitcoin, for instance to onboard the families of migrant
workers aboard, BitPesa could be a noteworthy experience. Bank
transfers and PayPal may take days to clear. The future too does not

81
see that this time will be reduced (Order, 2015). Also, Kenya is a
perfect example as most of the population depend on mobile
payments: M-PESA accounts which progressively are connected to
bank accounts (Mckay, 2014)(1). Thus, Bitpesa serves as a conduit for
those who hold bitcoins and wish to transmit them to those who
already participate within the M-Pesa mobile network. Clearly, bitcoin
holders, living abroad, may purchase bitcoins and send them directly
to their loved ones back home. The receiver’s would only require a
bitcoin wallet application on their smartphone to get them. In any
case, by utilizing Bitpesa, and consolidating the usefulness of the M-
Pesa, customers pick up a few advantages. By exchanging bitcoins
directly into the fiat currency of KES (Kenya Schillings), which could
turn into the M-Pesa digital money (Vincent, 2019).
In humanitarian move for the United Nations, Completed on 31st
May, the project run by the United Nation’s World Food Programme
(WFP) was designed to direct resources to thousands of Syrian
refugees by giving them cryptocurrency-based vouchers that could be
redeemed in participating markets (Brett, 2016).
2.1.12.7 Combating Money
Laundering and Terrorist Financing Many financial regulators and law
enforcement agencies have tried to shun the new cryptocurrencies
phenomenon and keep the population away. The Bank for
International Settlements (BIS) (2015) has been advising that
cryptocurrencies are "potentially vulnerable to illegal use" due to their

1
) Mckay, C. (2014, 12 10). the Consultative Group to Assist the Poor. Retrieved from
www.cgap.com: https://www.cgap.org/blog/digital-currencies-and-financial-inclusion-
revisited
82
"pseudonymity" and global reach. BIS noted how banks did not deal
with digital currency intermediaries directly and tried to prevent
interactions because of risk perceptions and uncertainty over questions
of legal or compliance (such as AML/CFT). Likewise, the IMF
emphasized that cryptocurrencies' can be used to cover up the illegal
or sanctioned source or destination of funds and thus promote money
laundering' (He, et al., 2016). The SWIFT Network viewed that
bitcoins is a special group for people engaged in drug trafficking and
money laundering" (Valcke, 2015). The apparently expanded use of
Bitcoin and other cryptocurrencies in the online exchange of
unauthorized goods and services has prompted intergovernmental law
enforcement agencies to warn that cryptocurrencies are used as an
instrument for encouraging crime, particularly with regard to money
laundering (Campbell-Verduyn, 2018). Global guidelines, business
codes of ethics, and subsequent legislation on fighting money
laundering or terrorist financing were provided for banks and financial
institutions in case they reported a certain transaction. In order to
combat these offenses, they must have a set of rules and regulations.
Large multinational banks have tried to avoid higher AML
compliance costs. In 2016,the Managing Director of the Morgan
Stanley Bank reported that until the key question as to who is in
charge had been answered, banks should "seriously not take
cryptocurrencies, primarily because of anti-money laundering and the
guidelines of' know your client' (KYC)" (Van Steinis, 2016). In the
coming pages, the researcher will try to determine if cryptocurrencies
in financial institutions, especially banks, have an effect on this or not.

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From the Multilateral Agreement entered into by many countries
around the world, namely the United Nations Convention against
Illicit Trade in Drugs and Psychotropic Substances (1989) ("Vienna
Convention"), the legal regime for money laundering has its origins.
The Vienna Convention requires the member states, to develop
domestic anti-money laundering legislation (S.Morgan, 1996). The
member countries shall use the standard model as a basis in the
drafting of their national anti-money laundering legislation.
The term 'money laundering' is now widely used. The meaning is
given in each country differently. The most common definition is the
one used in the Vienna Convention and the United Nations
Convention Against Transnational Organized Crime (“Palermo
Convention”) (2000): a procedure whereby the returns of proceeds
from the offences changed into lawful money (United Nations, 2019).
In other words, money laundering is a process by which the unlawful
property will be laundered and transformed into legitimate property;
or a procedure of making unlawfully obtained property (which is
“dirty money”) seem lawful (which is “clean”). The money laundering
may be performed by an individual or legal entity through financial
transactions. The process of money laundering consists of three stages
(FATF, 2019):
- Firstly, in the placement stage, the criminal will use financial
institutions to deposit/place illegal funds, for instance bank accounts
will be used to purchase financial products (e.g. cheques, bill of
exchange, cash orders, fund, securities, etc.)

84
- Secondly, in the layering stage, the money in the financial products
will undergo many layers of transactions to cut the relationship
between the criminal and its illegal origin. These changes may involve
purchase and sale of high-value property, investment in financial
instruments, or foreign currency exchanges across the countries.
- Thirdly, in the integration stage, funds will go back the laundering
criminal in a form that’s apparently legal. The returning fund may be
used to purchase real estate or luxury assets or invest in business.
Cross-border money laundering typically involves large multinational
banks dealing in cross-border financial transactions. Therefore,
international anti-money laundering (AML) efforts have traditionally
called for foreign banks to disclose payments suspected of laundering
illegal funds. Nevertheless, cryptocurrencies exchanges are carried out
among distributed user networks worldwide. Instead of hierarchical
institutions such as banks, cryptocurrencies rely on these distributed
users ' networks to check the validity of payments and prevent the
double spending problem. This shift has for some time placed AML /
CFT's efforts in the back burner. Exchanges that wish to fulfil
international efforts in the fight against illicit finance need now,
thanks to the uniform international recommendations made by the
Financial Action Task Force (FATF), to implement a uniform system,
similar to that implemented in banks and other financial institutions.

85
Table 1 Risks of Laundering Cryptocurrencies in the 3 stages of
Money Laundering
General risk Placement Layering Integration
factors
Quasi- CCs can be used by Suspicious names, Allowing cashing out of
anonymity criminals and particularly if money proceeds of crime to be
associations mules involved that cannot passed on anonymously to
be flagged individuals that cannot be
traced
Real-time Proceeds of crime Transactions occur in real- Proceeds of crime can be
transactions can be transferred to time, allowing little time to moved rapidly through
another CC in stop them if suspected of global financial system and
another country money laundering withdrawn in another country

Source: (Campbell-Verduyn, 2018)

In October 2018, the FATF adopted changes to its Recommendations

to explicitly clarify that they apply to financial activities involving
virtual assets, and also added two new definitions in the Glossary,
"virtual asset" (VA) and "virtual asset service provider" (VASP). The
amended FATF Recommendation 15 requires that VASPs be
regulated for anti-money laundering and combating the financing of
terrorism (AML/CFT) purposes, licensed or registered, and subject to
effective systems for monitoring or supervision. In June 2019, the
FATF adopted an Interpretive Note to Recommendation 15 to further
clarify how the FATF requirements should apply in relation to VAs
and VASPs, in particular with regard to supervision or monitoring of
VASPs for AML/CFT purposes; licensing or registration; preventive
measures, such as customer due diligence, recordkeeping, and

86
suspicious transaction reporting, among others; sanctions and other
enforcement measures; and international co-operation
In this move, FATF has urged exchanges and other stakeholders
(collectively known Virtual Asset Service Provider VASPs) in the
cryptocurrencies world to comply with the Standards just like all
financial institutions. Under the newly adopted Guidance, the
following information is needed for sending transfers (as all
transactions are deemed transfers since we do not know the originator
and the recipient) (Baydakova & De, 2019):
(i) originator’s name (i.e., the sending customer);
(ii) originator’s account number where such an account is used to
process the transaction (e.g., the VA wallet);
(iii) originator’s physical (geographical) address, or national identity
number, or customer identification number (i.e., not a transaction
number) that uniquely identifies the originator to the ordering
institution, or date and place of birth;
(iv) beneficiary’s name; and
(v) beneficiary account number where such an account is used to
process the transaction (e.g., the VA wallet)
Compare this to the Recommendation relating to traditional bank
transfers and they are almost the same. As Recommendation 16 says
that information accompanying all qualifying wire transfers should
always contain: (a) the name of the originator; (b) the originator
account number where such an account is used to process the
transaction; (c) the originator’s address, or national identity number,
or customer identification number, or date and place of birth; (d) the

87
name of the beneficiary; and (e) the beneficiary account number
where such an account is used to process the transaction (FATF,
2019).
2.1.12.8 Another Type of Stable Cryptocurrencies
Regulating Libra The newly introduced currency (yet to be introduced
officially) and project, Libra, surprised the world of finance both
traditional and alternative. It is a digital distributed Block chain , a
low-volatility asset, and an smart contracts network which, as part of
its website, seeks to create a new opportunity for financial services
technology (Libra, 2019) . On 18 June 2019, social media company
Facebook unveiled the concept document, which has drawn
international headlines.
The world reaction to Libra was captured by Zietzche et al. (2019), as
two weeks scan of world reactions shows that the world’s most
influential financial regulators, including the Financial Stability
Board, U.S. Federal Reserve, Bank of England, Bundesbank and the
Bank of France, issued statements that their respective institutions
would carefully examine Libra, and apply tough regulatory standards
to it. The Group of Seven (G7) nations immediately set up a high-
level forum to examine the risks of digital currencies to the financial
system led by the European Central Bank (Binham, Giles, & Keohane,
2019). This very high level of regulatory attention is understandable.
Facebook has over 2.3 billion active users globally (Facebook, 2019).
This scale and reach means that the question for regulators will be
how, not whether, to regulate Libra. Libra will be cash, according to
its White Paper (2019). The value will be linked to the basket of major

88
government currencies issued and a reserve with a secure database for
every libra issued with the same value of that currency, or a highly
liquid government bond. Libra is a stablecoin-a cryptocurrency that is
related to fiat currency. Libra isn't the first stablecoin, but the first
stablecoin with such a remarkable global reach and value. Customers
must first buy Libra by paying fiat currency. The Libra Alliance will
then deposit this money with a custodian or use it to buy highly liquid
government bonds and entrust them to the custodian. Libra will act as
a stablecoin linked to major government currencies. Libra is built to
ensure that the people "allow themselves to use Libra and that its
value remains fairly stable over time" (Libra, 2019). Years ago, Mark
Zuckerberg said, "Facebook is much more like a dictatorship than a
typical corporation" (Amer, Buckley, & Zetzche, 2018). Libra is a
wake-up call for everyone who has so far regarded data and financial
economies as separate fields. The only entities capable of
communicating with the Libra Alliance are the approved exchanges.
Once a buyer exchanges fiat currency into Libra, the company must
meet the demand either by selling its own libra stock at a market price
(after fees), buying additional libra from other libra owners, or
demanding a new Libra from the Libra Association, which is the sole
issuer of Libra. Only the Libra Association can "create" or "burn" the
existing coins. As such, the Libra Alliance acts as a "last resort
purchaser" and a "last resort seller" (Libra, 2019). All expenses or
proceeds from that "last resort" activity shall be drawn or added to the
Libra Reserve, a high-quality short-term government debt pool or
bank deposits, respectively, to support any issued Libra. Just like

89
decentralized cryptocurrency, in particular Bitcoin, Libra has a
network which strengthens the delivery and guarantees that Libra
complies with its mandate as outlined in the White Paper, rendering it
a licensed program and thus distinct from what crypto-monetary
purists had in mind. Libra is not decentralized; at the moment
worldwide leading institutions, including Mastercard, Mercado Pago,
PayPal, Napster's PayU, Stripe and Viro, technology and places,
Booking, eBay, Facebook / Calibra, Farfetch, Lyft, Spotify, and Uber,
the Iliad and Vodafone telecoms, the Anchorage Block chain sector,
are consortium members, although some members are thinking of
pulling out. The consortium is represented through a Geneva-based
limited liability company (Zietzche, Buckley, & Arner, 2019). As one
sees Libra foray into the world of finance, one thinks that Libra can
address financial inclusion. First, Libra, according to the White Paper
aims to empower billions of people who are still unbanked. In 2018,
about 1,7 billion adults still had no access to financial services and
many more had exposure, but did not know how to use them
efficiently or responsibly (Amer, Buckley & Zetzche 2018). Although
several hundred million people have access to financial services in the
past decade, access to financial infrastructure is a necessity for people
working in the long run, and financial isolation makes life quite
wasteful; days wasted in simply paying electricity bills, and a huge
amount of government payments is lost in the' leakage' prevalent to
paper-based systems and in largely illiterate societies. However, this
should be treated with care, as Elizabeth Loppatto put it, "We don't
know how many people have Facebook accounts but no bank

90
accounts" (Loppatto, 2019). Of the 1,7 billion people currently
unbanked, more than half of those originate from only seven
countries, with Facebook at some point either permanently or
temporarily blocked by four (China, Pakistan, Indonesia and
Bangladesh). Also, most unbanked people do not have smartphones or
reliable internet connections.
Another common case of use should be transfers. As previously
mentioned, remittances to migrant workers can cost 5 to 10 percent at
remittance prices, or more in certain corridors. This move should only
cost much less for Libra. Libra has the potential to replace all these
expensive ways for transferring money today. Sending funds should
therefore pump very large amounts of Libra into local remittances
economies. In countries where Facebook and/or WhatsApp are
already very common, such as Egypt, the Philippines, Bangladesh and
India this may be particularly the case.
Figure 15 Highest Facebook usage in the world

Source:https://www.statista.com/statistics/268136/top-15-countries-based-on-number-of-facebook-users/

91
Libra Disruptive Potential - Why Banks should be Afraid ?
The benefits delivered by Libra are at the cost of someone else: the
existing financial institutions and potentially new Fin Tech clients.
The transformative essence of Libra is within the scope of Facebook
remit. Calibra, the latest Libra digital wallet service for Facebook, is
supposed to be available through Facebook Messenger and
WhatsApp, two Facebook applications that touch billions of users
(Alvarez, 2019)(1) .
It is believed that Libra’s potential to disrupt banking in the developed
world is massive. Libra will propel Facebook to out-compete the
banks. This will happen for two reasons. First, Facebook will have
better access to more data than banks. Banks all over the world have
had the best data on customers and have therefore been best placed to
price credit and insurance. Facebook’s data advantages change all
that. The world in which a banking license was an exorbitant privilege
is coming to an end, and fast. Data-driven disruption is far more likely
than people think: in China, Ant Financial, the financial services
subsidiary of Alibaba, uses its vast store of data to be a leading
consumer lender and financial services supplier. In America, two of
the leading small business lenders are Amazon and Square, a
payments app. Ant, Amazon and Square have better data than the
banks - they have a real time feed on business income as it is paid by
customers - so of course they are displacing incumbent banks as
lenders. Also, these payment companies have excellent sources of data

1
) Alvarez, E. (2019). ‘Facebook's Calibra cryptocurrency wallet launches in 2020’,
endgadget. Retrieved from endgadget.com:
https://www.engadget.com/2019/06/18/facebook- calibra-libra-cryptocurrency-digital-
wallet/>.
92
on the pages liked, groups joined and events participated of the
account (Facebook and Libra) holder. The combination of Facebook’s
social media data with the payments data of Libra will be powerful.
Second, the Libra ecosystem will create self-reinforcing network
effects: the more people use Libra, the more applications for Libra
will be written, attracting even more users to Libra. A giant client base
such as Facebook’s is an excellent starting point from which to create
enormous network effects. Even more, Facebook accumulates huge
data about the users, such as their personal circles, the groups they are
members in, their interests, political views, personal lifestyles. This
will help companies provide very targeted and knowledgeable
financial services to those potential customers/current Facebook and
Whatsapp users.
Libra, although it differs from other cryptocurrencies, is indeed a
game changer. Radically new strategic thinking will be required of
financial services firms to respond. The question is whether banks’
leaders will be up to the challenge. In data-dependent finance, the
lender with the best data and data analytics wins. In fact it is suggested
that one of the greatest impacts of Libra may well be that it will prove
to be the first of a range of similar proposals, from a range of both
private and public organizations, despite uproar from many regulators
such as France (Landauro, 2019)(1). We suspect that these will include
stablecoin offerings by other Big Techs as well as governments and
possibly international organizations. Many governments have done

1
) Landauro, I. (2019, 06 18). France creates G7 cryptocurrency task force as
Facebook's Libra unsettles governments’,. Retrieved from resuters.com:
https://www.reuters.com/article/us-facebook-crypto-france/france-creating-g7-
cryptocurrency-taskforce-says-c
93
extensive work preparing to issue a central bank digital currency, and
yet no government has yet done so as a central bank digital currency
means a reworking of the financial system in fundamental ways, the
consequences of which are very difficult to predict. It may be that if
Libra becomes well established the best option governments have is to
counter it with their own digital currency.
2.1.13.Libra Effect
Having said this, if Libra succeeds as it may be predicted in poor
countries, replicating the example of M-pesa in East Africa and
Alipay and WeChat Pay in China, it will present fundamental
challenges to governments, particularly those in poorer countries with
weak structures and administrative environments. Therefore, once the
international existence of Libra is well known, it will mean that capital
control is no longer a government policy measure to prevent the
transfer of capital in periods of severe economic instability (as
Malaysia did in 1998, or as China has done during the last couple of
decades) (Buckley, Ross; Zetzsche, Dirk; Arner, 2019). It will have a
very systemically destabilizing effect on monetary supply and
subsequently on the monetary policy of emerging markets nations.
Another feature of Libra is so striking that it jeopardizes developing
countries ' adoption of Libra. We may reasonably assume that most
Libra Reserve custodians will be outside the developing world.
Countries with a high acceptability of Libra will suffer from fiat
drainage. Governments may order trades so as to prevent dealings
with Libra owners of any country so as to put pressure on the

94
government of that country. Regulators may require local custody of
the Libra Reserve Fund to maintain sovereignty.
2.2. Previous studies
Ansgar Belke, Edoardo Beretta(2020) (1)
This study explores the precarious balance between
modernizing monetary systems by means of digital currencies (either
issued by the central bank itself or independently) and safeguarding
financial stability as also ensured by tangible payment (and saving)
instruments like paper money.
John Taskinsoy (2020)(2)
This study looked into three hypothetical scenarios where the
price of bitcoin surges over $50,000 (scenario 1), $100,000 (scenario
2), and $1,000,000 (scenario 3). Although new path-breaking
technologies and inventions (i.e. Bitcoin) will continue to forge ahead
unabated regardless of doubters, doomsayers, skeptics, pessimists,
disbelievers, and short-sighted politicians (President Trump);
however, these scenarios can only become a reality if the Trump
administration and law makers stop constantly running headlong into
backlash to cryptocurrencies (Bitcoin and Libra coin in particular).
For future price growth of Bitcoin and altcoins, cryptocurrency
markets need more people like Christine Lagarde, the former
Managing Director of the IMF (currently, president of the European
Central Bank), who urged central banks not to ignore “winds of

1
) Ansgar Belke, Edoardo Beretta(2020), Journal of Economic Studies, ISSN: 0144-
3585
2
) John Taskinsoy (2020) : Bitcoin Could Be the First Cryptocurrency to Reach a
Market Capitalization of One Trillion Dollars, Universiti Malaysia Sarawak (UNIMAS)
95
change” and consider looking into the case of central bank digital
currency.
Ahmad A. Al-Naimi (2021)(1)
This study tries to provide an overview of Fintech trends with a
special focus on Jordan. It provides an explanation for the evolution of
Fintech and how Fintech relates to banks through discussing the role
of E-banking that considered the most modern approach of using
banking services through electronic channels. Also, we briefly discuss
E-banking services and the literature about Peer-to-peer lending and
cryptocurrencies that considered an incredibly transparent alternative
to the traditional fiat currencies which we are used to, and it is an
alternative that will improve the society, in addition we preview the
point of view for various countries toward the financial technology
and cryptocurrencies.

Khoutem Ben Jedidia (2021) (2)

This study examines the effects of private cryptocurrencies in
dual system (conventional and Islamic), it highlights some challenges
that private cryptocurrencies pose for financial stability. It show that
the widespread use of private currencies causes a compromised
payment system notably with the absence of guarantee mechanisms.

1
) Ahmad A. Al-Naimi (2021), Volume 25, Special Issue Print ISSN: 1099 -9264
Online ISSN: 1939-4675
2
) https://www.reuters.com/article/us-facebook-crypto-france/france-creating-g7-
cryptocurrency-taskforce-says-c
96
Chapter 3

1
3-1 Introduction
The researchers has checked all available academic research
engines to him such as Sprinkler, Ssrn, Google Scholar and the like to
get historical data that show the relationship between the independent
variable, namely Cryptocurrencies and the dependent one, i.e. the
banking sector (especially the chosen banking products and services),
but there was no historical numerical data to build on and use
statistical correlation or regression methods to show that relationship.
Therefore, the research was forced to be an exploratory one that shows
the views of respondents, both Egyptian and foreign on this
relationship. The research will be a qualitative one that shows how
experts in the banking field in Egypt and foreign banking and
cryptocurrencies experts see the phenomenon and how it will evolve
and impact banking services and products, if any. Moreover, the
Egyptian respondents will be asked on how to deal with
cryptocurrencies in Egypt, i.e. regulate it, ban it or keep the approach
of wait-and-see. Foreign experts, as well, will be asked on the optimal
way forward to deal with cryptocurrencies as they should have a more
specific and expert view on the phenomenon. So, the results of the
questionnaire will see the different views and juxtapose the answers
qualitatively and show repetitions.
To get insights into how different groups see and experience
Bitcoin, a questionnaire was designed and distributed by email in
December 2021. To gain maximum diversity and cover-age,
individuals from two distinct groups were questioned as a sample.
These are Egyptian Banking officials (Compliance Officers from 18

97
Egyptian banks) and members of regulatory bodies from Egypt, the
second group is comprised of 14 banking and regulatory foreign
experts from the US, the Netherlands, Canada, Ukraine, Switzerland,
Bulgaria, France and the UK and some working in international
organizations (i.e. UN), all with differing levels of experience with
Bitcoin (see Table 1 for description). The selection of the
questionnaire partners was based on the researcher’s previous
knowledge of their roles and on the relevance of each one of them to
contribute to the analysis of the hypotheses. This ensured the inclusion
of a wide array of aspects of the evidence gathered from respondents.
The interviews were sent by emails to everyone at the same time to
ensure transparency and give ample amount of time for each one to
respond. Questions were followed by phone/skype calls to ensure that
questions were well understood, if needed.

3-2 Research Sample

Individual Group Occupation Means of
Interview
1 Head of Compliance Dept. – Egyptian Email
Bank
2 Head of Combating Money Laundering Email
Egyptian Banking experts

and Terrorist Financing – Egyptian Bank

3 Economics professor – Local University Email
4 Head of Operations – Egyptian Bank Email
5 Head of Compliance – Egyptian Bank Email
6 Senior Money Laundering reporting Email
Officer
7 Head of Compliance – Egyptian Bank Email
8 Head of Compliance – Egyptian Bank Email
9 Head of Combating Money Laundering Email
and Terrorist Financing – Egyptian Bank
98
 10 Head of Compliance – Egyptian Bank Email
11 Head of Compliance – Egyptian Bank Email
12 Head of Combating Money Laundering Email
and Terrorist Financing – Egyptian Bank
13 Senior Money Laundering Reporting Email
Officer
14 Senior Money Laundering Reporting Email
Officer
15 Money Laundering Reporting Officer Email
16 Senior Fraud Analyst Email
17 Money Laundering Reporting Officer Email
18 Money Laundering Reporting Officer Email
1 Banking Expert from the UK Email
2 Banking Expert from Bulgaria Email
Foreign Banking and regulatory professionals

3 Banking Expert from the Netherlands Email

4 Banking Expert from Bulgaria Email
5 Banking Expert from USA Email
6 Banking Expert from the UK Email
7 Banking Expert from Canada Email
8 Banking Expert from Switzerland Email
9 Banking Expert from France Email
10 Banking Expert from the USA Email
11 Banking Expert from Egypt (working in Email
the UN)
12 Banking Expert from the Netherlands Email
13 Banking Expert from Egypt (working in Email
the UN)
14 Banking Expert from France Email

3-3 Study Construction

The questionnaire is divided into 3 sections, both in a 5-level
scale ranging between strongly disagree and strongly agree with some
room for narrative answers as per the respondent’s opinions. The first
section measures the awareness and understanding of respondents on

99
the phenomenon of Cryptocurrencies. Questions will tackle their
knowledge on this new currency, their advantages, disadvantages,
their future …etc. The second section is about their future and what
will happen to them well and which way forward in their regulation or
banning will be beneficial. The third section, which is the main one,
tries to describe their relation with selected banking products and
services, namely remittances, online/internet payments, trade finance
and equity finance. The questionnaire will safeguard anonymity for
respondents and their answers.

3-4 Analyzing Questionnaire Results

3-4-1 Section One: Knowledge and Awareness
To analyze the outcomes systematically, the researcher will
describe the responses of the Egyptian experts first followed by their
foreign counterparts. In the first section that tackled knowledge and
awareness, respondents were given few questions to see if they are
acquainted with the cryptocurrencies phenomenon. 4 respondents
mentioned that they have very good knowledge, 8 stating that they
have good knowledge and 4 mentioned that they have fair knowledge.
No one commented how their knowledge was accumulated or whether
they have used cryptocurrencies before.
All foreign 14 respondents mentioned that they have either good
or very good knowledge of cryptocurrencies. One respondent
mentioned that in his previous capacity in the financial intelligence
unit of Bulgaria, where he worked on several cases related to
cryptocurrencies, unlocked his interest about the technology behind.

100
 All Egyptian respondents mentioned that Bitcoin was the most
well known cryptocurrency and two stated that Ripple and Ethereum
are also well known. All respondents mentioned that Bitcoin and
Ethereum are the most well known.
Four respondents mentioned that their banks have not taken any
measures at all regarding cryptocurrencies, while 6 respondents stated
that an Internal circular has been provided to acquaint staff with it,
while 12 respondents answered that training sessions (or circulars) of
varying degrees on cryptocurrencies use, advantages and risks .. etc
were instilled in the regular training sessions whether provided in-
house of by other training institutes. One respondent though stated
that they suspended payments via credit cards to cryptocurrency
exchanges. The foreign experts did not answer this question because
they do not work for banks. The importance and weight of the
advantages of cryptocurrencies on the user side showed little
variations. All respondents confirmed that speed (of transactions) is
the best advantage for cryptocurrencies transactions. In the second
place, 12 respondents answered that the most two advantages for users
were anonymity that these currencies provide and low transaction
costs. Also, respondents regarded the fact that having no central
authority and international acceptance as medium to high importance.
Talking about the disadvantages of Cryptocurrencies from the
user perspective, all respondents but one stated that exchange risk
(fluctuations in exchange rates between fiat currencies and
cryptocurrencies) was by far the most remarkable disadvantage.
Likewise, having no central authority or regulator attracted the

101
attention of all respondents and they put it either a high or medium
disadvantage. 12 respondents stated that cryptocurrencies are prone to
theft and hacking, while the required technical knowledge and
expertise was downplayed as 10 respondents mentioned that it was a
low disadvantage. Answering the follow up question on if they had
any other perceived advantages and disadvantages of
cryptocurrencies, one Egyptian expert states that Financial inclusion
can be one of the advantages of cryptocurrencies. As for the
disadvantages, some of the main risks are the following:
- The use of cryptocurrencies in money laundering and terrorist
financing
- Fraud
- High fluctuation of prices
- Technical risks (such as high cost of mining)
- Legal risks (some countries ban the use of cryptocurrencies,
others accept it, and other countries are described in the grey
area, which creates an unstable legal environment for
cryptocurrencies)
One respondent mentioned that the high volatility may create a
situation where a holder of cryptocurrencies may lose a substantial
amount of his assets. Another respondent stated that one of main
disadvantages is that cryptocurrencies are not controlled by any
regulatory authority so they can be misused in money laundering
transactions and terrorism activities; a third respondent affirms that
one more disadvantage is the sophistication /complexity of using

102
crypto currency, as a large section of the community still don't know
how it works.
All foreign respondents named anonymity as the highest
advantage for users of cryptocurrencies, low transaction costs,
international acceptance then speed came afterwards. One respondent
added that “I would add that the relative weight of the importance of
these factors also depends on the individual that is transacting in
crypto. For example, terrorists that are acting to overthrow an
established government would seek out decentralized cryptocurrencies
that are not tied to any central authority or oversight board to better
protect their anonymity. On the other hand, your 'everyday user' who
holds crypto because they want to see a cashless society in the future
may be willing to sacrifice some privacy concerns (i.e. allowing an
exchange or other node to collect basic B[eneficial] O[wner])
information in exchange for the ability to access and use the token.
For authorities, all of these factors pose challenges to the effective
regulation and supervision of crypto (with perhaps the exception of
speed)”.
On asking about the disadvantages of cryptocurrencies for users,
6 foreign respondents stated both exchange risk and theft and hacking
as the highest. One respondent mentions that among the other
advantages are “being open source, and [being a member] community
of same-minded users and the disadvantage could be that
cryptocurrencies are not backed by real-world assets or by some
government/large business. Another respondent mentions that the
most important advantage of the so-called stable cryptocurrencies is

103
“their potential ability to become an alternative payment instrument.
This could impose an entirely new paradigm in the economic behavior
of natural persons and legal entities and arrangements. Hence, it will
attract even more attention by Organized Criminal Groups (OCGs).
The reason behind is very simple, currently there are still not so many
transactions with cryptocurrencies as most of them are related to
speculative economic purposes because of the high fluctuations of the
exchange rate of the cryptocurrencies such as Bitcoin, Ether, etc. If
any stable cryptocurrency become popular enough in order to be
considered as equivalent payment instrument, this will naturally
increase the number of transactions and respectively the exchanged
amounts. Therefore, it will provide OCGs with even more advantages
to launder their ill gotten funds or finance terrorism”.

104
Chapter 4
4.1 Conclusions
The private cryptocurrencies are unregulated as they are issued
and generally controlled by their developers. This chapter examines
the impact of private cryptocurrencies on the payment system, bank
activity, and the financial stability. Further, we discuss these issues
for dual banking system while considering the sharia-compatible
cryptocurrency.
The use of cryptocurrencies in the payment system through the
distributed ledger technology enables the decentralization of the
transaction settlement without a central authority which constitutes a
revolution in the financial system controlled conventionally by
monetary authorities. The rapid development of the digital
technology constitutes the principal concern for the Central Banks to
consider whether to regulate private digital currency, to conduct
monetary policy or to issue and design their own digital currency.
We show that the widespread use of private currencies causes a
compromised payment system notably with the absence of guarantee
mechanisms. The competition that comes from cryptocurrency will
be potentially added to the competition with conventional banks,
leading to more challenge for Islamic banks business model. Yet, the
effect of private cryptocurrencies on Islamic banks seems nowadays
far away. Moreover, the overall impact of cryptocurrencies on
financial stability may depend on the behaviour of economic agents
over time. However, the sharia-compatible cryptocurrency can avoid
many concerns and ensure better financial stability and social
cohesion in a dual system.

105
 Government authorities should regulate the use of
cryptocurrencies to prevent regulatory arbitrage and any unfair
competitive advantage crypto assets that may derive from lighter
regulation. That means rigorously applying measures to prevent
money laundering and the financing of terrorism, strengthening
consumer protection, and effectively taxing the crypto transactions
(He, 2018). Spithoven (2019) considers that without strong external
regulation, cryptocurrency may being like Veblenian (predatory)
markets.
We recommend an adequate regulation of cryptocurrency and
the adoption of Sharia-compliant cryptocurrency to guarantee the
financial system stability.
4.2. Recommendations
1. As the questionnaire and the dissertation aims to provide a clear
steer where to go about regulating or banning cryptocurrencies, some
respondents see that virtual assets service providers should be
regulated while some disagreed with that and only one respondent had
no opinion and further preferred to have a let’s-wait-and-see approach.
some respondents believed that dealings in cryptocurrencies should be
banned.
2. All foreign experts anticipate that governments will impose
restrictions on cryptocurrencies and one respondent elaborated.
3. In this vein, all foreign respondents see that regulating
cryptocurrencies is inevitable.

106
4. Some respondents agree that cryptocurrencies will impact banking
and financial institutions. However, responses were varied but
inclined to having a negative outlook to this impact as some
respondents disagreed that cryptocurrencies will have a positive
impact on banks and other financial institutions.
5. On the other hand, some respondents see that they will have a
positive impact on the banking industry .

107
46
 Appendix (1)
Section I: Knowledge and Awareness
1) Please, illustrate your knowledge about cryptocurrencies
Excellent Very good Good Fair Basic

2) Which cryptocurrencies do you consider to be the best known?

Bitcoin Ripple Stellar Ethereum Dash Other

3) What are the measures taken in your bank to deal with

cryptocurrencies ?
a) Internal circular has been provided to acquaint staff
b) Training sessions on cryptocurrencies use, advantages and risks ..
etc were instilled in the regular training sessions
c) No action taken

4) How important are the following factors as advantages for the

user of Cryptocurrencies?
Factor Scale
1 Anonymity Low medium High
2 Low transaction costs Low medium High
3 No central authority Low medium High
4 International acceptance Low medium High
5 Speed Low medium High

108
5) How important are the following factors as disadvantages for
the user of Cryptocurrencies?
Factor Scale
1 Exchange risk Low medium High
2 Theft and hacking Low medium High
3 Required Expertise Low medium High
4 No central authority Low medium High

6) Do you have any other perceived advantages and disadvantages

of cryptocurrencies as compared to other forms of (electronic)
payment?
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Section II: Potential for Future
1) In the next 5 years, do you expect cryptocurrencies use will … ?
a) Shut down
Strongly agree No opinion disagree Strongly
agree disagree

b) Decline substantially
Strongly agree No opinion disagree Strongly
agree disagree

109
c) Lose public interest
Strongly agree No opinion disagree Strongly
agree disagree

d) Remain the same

Strongly agree No opinion disagree Strongly
agree disagree

e) Grow in use
Strongly agree No opinion disagree Strongly
agree disagree

f) Grow substantially
Strongly agree No opinion disagree Strongly
agree disagree

Why do you think so?

-------------------------------------------------------------------------------------
2) Do you think cryptocurrencies can be a serious means of currency,
unit of account, asset?
Strongly agree No opinion disagree Strongly
agree disagree

110
3) Do you expect Governments will impose restrictions on
cryptocurrencies?
Strongly agree No opinion disagree Strongly
agree disagree

4) There are three broad categories of official stances to

cryptocurrencies, 1) regulating virtual assets service providers, 2)
banning dealings in cryptocurrencies, 3) let’s wait and see
approach, where countries resort to moral suasion to indirectly
lessen demand of cryptocurrencies, in your opinion, should
cryptocurrencies be regulated in Egypt ?
a) regulating virtual assets service providers,
Strongly agree No opinion disagree Strongly
agree disagree

b) banning dealings in cryptocurrencies

Strongly agree No opinion disagree Strongly
agree disagree

c) let’s wait and see approach, where countries resort to moral suasion
to indirectly lessen demand of cryptocurrencies
Strongly agree No opinion disagree Strongly
agree disagree

111
Which approach is the most appropriate in your opinion?
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------

Section III: Impact on Financial Institutions

1) Do you think the use of cryptocurrencies will impact the
banking industry?
Strongly agree No opinion disagree Strongly
agree disagree

2) Do you think cryptocurrencies will have a positive impact on

banks and other financial institutions?
Strongly agree No opinion disagree Strongly
agree disagree

Please elaborate
3) Do you think the impact will be a negative one on banks and
financial institutions?
Strongly agree No opinion disagree Strongly
agree disagree

112
Please elaborate
-------------------------------------------------------------------------------------
4) Do you think cryptocurrencies will mark the end of the banking
industry as we know it?
Strongly agree No opinion disagree Strongly
agree disagree

5) Do you think that financial institutions will lose customers to

cryptocurrencies?
Strongly agree No opinion disagree Strongly
agree disagree

6) Which types of banking activities are prone to this effect ?

Product/service Scale
1 Remittances Strongly agree agree No opinion disagree Strongly disagree
2 Trade Finance Strongly agree agree No opinion disagree Strongly disagree
3 Online Strongly agree agree No opinion disagree Strongly disagree
payments
4 Equity finance Strongly agree agree No opinion disagree Strongly disagree
5 Debt finance Strongly agree agree No opinion disagree Strongly disagree
6 Others Strongly agree agree No opinion disagree Strongly disagree

-----------------

113
Could you please elaborate how ?
-------------------------------------------------------------------------------------
a) Remittances
7) Do you think more people will resort to remittances using
cryptocurrencies in the future ?
Strongly agree No opinion disagree Strongly
agree disagree

8) Did your bank pursue any analysis to understand the current

or potential use of crypto in remittances?
Yes, ------------------------------------------------------------------------------
No, -------------------------------------------------------------------------------
9) How do you expect the banks’ policies and internal regulaiton
to change accordingly?
-------------------------------------------------------------------------------------
10) Has your bank attempted to decrease the remittance fees to
compete with the new remittance platforms (be them provided by
fintech companies or cryptocurrency ones?
-------------------------------------------------------------------------------------
11) Will the potential widespread use of cryptocurrencies in
remittances lead to reduced transfer fees in banks and money
transfer businesses ?
Strongly agree No opinion disagree Strongly
agree disagree

114
12) Do you think cryptocurrencies remittances will cause banks
and money transfer services to lose market share?
Strongly agree No opinion disagree Strongly
agree disagree

b) Online Payments
13) Do you think more retailers, whether big as Amazon,
Walmart, Carrefour or smaller ones will resort to
cryptocurrencies in their quest to attract more customers?
Strongly agree No opinion disagree Strongly
agree disagree

14) Do you think more people will resort to cryptocurrencies to

pay their everyday needs (grocery, foodstuffs, other fees … etc) ?
Strongly agree No opinion disagree Strongly
agree disagree

15) Do you think online payments by cryptocurrencies are more

secure than those provided by banks and payment processing
companies ?
Strongly agree No opinion disagree Strongly
agree disagree

115
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