11 January 2018

Zimbabwe: RBZ Warning Dampens Bitcoin Demand

THE demand for Bitcoin in Zimbabwe slumped over the past month following the central bank's warning to the public over the use of virtual currencies and cryptoccurencies. Bitcoin, which is the most prominent cryptocurrency, is a decentralised digital payment system which works without a central repository or single administrator.

A cryptocurrency is a decentralised digital cash system based on cryptography. There are over a thousand such currencies today with a combined market capitalisation of more than US$700 billion.

The demand for Bitcoin in Zimbabwe significantly dropped during the past month following a statement issued by the central bank on December 20, 2017, highlighting the risks associated with the use of virtual currencies. Even though the apex bank has informally issued similar warnings in recent times, the statement issued on December 20 was the first and only official warning from the southern African country's monetary authority on the back of an unprecedented rise to prominence, both locally and globally, of the cryptocurrencies.

"The Reserve Bank of Zimbabwe wishes to advise members of the public that the use and trading in cryptocurrencies and virtual currencies is not regulated by the country's laws and presents risks such as money laundering, terrorism financing, tax evasion and fraud.

"Under the existing legal and regulatory dispensation, any person who invests in virtual currencies or participates in any transaction involving virtual currencies, does so at own risk and will not have protection from, or recourse against, any regulatory authority," reads a statement from the central


Bitcoin typically trades locally at a premium to prices obtaining on cryptocurrency exchanges outside of Zimbabwe. But the premiums have declined significantly since December 20 from levels of between 60 and 80 percent to levels of 30 to 40 percent. This comes after the digital currency traded locally, at premiums of between 60 and 80 percent since September last year.

Yesterday morning, Bitcoin was trading on local cryptocurrency exchange, Golix at $20 000, representing a premium of 38 percent to the price on American exchange, Coinbase at the same time, US$14 500. The premiums are generally seen as representing the discount levied on the local currency as represented by the bond notes and RTGS balances because ideally, an asset should be priced without significant variation across markets. However, during the period from September to early December, the premiums charged on Bitcoin locally as represented by prices on Golix were consistently above the premiums charged on the US dollar in the informal markets.

As Bitcoin was priced at premiums of 60 to 80 percent, the premiums on the American dollar on the streets were hovering in the 50 to 60 percent levels. This suggests that the additional premium over and above the currency parallel market discounts should have been a result of high demand for Bitcoin in the country at the time.

Over the past month, the premiums charged on Bitcoin locally have been tracking the premiums charged on the US dollar more closely pointing to a significant drop in demand for Bitcoin locally. Yesterday, as Bitcoin was trading locally at a premium of 38 percent, a snap survey by The Financial Gazette showed the premium charged on US dollars in the informal market to be in the levels of 30 to 45 percent.

Bitcoin's rise in 2017 on the local scene was partly driven by its utility as a way to settle payments across borders amid foreign currency shortages and stringent controls on foreign exchange in the country.

Bitcoin's rise in 2017 was, however, also driven by speculation as the cryptocurrency proved its usefulness as a speculative instrument both locally and globally.

Last year saw the introduction of Bitcoin futures by two of the biggest exchanges in the world, Cboe and CME. Nasdaq and the New York Stock Exchange have also announced plans to make similar moves. Futures contracts are the mainstream instruments for speculation and the introduction of such tools to the trading universe promises to add to Bitcoin's utility as an investment and speculative avenue.


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