MUST LISTEN: RMB Blockchain lead Farzam Ehsani on how Bitcoin is disrupting finance

JOHANNESBURG — Sandton-headquartered Rand Merchant Bank (RMB) is probably as traditional a finance institution you can get. But the bank is putting itself at the forefront of innovation by taking a very serious look at the emergence of cryptocurrencies like Bitcoin and their underlying blockchain technologies. Farzam Ehsani is RMB’s Blockchain Lead and he is definitely an authoritative voice in South Africa on all things blockchain and cryptocurrencies. He has among the most insightful comments on the space. And for anybody who is interested in how cryptocurrencies and the blockchain are set to change the world of finance, then this is a must-listen interview. – Gareth van Zyl

With me on the line from Johannesburg, I have Farzam Ehsani who probably has one of the most interesting and unique banking jobs in South Africa. Farzam, you’re the Blockchain Lead for Rand Merchant Bank. Can you tell us exactly what you do at RMB?

For sure, as you said, I am the Blockchain lead to RMB. We have been looking at this technology for a few years now. We started a unit called FOUNDeRY at the beginning of 2016 and since then I’ve been leading our Blockchain and Cryptocurrency work for RMB and more broadly for the FirstRand Group. This is within the different divisions within the FirstRand Group. This technology’s been moving very fast and it’s applicability to our economic systems is very deep, and quite vast.

So, we started trying to understand what Blockchain technology means for our financial system, specifically for the current system. And as many listeners will probably know, our current financial system is based on a whole bunch of different financial institutions that manage their own ledgers. Whenever transfers are made between different institutions, there’s a whole lot of work that needs to be done to make sure that all these ledgers are kept in sync. When there’s a transfer, the receiving party’s ledger goes up and the sending party’s ledger goes down — this ensures that there’s no creation of money, bonds, or stocks or anything like that, but that it’s all in sync and it transfers between different institutions.

Farzam Ehsani, RMB's Blockchain Lead.
Farzam Ehsani, RMB’s Blockchain Lead.

There’s a great potential to reduce the complexity and the work that’s required from bringing all these ledgers into sync by just creating a single shared ledger. We’ve never had that possibility before because the technology didn’t really exist. But since the advent of what Bitcoin brought to us with the underlying technology of Blockchain through cryptography and consensus mechanisms (plus different kinds of disciplines that Blockchain brings together), there’s a new world that lies ahead of us. We started looking at that and doing some POCs (proof of concepts). It is public information that we also created a private network with several financial institutions in South Africa — including the Central Bank last year — as part of an experiment.

I think there were nine institutions involved and we created a test token, or a digital asset, on a shared ledger. We’ve done a lot of learning and thinking about that, but I think what’s probably just as important is this world of decentralised cryptocurrencies. So these are cryptocurrencies that are not backed by government or any central institution such as Bitcoin, Ether, Dash, Monero and Zcash — there are lots of these things. As you’ve seen — and as the public has seen over the last year — it’s been insane. We started the year at about US$14bn in market cap and have headed up towards US$600BN. These are astronomical figures, but let me paus there and we can get into some other topics as well.

Yes, just talking about that Bitcoin price: it’s just been on a tear this year. Everybody in the financial industry is calling it a bubble, but what’s been the main driving factors behind the surge in price?

There’s a lot that’s at play. I think the first thing to say is the world is a very small place today. There are internet and communication channels that have allowed us as humanity to know what’s going on in all corners of the world, in an instant. And if you look at adoption curves of technologies recently, the time it takes for global adoption is so much less in today’s age than it was even 20 years ago. This is predominantly because any new technology now has the internet that can be used to spread the message of what’s happening: people hear about it and if there’s interest, adoption rates are very high.

Two hundred South African Rand notes sit on top of American fifty dollar notes in this arranged photograph. Photographer: Jason Alden/Bloomberg

With Bitcoin specifically, it’s the first time in history Gareth that we have what we call a digital scarce asset and it’s worth explaining this concept. About 95% of the world’s money right now (and I’m talking about traditional forms of money, the Dollar, the Rand, the Yen, the Euro etc) is digital, right. In our minds, we generally think about the notes and coins that represent that money, but most of it is living on servers of financial institutions. A way to think about it is that when you log onto your banking app, you have a balance there. That balance is probably much bigger than what you have in cash (for most people). Now, that’s an interesting concept because anything digital, as you know, like an email or a photograph or a document can be copied and pasted and replicated with effectively zero cost.

How do we therefore keep money scarce in a digital form if anything digital is shown to being capable of being multiplied? And we know from monetary theory that if you multiply a monetary base or a token of value, then it devalues and it stops being used as a monetary instrument. So the way we actually protect against that inflation of digital money is we have financial institutions, like banks, that are responsible for making sure that every time money is transferred someone is debited and someone is credited. That’s been great until now, but I think the majesty of Bitcoin and Blockchain technology, and many other cryptocurrencies, is that can now be done without relying on a trusted centralised institution.

This concept is actually quite remarkable because we don’t realise it, but whenever we have anything digital — money or whatever it may be — we need to trust the institution that manages that ledger to make sure that they’re doing the right job and, for the most part, they do a good job. You know, I’m working for an institution (RMB and FirstRand) that does that. It’s a stable element of our economy in South Africa, but I think many people have seen some things that have worried them in the past. If you think about Cyprus in 2013; the crisis that happened there. There was a unilateral decision by those in power that said everybody that has above 100 000 Euros in their bank accounts, about 10% would be taken out. Now the people who had more than 100 000 Euros and who didn’t want to have a unilateral tax on them, they basically didn’t have any say in the matter, and that makes people upset.

Therefore, when they see a technology where there isn’t any central authority that can do that and that is also portable, it gets very exciting. I think it’s really important to recognise that these technologies are allowing humans to transfer value across the world at a price that is much cheaper than anything we’ve ever been able to do before and at a swiftness, with many of these cryptocurrencies that take a second or two. It’s quick and it’s cheap. Our traditional financial channels aren’t that quick and they aren’t that cheap. So I always like to say that in the future, the concept of a cross-border payment will be as ridiculous as the concept of a cross-border email.

You work within one of the premier banks in South Africa. RMB is regarded as being quite a traditional bank. How are your colleagues inside the bank responding to Blockchain, Bitcoin and cryptocurrencies, especially seeing as you’re in this very interesting role within that bank?

It’s a great question. I think like the rest of the world, a couple of years ago there was a lot of scepticism and people were saying: “Is this a fad, is this going to just blow up?” I think what’s been required within this institution, as with other institutions and the general public, is basically upskilling and educating everyone to realise what we’re talking about. You know, this is not just a price that goes up: there’s a reason why we’re seeing prices going up and there’s also a reason why those prices come down. There’s a lot of volatility as well, so I think this institution — just like any other forward thinking institution — is trying to get their minds around what this technology means, what these cryptocurrencies are. And I think there’s been great progress over the past couple of years. I also think, like with any large institution, there’s still a lot of work to be done as well.

bitcoin necklace

You’ve probably also seen the news of the CEOs of other big financial institutions globally who haven’t been, let’s say, warm to the idea of this technology and these cryptocurrencies. People who have really been at the forefront of our current system oftentimes have difficulty in understanding the use and value of this new technology and these new cryptocurrencies. So, I think it’s a journey, and I think there’s been great progress within FirstRand and RMB, just as there is in the rest of the world. I think there’s also still a long way to go everywhere, but it’s an exciting journey to be on.

Do you know if any other banks in South Africa are also taking a closer look at Blockchain and cryptocurrency technologies? I know that you mentioned that there was a development of a token that it would be used among banks locally?

Absolutely, I currently serve as the Chairperson of the South African Financial Blockchain Consortium and that consortium at the moment is comprised of about 55 financial institutions across South Africa. All of these institutions are actually looking into this technology to understand what it means for our economic system, for their respective institutions and for their business models at large. I would say that the financial institutions in South Africa, most of them, are indeed looking at this technology. Some more than others, but I don’t believe there is a single institution that is not looking at it at all. Some banks even have full-time employees or divisions looking at it and for others, it’s just on a part-time basis, but it’s something that is definitely being looked at by several institutions, not just in South Africa. But I would venture to say that there isn’t any serious financial institution globally that isn’t looking at this technology in some form or another.

It’s very interesting because Ian Bremmer Tweeted something this week in which he showed the most number of Google searches for Bitcoin in the world and South Africa came out tops. Do you think that we as South Africans are mainly consumers and early adopters of cryptocurrencies, or are we also capable of developing interesting cryptocurrency or Blockchain technologies as well? Our banking sector is quite highly regarded around the world, so could it follow that we could also become leaders in the Blockchain space as well?

Absolutely. I think there’s a lot of knowledge that’s come out of South Africa, there are many individuals that have come out South Africa that are leaders in this space. With some of the cryptocurrencies like Monero, the lead developer there is a South African. There are other entrepreneurs in the space that have now since left South Africa (but who very much classify themselves as South Africans) that are leaders in this space as well. In addition, there are also some projects that have been coming out of South Africa. Even with ICOs, Initial Coin Offerings (a means of issuing tokens for cryptocurrencies), there have been a couple of projects that have come out of South Africa. So, I think South Africans have a lot to offer. We’ve come a long way in this space. I think a lot of the world also does look to South Africa to see what we have to say.

Obviously we’re not on the cutting edge as far as mining or anything like that is concerned for a number of reasons. For example, electricity is more expensive here than it is in the cheaper parts of the world. But there’s a lot to be said about where we’ve come. I was actually quite surprised when I saw that Tweet of Ian Bremmer’s which said that we were number one because it’s a phenomenon that’s being seen and heard about across the entire word, especially in economies where there is more instability than our own, like Venezuela, Zimbabwe. But I’d like to say that we have good standing on the world stage and I hope that we can continue that.

We’ve had a lot of volatility within our own currency, the South African Rand. In fact, this week it strengthened on the news of Cyril Ramaphosa being elected ANC President, but before that we’ve had a wild ride. So do you think that the weak, or rather the unstable Rand is perhaps one factor here?

I think that could certainly be true. There’s a lot of factors. And maybe we should just dive a little bit into the current monetary system. If we look at the monetary history of the world, we’ve come a long way from using cows as money to shells and salt, and then metals like gold. Today, we don’t realise that our current monetary system — the likes of Dollars, Rands and Yen etc. — they’re not backed by anything. So many people say, “Oh, Bitcoin’s not backed by anything and these other cryptocurrencies aren’t backed by anything”. But we forget that in 1971, President Nixon took the world and the US Dollar off the gold standard. Before you could redeem your US Dollars for gold, but in 1971 that connection was severed.

As a result, the US Dollar has lost about 97% of its value against gold since 1971, which is a huge depreciation if you think about that and I think many people are starting to question our current financial system. Even with central bankers, we’ve moved from conventional monetary policy what is now called unconventional monetary policy, which involves the likes of quantitative easing. That’s a fancy term for trying to stimulate an economy, not just in the short-end of the interest rate curve, but in the long end of the curve. It’s getting a little technical, but my point is that we’re in relatively new territory and many people think that Bitcoin, for example, is very new. We don’t realise that the US Dollar in its current form is only five times older than Bitcoin.

In the grand scheme of things, when you think about monetary history, 1971 to 2017 (46 years), that’s just half of our human lifetimes. So, I think we still have a lot to learn about our current monetary system and I think many people are actually learning a lot about our current system by trying to understand this new system of cryptocurrencies. So, it’s a fascinating journey and actually I encourage people all the time to try to understand this new world of cryptocurrencies because it will also give everyone a good appreciation for our current system.

I was lucky enough to attend an event where you were one of the panelists. It was the CryptoJoburg event and I thought you made very interesting points about Bitcoin versus the US Dollar and other fiat currencies. You compared it to being in an elevator. Can you maybe just explain that metaphor for us?

I was with my nephew in an elevator and we were in one of those old elevators where the door has a glass pane in it and you can actually see the structure of the building. We were going from the third floor down to the first floor, and as we were going down, my nephew (who is two and a half years old) saw the building relative to us going up. We were going down and so he said, “Oh, we’re going up” because he saw the building going up. I said, “No, no, we’re going down” and he said, “No, we’re going up”. I thought it was quite interesting because when we look at the Bitcoin price, everybody says it’s going up, but what’s important with anything of value, monetary value that is, is that it’s always in relation to something else.

So, when we think about the Bitcoin price that has gone up — from say $1 000 about a year ago to about $16 000-$17 000 right now — we see this great increase in price. But you can say that Bitcoin is going up, or one can say that fiat currency, like the US Dollar relative to Bitcoin, is going down. So it’s relative. Anything to do with value is relative. So many people are focusing on the Bitcoin price, but very few actually focus on the underlying metric we’re using to measure the Bitcoin price and those of us familiar with South Africa’s neighbour, Zimbabwe, which experienced great hyperinflation in 2009 or what’s going on in Venezuela right now or what happened in Brazil and Argentina a couple of decades ago or what happened in Germany in the 1920s: you see that if your currency gets hyperinflated, then an increasing price is not something to celebrate. Rather, it’s something to worry about.

Zimbabwe bond notes

Here’s what I mean by that. Let’s say just before the hyperinflation in Zimbabwe took place, if you were measuring your investments in Zimbabwean Dollars and you bought a house and the house went from 100 000 Zimbabwean Dollars to 120 000 Zimbabwean Dollars, that’s great, you think you’ve done very well. But if your house goes from 100 000 Dollars in the morning to a million Dollars in the evening, you don’t start saying: “Wow, that was a great investment”. You start questioning the underlying currency that you’re valuing your house in.

I think luckily for the time being most of the countries’ economies and currencies are stable, but we can’t get complacent as a world and believe that we have a perfect financial system. We don’t, and it’s a new financial system. As I said earlier, this whole world of cryptocurrencies helps us to understand our current system and hopefully we can make our financial system better for the entire world.

Is what we’re seeing now then the migration of value from your traditional fiat currencies into these cryptocurrencies? Is that a good way to describe what we’re beginning to witness now?

Let me put it this way. The total market cap of cryptocurrencies is currently standing at about US $613bn. That is really just a small drop in the ocean of the world’s financial system. If you think about gold, its value is about US $7.5 trillion. If you think about all US Dollars and what we called the M2 money supply or broad money, that means if you counted everybody’s US Dollar chequing accounts and savings accounts (which amounts to about US $13 trillion in the US alone), then cryptocurrencies are still a very young asset class. I think many people are seeing it as a very beautiful asset class and are seeing the value in it and are, as you mentioned, moving some of their fiat currency into cryptocurrency.

I don’t think it’s taken off in a big way at all, even though we see the prices skyrocketing. By some estimates I think it’s only between 0.5% and at a maximum 1% of the entire human race that’s bought any of this stuff. So, if it does take off in a big way, I think we’re yet to see a big surge in transfer of value of fiat currencies to cryptocurrencies. But having said that, there are many risks with these cryptocurrencies and they’re not a panacea for the world’s problems and they’re not a panacea for our financial problems.

One of the problems with Bitcoin at the moment, for instance, is that you can only do a few transactions per second, and I’d like to put that into context. Venezuela right now is having a crisis of their monetary system. If we basically said that nobody in the world should use Bitcoin except for the Venezuelans and let them use the capacity on the Bitcoin network, then at the current level of transaction volume, each Venezuelan would only be able to do one financial transaction about every two months and you simply cannot run a financial system with that type of scaling.

That all comes down to block size, doesn’t it? There’s been this massive debate around block size.

Yes, exactly. So, right now Bitcoin is kept at a one megabyte block size. They have implemented something called Segregated Witness or SegWit, which has great potential. We won’t go into that detail, but suffice to say that there’s a lot of innovation and research being done into what are called second layer protocols or second layer transaction mechanisms, something called a Lightning Network. And that certainly has great potential to massively increase the scaling issue in Bitcoin. At the beginning of August there was what’s called a Bitcoin fork where certain developers and people decided that they didn’t like this one megabyte block size cap and so they went and created Bitcoin Cash which is a separate cryptocurrency and there they’re basically saying that they’re hoping to bring transaction fees down and I think their cap size right now, their lock cap size, is about eight megabytes.

There are still many issues and there is disunity in this space. I think it’s still a very early ecosystem and we will find certain players and certain protocols in the system that will take off and I think others that will be discarded and anything this new, Gareth, is prone to serious volatility. I think it’s important to put this on record: this is not a guaranteed get rich quick scheme. Many people have made a lot of money, but there have been people that have lost money as well and nobody can tell you with absolute certainty which particular cryptocurrency is going to do well, which one is not going to do well. I always suggest putting a little bit in that is not going to really harm you if you lose it, but putting enough in that makes you pay attention. As you learn more about the technology, as you learn more about the cryptocurrencies, you can then make more informed decisions about what your risk appetite is and how exposed you want to be to this asset class.

Farzam, as a last question, Bitcoin is the big daddy in the cryptocurrency world. Its market cap is over 50%. Which other cryptos (if any) are biting at the heels of Bitcoin? Do you think that there could be another cryptocurrency that could usurp Bitcoin in years to come? There’s been a lot of talk around the likes of Ethereum, you’ve mentioned Monero, Bitcoin Cash, Litecoin. Do you think any of these Altcoins as they’re typically called can ultimately displace Bitcoin amid some of those issues that you mentioned around block size in particular?

The die-hard Bitcoin Maximalists, as they call themselves, would say that there’s nothing that’s going to take over Bitcoin. There was this concept called ‘The Flippening’ which was where the Ethereum market cap was coming close to Bitcoin’s. But since then it’s diverged again and Bitcoin has taken a big lead. I can certainly not say with any modicum of certainty whether Bitcoin will be the go-to choice for cryptocurrency or if it’s Bitcoin Cash or if it’s Ethereum or Monero, Zcash or any of these other ones. I think what’s healthy at this point is to have a good dose of humility, to say, “Listen, we don’t really know”. We can have views and thoughts about what the future is, but there are so many things at stake here. One of the key considerations is the way in which transactions are verified and blocks are added to the Blockchain.

A collection of Bitcoins stand in this arranged photograph in Danbury, U.K. Photographer: Chris Ratcliffe/Bloomberg

Bitcoin uses something called proof of work. Proof of work requires many resources, natural resources, and energy to actually help the system build the blocks onto the network. Other forms are proof of stake. There are also lots of different types of systems dubbed consensus mechanisms. Also, Bitcoin is not a very private network. People say it’s anonymous, but it’s not anonymous, it’s pseudonymous where people have what are called public addresses that everybody can see. It’s very visible to see how many bitcoins are in each public address. We don’t know who’s behind those public addresses, but with a little bit of work oftentimes, if someone’s not careful, people can put things together and figure out who’s behind these addresses. This is something that’s been done time and again, and some people are currently behind bars because of it.

There are other private protocols like Zcash or Monero or Dash — which are the three that come to mind at the moment — that allow the transfer of value but with much more privacy than Bitcoin allows. Many people are saying that’s going to be the way of the future. I think at the end of the day, we have to realise that any form of money is a network. The Rand, for instance, is a network. The only reason we accept Rands right now, is that we believe that there’s a network of people that will accept Rands from us. The same thing with the Dollar. So, it’s yet to be seen over the next five, ten years what this space will yield, but I think what’s safe to say is that we have a new asset class in cryptocurrency and crypto assets that allows the transfer of digital assets in a decentralised manner. That is a very powerful concept and I think it’s unfathomable that this will go away any time soon.

Farzam, it’s been an absolute pleasure talking to you today. Thanks a lot for giving us this very enlightening discussion on cryptocurrencies.

It’s a great pleasure, thanks for having me, Gareth.

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