Japan | How Bitcoin can save the world from deflation
Bitcoin coin. Photo: iStock

How Bitcoin can save the world from deflation

Are blockchain technologies Japan’s ticket to reflating an underperforming economy?

December 5, 2017 8:40 AM (UTC+8)

Tokyo is an amazing city in which to live, but never an obvious epicenter for the global Bitcoin craze.

Especially since Japan’s risk-averse capital was the site of one of the cryptocurrency’s most notorious scandals, the 2014 collapse of the Mt. Gox exchange.

It’s still a bit of mystery how nearly half a million US dollars just up and vanished.

In his new book “Pay the Devil in Bitcoin,” Tokyo-based scribe Jake Adelstein and coauthor Nathalie Stucky explore what “might be the greatest heist in history.”

But are blockchain technologies also Japan’s ticket to reflating an underperforming economy?

As Bitcoin rallies past $11,000 (briefly, at least), central banks are under growing pressure to decide whether to embrace or shun digital currencies.

As Bitcoin rallies past $11,000 (briefly, at least), central banks are under growing pressure to decide whether to embrace or shun digital currencies.

The People’s Bank of China, for example, thinks “conditions are ripe” for welcoming the technology, even if it seeks total control over issuers and trading. The US, not so much. The Federal Reserve harbors privacy concerns, with Jerome Powell, chairman nominee, concerned about “meaningful” challenges to US adoption.

What of Japan? Central bank Governor Haruhiko Kuroda also is in study mode and raising concerns about whether blockchain mediums collide with “fundamental issues of central banking.”

Yet Kuroda may want to consider how digital-currency advancements could collide with the “deflationary mindset” he’s trying to defeat, and in the best of ways.

Today’s bull market in Bitcoin debates has me thinking of a 2015 speech by monetary futurist Andy Haldane, chief economist at the Bank of England.

Blockchain is an exciting technology, but for it to go mainstream governments must be able to regulate it. Photo: Name Coin/Flick
Blockchain is an exciting technology, but for it to go mainstream governments must be able to regulate it. Photo: Name Coin/Flick

Titled “How Low Can You Go,” it was one of those dry monetary-policy ruminations – until it suddenly veered into thinking-out-of-the-box territory. Rather than printing cash or toying with quantitative easing (QE), Haldane argued, why don’t central banks harness blockchain technology to achieve greater monetary traction?

As the Bank of Japan knows better than peers, monetary authorities can only slash borrowing costs so much – even while pursuing negative interest-rate policies.

Economists call it the “zero lower bound” barrier, or ZLB. When monetary authorities thrust rates below zero, many consumers withdraw their cash from banks. The solution is a radical one: scrap all notes and coins. Enter blockchain mediums, which do just that.

“One interesting solution,” Haldane says, “would be to maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form.

“One interesting solution,” Haldane says, “would be to maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form.This would preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets. But it would allow negative interest rates to be levied on currency easily and speedily, so relaxing the ZLB constraint.”

Perhaps the biggest trouble with Japan’s QE is that it’s perceived as semi-permanent, reducing its potency.

When QE becomes old hat, “monetary policy credibility heads down the most slippery of slopes,” Haldane explains.

“What I think is now reasonably clear is that the distributed payment technology embodied in Bitcoin has real potential. On the face of it, it solves a deep problem in monetary economics: how to establish trust – the essence of money – in a distributed network.”

Speaking on the U.K. economy this week, Haldane said monetary policy makers must work harder to reverse a popular mistrust in economics.

That’s even truer for Kuroda’s Japan. Even if the BOJ pumped more conventional cash into the economy, there’s no guarantee banks will lend it, consumers will spend or companies will share the profits it generates with workers.

To be sure, central bankers have been reaching for science fiction volumes since the mid-1990s.

Back then, Janet Yellen, then a Fed governor, and her colleagues gave many a speech about how cashless societies would complicate central banking.

Now, the problem may be our failure to harness what Haldane calls the banking world’s “own great technological leap forward.”

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