Inside Asia’s love-hate relationship with virtual currencies
The debate around Bitcoin and its many clones swings from absurdity to unstoppable bullishness to real-world consequences – often all in the same day
Cryptocurrency exchanges may be the next big thing, but they’re also today’s crime scenes. Just ask Japanese Finance Minister Taro Aso, whose team has been stepping over the yellow tape draped around the Tokyo offices of Coincheck.
The bourse made headlines for all the wrong reasons last month. In the early morning of January 26, hackers helped themselves to nearly US$500 million dollars in digital tokens. It was one of history’s biggest-ever heists. Not to mention the second on Aso’s watch. In 2014, about US$470 million worth of Bitcoins vanished from the Mt. Gox exchange in Tokyo. Not surprisingly, Aso argues of Bitcoin and its fast-exploding number of peers: “It has not yet been proven to be credible enough to become a currency.”
Yet Aso is at the center of a doozy of a paradox: even though Bitcoin has two strikes against it in Tokyo, officials are angling to make Tokyo the global cryptocurrency trading hub. Consider Aso, 77, ambivalence personified.
Japan isn’t alone. It is currently being reported that China is to block all on-shore and off-shore platforms related to cryptocurrency trading and initial coin offerings (ICOs) in an attempt to quash the market completely. And South Korea is having its own love-hate-quarrel with cryptocurrencies, the most recent drama being skewed toward hate. Despite great enthusiasm among local punters, officials in Seoul have pledged to hammer a market which the US economist Nouriel Roubini has labelled the “biggest bubble in human history” and a “scam.” India has made similar noises.
All this raises a question: are Asian regulators overreacting? So far, no, given the utter chaos in cryptocurrency trading. But, at the same time, regulators shouldn’t shut the door on the future just because it’s racing ahead of them.
Even as they act to stem wild volatility, governments must expand efforts to (a) understand the cryptocurrency phenomenon, (b) separate froth from the potential of the blockchain technology beneath it and (c) get to grips with how today’s bubbles will affect the fintech industry that Asia’s four biggest economies see as a vital growth engine.
The learning curve is an exceedingly steep one and involves confronting a cult-like overconfidence. In 1994, remember, George Soros comforted many investors when he admitted that he, too, didn’t understand derivatives. Fourteen years later, during another crisis, it was Warren Buffett’s turn to admit the mechanics of subprime debt were beyond him. Today, everyone from Nobel laureate Paul Krugman (bubble, bubble, fraud and trouble) to BlackRock’s Larry Fink (it’s an “index of money laundering”) to former Federal Reserve chief Ben Bernanke (“I don’t think that’s going to be a success”) to International Monetary Fund leader Christine Lagarde (it’s only for places with “weak institutions and unstable national currencies”) has admitted a degree of puzzlement.
But the economic elite should recall that Milton Friedman, another Nobel winner, telegraphed this moment in June 1999: “The internet is going to be one of the major forces for reducing the role of government. 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 $20 bill and hand it over to you, and there’s no record of where it came from.”
Is Bitcoin, and its too-many-to-count clones, that? It’s certainly not the “reliable” version that one of the fathers of monetarism had in mind. Satoshi Nakamoto introduced those on his mailing list to a paper he had written, Bitcoin: A Peer-to-Peer Electronic Cash System, with the words: “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”
That’s just the problem, though. There’s “no trusted” party to ensure the value of cryptocurrency, prove physical ownership or provide some semblance of legal recourse should things go awry (as they have majorly in Tokyo twice since 2014). Who, for example, wants to accept Bitcoin in exchange for, say, an airline ticket when its value could fall US$500 while the transaction is processing? The 99bitcoins.com website found that, as of January 14, only about 90 companies regularly accept Bitcoins for transactions.
Having little practical use, cryptocurrencies are good for little more speculation. That’s its own paradox: what exactly are you speculating on? Some counter that Bitcoin should be viewed as a store of value, like a digital gold bar. Again, though, this argument – made by Tyler and Cameron Winklevoss – has debunked by Goldman Sachs, former Fed Governor Randall Kroszner and others. You can hold gold in your hand. Bitcoin wallets can be emptied while you sleep.
Amid deflation and a dearth of innovation, Tokyo views the cryptocurrency orbit as a means of growth, higher tax revenues and competing with Hong Kong, Shanghai and Singapore
The balancing act for Asia, though, is not throwing the baby out with the proverbial bathwater. In theory, there are myriad reasons why hyper-conservative, rules-obsessed Japan should run away from the cryptocurrency game – crazy volatility, excessive transaction costs, unsustainable electricity hoarding during the “mining” process. That’s why the “market is moving to a ‘cryptocurrency bad: blockchain good’ belief,” says Nicholas Smith of CLSA Japan.
The problem, Smith says, is that “as yet, most Japanese software developers have little in the way of products to show for their investments.” Then again, that – arguably – is the good news. An obvious missing element in Prime Minister Shinzo Abe’s revival scheme is a startup boom. China, for example, has left Japan in the dust when it comes to fintech innovation.
One possibility is for China, Japan and Korea to mint their own digital currencies to improve security and transparency. In Japan, for example, megabanks like Mitsubishi UFJ and Mizuho have snapped to attention, along with SBI Holdings.
In Korea, banks are investing in blockchain startups, as is Samsung. Korean Finance Minister Kim Dong-yeon personifies the official ambivalence that colors this debate. At the same time as Seoul is clamping down, Kim says Korea should grab its share of “big revenue sources.” Asia, after all, has been chronically short of risk capital to drive the startup revolution needed to create new jobs and wealth and drive disruption.
Still, Asia is on the frontlines of another dilemma: how to pull cryptocurrencies into the conventional regulatory system without killing their unique qualities and utilities. And what about the danger that, once perfected, blockchain payment systems could drive conventional banks into extinction – and, in turn, extinguish authorities’ ability to track the activities of money launderers, drug cartels, weapons merchants and rogue states? Couldn’t North Korea, ISIS, heroin producers in Afghanistan or elements of Pakistan’s military looking to sell nuclear secrets or hardware mint their own versions of Bitcoin?
This explains why Silicon Valley’s insistence that governments stay away is a naive non-starter. Financial upheaval on this level is a political minefield. Before China’s renewed assault on cryptocurrencies, Indian Finance Minister Arun Jaitley said in New Delhi, on February 1, that India will “take all measures to eliminate” cryptocurrencies from its payments system. Korea banned anonymous transactions, amounting to the same thing.
It’s intriguing to see Japan, with a cultural tendency toward conservatism, go the other way. Amid deflation and a dearth of innovation, Tokyo views the cryptocurrency orbit as a means of growth, higher tax revenues and competing with Hong Kong, Shanghai and Singapore.
Since Coincheck was accused of negligence, policymakers – including Bank of Japan Governor Haruhiko Kuroda – have oscillated between demanding that exchanges “enhance security” and being stricter about future applications. But are Japan’s infamously cautious bureaucrats picking the wrong asset on which to be first-movers? Only time will tell. The Japanese public seems plenty enamored, though. And Japan’s biggest consumer electronics retailer, Yamada Denki, has said it will accept Bitcoin on a trial basis.
In a case of art imitating life, there’s even a ‘Virtual Currency Girls’ pop group, a creative attempt to marry Japan’s “cute” culture with cutting-edge finance. Or is it a case of life imitating art? The J-pop artists were among the victims of the Coincheck heist, unable to receive their salaries. There’s nothing cute about the episode, of course. But it sure does capture how the Bitcoin debate swings from absurdity to unstoppable bullishness to real-world consequences – sometimes all in the same day.
Where that pendulum will swing next is anyone’s guess. What’s certain, though, is Asia will be at the center of whether cryptocurrencies change everything or disappear.