CRYPTO CURRENCIES AND MONGOLIA
Crypto currencies are the latest craze in the overlapping world of finance and technology. It is a relatively new concept, dating back to 2009 with the launch of what has become a somewhat figure of crypto currencies, bitcoin.
Since its inception, the concept of crypto currency has been divisive, especially amongst economists.
On one side, many want the world to embrace crypto currencies and the freedom it provides. The opposition, however, has been equally vocal, citing concerns about an economic bubble and more importantly the dangers of an unregulated financial sector. At a critical juncture in the development of crypto currencies, how should Mongolia address this issue?
An important characteristic of crypto currencies is that they are not synonymous with electronic money. In the modern world, most of our money is in electronic form, stored in the servers of a bank or financial institution. According to Mongol Bank, the flow of 890 billion MNT in tangible currency makes up only six percent of the money supply in the economy. The rest, while not tangible money, is the MNT in electronic form. The currency is backed by the Mongolian government and as an extension its central bank, Mongol Bank.
Crypto currencies are not backed by governments or financial institutions. They rely on peer to peer connections to conduct transactions. All transactions are accounted for in a public ledger, called a block chain, that records transactions in a verifiable and permanent way. The public ledger is a centralized registry that can be accessed by all members, and every event is registered as an unalterable “block”. This allows two users to bypass a financial institution for a much more anonymous transaction. This in itself has been a major point of discussion about the morality of the technology and its unregulated nature. Critics discredit the concept of crypto currencies by portraying it as a hotbed for criminal activity. The jury is still out, however, as the technology has not been around for long enough for any concrete conclusions on its potential benefits and drawbacks.
China is the largest bitcoin miner in the world, having mined a reported 71 percent of total bitcoins. Similar to natural resources such as gold or copper, bitcoin has to be “mined”. A bitcoin is mined by solving complex mathematical problems which provides a certain amount of bitcoin to the miner.
In another common characteristic with gold, bitcoin is finite and limited. When it was first coded by an author or authors using the name Satoshi Nakomoto, the maximum amount of bitcoin was set at 21 million. The current protocol of bitcoin only allows 21 million bitcoins to be mined unless the protocol is changed to accommodate the depletion. As of September, 16.5 million bitcoins have already been mined, mostly in China.
The bitcoin mining process is complicated and requires significant resources and an abundance of energy. China’s cheaper energy prices are a key reason why the country is the leading bitcoin miner.
However, the People’s Bank of China recently has made initial coin offerings and the crypto marketplace illegal. Chinese crackdown on bitcoin and other crypto currencies have raised concern that bitcoin mining could be ceased altogether in the world’s largest bitcoin mines.
Where Mongolia comes into the equation is that the current lack of regulation on crypto currencies could attract Chinese miners to relocate. The world’s largest bitcoin mine is located just across the border in Inner Mongolia, China.
Rising crackdowns could push bitcoin mining equipment out of China and into Mongolia. There is still around four million bitcoins that have yet to be mined and established bitcoin miners could see Mongolia as a land of opportunity.
The government of Mongolia has yet to reach a conclusive verdict on crypto currencies. On one hand, its neighbor and ironically the largest miner of bitcoin, has been cautious of the concept. Meanwhile, a close partner of Mongolia, Japan has also been open to the idea of digital currencies. Earlier this year, bitcoin was legalized as a legal payment method in Japan and large retailers began accepting the crypto currency.
Banks in Japan and even central banks in governments such as India, Estonia, and Saudi Arabia are in the process of issuing their own crypto currencies backed by their respective national currency. Despite a distrust of non-fiat crypto currencies, central banks all over the world have been closely observing and even participating in its development.
Even China’s crackdown is not to combat the development of crypto currencies but it is seen as a move to reign in its development and establish more control. According to Bloomberg, the People’s Bank of China has done trial runs of its prototype cryptocurrency, taking it a step closer to being the first major central bank to launch its own version.
How crypto currencies will play out is anybody’s guess at this point. There isn’t a global consensus and there likely will not be for quite some time. One thing is for sure, how Mongolia handles the opportunity to replace some of China’s bitcoin mining activities and crypto currencies in general will be an interesting spectacle.