Baf­fled by Bit­coin: Asia Takes On Vir­tual Cur­ren­cies

Global Asia - - CONTENTS - By Tser­ing Nam­gyal

asia has a par­tic­u­lar fas­ci­na­tion with these vir­tual cur­ren­cies, and that has gov­ern­ments grap­pling with how to reg­u­late them.

Few in­no­va­tions in fi­nan­cial technology have cap­tured the pub­lic imag­i­na­tion with such force as dig­i­tal cur­ren­cies, also known as vir­tual or crypto cur­ren­cies. Un­like tra­di­tional, or fiat, cur­ren­cies that are backed by gov­ern­ments, these dig­i­tal as­sets use en­crypted trans­ac­tion technology known as blockchain and rely on net­work ef­fects, among other things, to fuel their val­u­a­tions. Asia has a par­tic­u­lar fas­ci­na­tion with these vir­tual cur­ren­cies, and that has gov­ern­ments grap­pling with how to reg­u­late them, writes Tser­ing Nam­gyal.

WITHIN a Decade, the world’s first cryp­tocur­rency, bit­coin, which was launched in 2009, has amassed a cult-like fol­low­ing around the world — and nowhere more so than in asia. It has also spawned dozens of other dig­i­tal cur­ren­cies and the cre­ation of ex­changes to trade in them. It has even led to the emer­gence of a class of as­sets for fund-rais­ing known as ini­tial coin of­fer­ings. all of this has fi­nan­cial reg­u­la­tors and in­sti­tu­tions, in­clud­ing the In­ter­na­tional Mone­tary Fund, sit­ting up and tak­ing no­tice — not least be­cause bit­coin has ex­pe­ri­enced phe­nom­e­nal gains that have sparked fears of a bub­ble. but it is in asia where gov­ern­ment reg­u­la­tors have been the most ac­tive in try­ing to come to terms with this fi­nan­cial in­no­va­tion. In seek­ing to es­tab­lish new rules to gov­ern cryp­tocur­ren­cies, they are per­form­ing a del­i­cate balancing act, be­cause any form of pro­hi­bi­tion might risk send­ing the cryp­tocur­rency in­dus­try un­der­ground or mak­ing it even more pop­u­lar. Or worse, the po­ten­tial un­in­tended con­se­quences might in­clude throt­tling in­no­va­tion sur­round­ing blockchain technology it­self, which has earned many sup­port­ers and is seen as hav­ing a po­ten­tially rev­o­lu­tion­ary im­pact on ar­eas as di­verse as trade fi­nance, gov­ern­ment pro­cure­ment and pub­lic records keep­ing. In short, cryp­tocur­ren­cies are no longer a play­thing of technology ec­centrics who speak at cultish con­fer­ences filled with tat­tooed, thug­gish-look­ing char­ac­ters. largescale pa­trons and spec­u­la­tors now feed the crypto bub­ble, forc­ing both na­tional and in­ter­na­tional reg­u­la­tors to pay closer at­ten­tion to the phe­nom­e­non. even fi­nance chiefs and cen­tral bankers among the Group of 20 ma­jor economies found it fit to dis­cuss bit­coin and other cryp­tocur­ren­cies in March, dur­ing their meet­ing in ar­gentina. They said they would con­tinue to mon­i­tor the sec­tor, while main­tain­ing that the mar­ket re­mains small enough at this point not to pose any sig­nif­i­cant threat to global fi­nan­cial sta­bil­ity. They flagged such con­cerns as con­sumer pro­tec­tion, be­cause many re­tail inves-

tors have be­come car­ried away by cryp­tocur­rency ma­nia with­out be­ing fully aware of the risks.

They also worry about the anonymity that bit­coin af­fords its hold­ers and how that makes it prone to il­licit ac­tiv­i­ties such as black money transactions and ter­ror­ist fi­nanc­ing. They lament the chal­lenge of trac­ing on bit­coin transactions, let alone do­ing proper know-your-cus­tomer checks, which makes the cur­rency par­tic­u­larly at­trac­tive to those who wish to cir­cum­vent cap­i­tal con­trols and in­ter­na­tional sanc­tions and do not want their fi­nan­cial transactions mon­i­tored by gov­ern­ments. Chris­tine la­garde, the man­ag­ing di­rec­tor of the In­ter­na­tional Mone­tary Fund, has of­fered the or­ga­ni­za­tion as a plat­form to de­lib­er­ate on a cross-bor­der frame­work for cryp­tocur­ren­cies.

a brief his­tory of bit­coin

bit­coin has its ori­gins in a pa­per en­ti­tled “bit­coin: a Peer-to-peer elec­tronic Cash sys­tem,” pub­lished in 2008 by the pseudony­mous au­thor satoshi Nakamoto. While sev­eral peo­ple have been sus­pected of be­ing Nakamoto, the real iden­tity of the per­son re­mains a mys­tery, which adds to bit­coin’s ro­mance as a state­less dig­i­tal cur­rency.

ex­perts hold that a form of money that can be e-mailed from one in­di­vid­ual to another seems to be a nat­u­ral step, if not the fi­nal fron­tier, in the evo­lu­tion of the In­ter­net. It should come as no sur­prise that bit­coin had been pre­dicted as early as 1999 by none other than one of the great­est the­o­rists of money, econ­o­mist Mil­ton Fried­man.

There are two main rea­sons be­hind bit­coin’s pop­u­lar­ity, most ex­perts be­lieve. First, bit­coin has solved the is­sue of “dou­ble spend” — the near im­pos­si­bil­ity of en­sur­ing whether the cur­rency had al­ready been spent once — that had eluded many tech­nol­o­gists deal­ing with de­cen­tral­ized dig­i­tal pay­ment schemes for years. The bit­coin pro­to­col claims to have solved this dilemma with the help of blockchain, which keeps a record of all transactions. sec­ond, bit­coin is a de­cen­tral­ized sys­tem that runs on a pub­lic ledger, which means no one sin­gle in­di­vid­ual or in­sti­tu­tion con­trols it. bit­coin fans be­lieve that this makes it trust­wor­thy pre­cisely be­cause it doesn’t re­quire trust. but crit­ics be­lieve that such a sys­tem is prone to se­cu­rity mishaps, in­clud­ing hacks, cy­ber­at­tacks and thefts, be­cause even the most se­cure of pub­lic ledgers is not com­pletely fail­safe. (at the time of writ­ing, bit­coin Gold, one of a num­ber of bit­coin spin-offs, and the world’s 27th largest cryp­tocur­rency, had just fallen prey to a ma­li­cious at­tacker who had taken con­trol of the net­work and had stolen money by en­gag­ing in dou­ble-spend­ing.)

largely be­cause of the nov­elty of bit­coin as an in­ven­tion, and the tech­ni­cal jar­gon sur­round­ing it, many out­siders were skep­ti­cal, if not dis­mis­sive, in its early days. bit­coin con­se­quently lan­guished on the mar­gins, re­main­ing largely the do­main of a few early adopters, mostly tech­nol­o­gists and geeks. It is now hard to be­lieve that it was only eight years ago, in 2010, that laslo hanyecz paid 10,000 bit­coins for two Papa John’s piz­zas — an amount worth more than us$80 mil­lion in to­day’s bit­coin. That’s how quickly the cryp­tocur­rency has gained in value.

the Cult of bit­coin

bit­coin be­gan to at­tract an al­most cult-like fol­low­ing, most notably in China (the coun­try hav­ing al­ready es­tab­lished ma­jor strides in cut­ting-edge fi­nan­cial technology such as mo­bile pay­ments). at one point, China ac­counted for nearly 80 per­cent of global bit­coin transactions, but that ra­tio has come down dra­mat­i­cally since bei­jing be­gan clamp­ing down on the cryp­tocur­rency in 2013. China re­mains a ma­jor player in bit­coin “min­ing” (whereby com­puter users as­sist in ver­i­fy­ing transactions on the blockchain with the help of pow­er­ful pro­ces­sors, for which they are re­warded in bit­coins.) The min­ing metaphor helps draw bit­coin’s com­par­i­son to pre­cious com­modi­ties, hence the nick­names “dig­i­tal gold” or “vir­tual gold.”

Chi­nese cit­i­zens can there­fore be for­given for em­brac­ing bit­coin with such zeal. be­sides har­vest­ing wealth us­ing noth­ing but pow­er­ful com­put­ers and cheap elec­tric­ity, they also found in bit­coin new means of peer-to-peer trans­fers of money, notably to send it off­shore with­out gov­ern­ment per­mis­sion. The Chi­nese au­thor­i­ties did not like what they saw, and the Peo­ple’s bank of

China, the coun­try’s cen­tral bank, banned banks from deal­ing in bit­coin in 2013, which led to a col­lapse in its price. but bit­coin’s value not only re­cov­ered, it also be­gan a re­lent­less as­cent over the fol­low­ing three years that reached its apogee at us$20,000 in De­cem­ber 2017. It is as though the sever­ity of China’s re­sponse had the un­in­tended ef­fect of mak­ing bit­coin far more pop­u­lar than it used to be.

as Chi­nese in­vestors rushed off­shore, many bit­coin ex­changes were es­tab­lished in places such as hong Kong, Ja­pan, south Korea and sin­ga­pore, forc­ing reg­u­la­tors and ex­perts to be­gin the ar­du­ous task of defin­ing some­thing as fu­tur­is­tic as dig­i­tal as­sets through reg­u­la­tory frame­works, notably se­cu­ri­ties laws, that were first cre­ated in the early 20th cen­tury.

Many con­sider bit­coin to be a re­sponse to the global fi­nan­cial cri­sis of 2008, mainly point­ing to the tim­ing of the pub­li­ca­tion of Nakamoto’s pa­per. They ar­gue that the cat­a­strophic down­fall of the main­stream bank­ing sys­tem as a re­sult of mis­con­duct by bankers, bla­tant fail­ures in reg­u­la­tory over­sight and the sub­se­quent bailout by cen­tral banks (through the print­ing of tril­lions of dol­lars through “quan­ti­ta­tive eas­ing”) led to a mas­sive ero­sion of trust in the bank­ing sys­tem. The crit­ics ar­gue that bankers walked away scot­free, while in­no­cent tax­pay­ers had to field the cost of the bailouts — and the de­pre­ci­a­tion in the value of money and the mas­sive ap­pre­ci­a­tion of other as­sets like prop­erty in cities such as hong Kong. It was, there­fore, not en­tirely a co­in­ci­dence, that the rise of a de­cen­tral­ized cur­rency such as bit­coin seemed to have ap­peared on the hori­zon just as the pub­lic be­gan to lose con­fi­dence in the tra­di­tional fi­nan­cial sys­tem.

The ques­tion lingers, mean­while, as to the na­ture of bit­coin and whether it is even a cur­rency at all or should be viewed as a com­mod­ity. some even be­gan to look for clues in his­tory and pre­his­tory, even to the days be­fore hu­mans had an es­tab­lished con­cept of money mil­len­nia ago.

EN­TER the ico

With the grow­ing pop­u­lar­ity of bit­coin came a whole new ad­di­tion to the bit­coin ecosys­tem — the so-called ini­tial coin of­fer­ings (ICOS) that were is­sued by blockchain com­pa­nies to raise cap­i­tal. With the cre­ation of ICOS, bit­coin and ether — another cryp­tocur­rency that runs on a blockchain plat­form known as ethereum cre­ated by 24-year-old Cana­dian-rus­sian de­vel­oper Vi­ta­lik bu­terin — could be used to di­rectly in­vest in startups. This has spawned thou­sands of ICOS, such that the mech­a­nism now com­petes with tra­di­tional

While reg­u­la­tors dif­fer widely when it comes to their po­si­tion on Bit­coin and cryp­tocur­ren­cies, and most of them re­main skep­ti­cal at best, they are unan­i­mous in their sup­port for blockchain as a technology.

forms of ven­ture cap­i­tal through a new, al­ter­na­tive form of crowd­fund­ing.

This added a whole new di­men­sion to the dis­course over the reg­u­la­tory frame­works gov­ern­ing cryp­tocur­ren­cies. help­ing frame the de­bate over the na­ture of these ICOS was a state­ment pub­lished by the us se­cu­ri­ties and ex­change Com­mis­sion (sec) on a blockchain project known as the De­cen­tral­ized au­tonomous Or­ga­ni­za­tion, or the DAO, in 2017. The sec’s rul­ing that to­kens is­sued by The DAO should be de­fined as se­cu­ri­ties was fol­lowed by of­fi­cial pro­nounce­ments in hong Kong and sin­ga­pore. Reg­u­la­tors in these two asian fi­nan­cial hubs main­tained that ICOS that is­sue dig­i­tal to­kens that act like se­cu­ri­ties must be reg­u­lated un­der the rel­e­vant se­cu­ri­ties laws. They have to fol­low the same pro­ce­dures as any other ini­tial pub­lic of­fer­ing, in­clud­ing the pub­li­ca­tion of a prospec­tus, un­less they are ex­empted from do­ing so.

asia’s di­ver­gent re­sponses

The re­sponse of gov­ern­ments in asia to the rise of bit­coin re­mains quite di­verse, rang­ing from a dra­co­nian ap­proach in China to a more pro­gres­sive one in Ja­pan. Tokyo has of­fi­cially rec­og­nized bit­coin as a “means of pay­ment that is not a le­gal cur­rency.” This Ja­panese ap­proach was born out of its 2014 ex­pe­ri­ence of deal­ing with one of the first ma­jor scan­dals in­volv­ing a bit­coin ex­change, the col­lapse of Mt. Gox, which at one point han­dled 70 per­cent of the world’s bit­coin transactions. bit­coin ex­changes are now re­quired to be reg­is­tered with the Fi­nan­cial ser­vices agency.

some coun­tries such as sin­ga­pore have em­barked on a ma­jor over­haul of fi­nan­cial reg­u­la­tions to ac­com­mo­date new fi­nan­cial in­no­va­tions cen­tered on cryp­tocur­ren­cies. While bit­coin it­self is not reg­u­lated in sin­ga­pore, the citys­tate is set to re­vise its pay­ments bill that would sub­ject in­ter­me­di­aries that deal in bit­coin to rules to tackle money laun­der­ing and ter­ror­ist fi­nanc­ing. sin­ga­pore is also propos­ing a frame­work that would cre­ate a li­cens­ing regime for cryp­tocur­rency ex­changes. such rules put the city-state far ahead of any other regime in asia, per­haps in the world, for hav­ing a le­gal frame­work for cryp­tocur­rency ex­changes.

In hong Kong, bit­coin it­self, as in sin­ga­pore, is not reg­u­lated, as it is con­sid­ered a vir­tual com­mod­ity. but cryp­tocur­rency ex­changes there, which have at­tracted a large num­ber of in­vestors, par­tic­u­larly from main­land China after bei­jing banned bit­coin ex­changes in 2017, re­main un­li­censed, and thus prone to huge reg­u­la­tory risks.

south Korea has also emerged as a ma­jor player in the bit­coin sec­tor, be­cause it caught the fancy of the coun­try’s mil­len­ni­als, who went into cryp­tocur­ren­cies with en­thu­si­asm bor­der­ing on fa­nati­cism. such was the de­mand that cryp­tocur­ren­cies traded at a higher price in south Korea than any­where else in the world, in what came to be known as the “kim­chi pre­mium.” so stress­ful was it to man­age the coun­try’s crypto boom that one se­nior reg­u­la­tor re­port­edly died of a heart at­tack in his sleep. bit­coin is cur­rently un­reg­u­lated in south Korea and its po­si­tion on ICOS is seen by mar­ket par­tic­i­pants as lack­ing clar­ity. but the gov­ern­ment has said they are go­ing to reg­u­late bit­coin and cryp­tocur­ren­cies in the fu­ture. In the mean­time, it has stepped up its polic­ing mea­sures, in­clud­ing raid­ing crypto ex­changes and re­port­edly ban­ning bit­coin fu­tures and de­riv­a­tives.

In­dia has yet to come out with a pol­icy frame­work to gov­ern bit­coin, as au­thor­i­ties wait for a re­port by an ad-hoc com­mit­tee en­trusted with the task of draft­ing a for­mal re­sponse to bit­coin. Fi­nance Min­is­ter arun Jait­ley, how­ever, told par­lia­ment that the gov­ern­ment does not rec­og­nize bit­coin as a le­gal ten­der and will dis­cour­age its use as a pay­ment method. In­dian bit­coin ex­changes have also chal­lenged in court the Re­serve bank of In­dia’s de­cree that asked all banks to stop deal­ing with the ex­changes. un­der­stand­ably, two less de­vel­oped asian coun­tries, Nepal and bangladesh, have is­sued a blan­ket ban on bit­coin.

blockchain, Not bit­coin

While reg­u­la­tors dif­fer widely when it comes to their po­si­tion on bit­coin and cryp­tocur­ren­cies, and most of them re­main skep­ti­cal at best, they are unan­i­mous in their sup­port for blockchain as a technology. They are push­ing for the use of blockchain in such ar­eas as trade fi­nance and ini­tia­tives to en­hance fi­nan­cial in­clu­sion, and some cen­tral banks, some­what pre­ma­turely, are even toy­ing with the idea of cre­at­ing their own dig­i­tal cur­ren­cies. Ma­jor stock ex­changes and banks, mean­while, are pour­ing money into the new technology. It is seen as hav­ing the po­ten­tial to help solve many age-old prob­lems for the fi­nan­cial sec­tor, from mak­ing se­cu­ri­ties set­tle­ments and clear­ing less cum­ber­some to in­tro­duc­ing cost-ef­fi­cient forms of de­liv­er­ing bank­ing ser­vices to the poor and the fi­nan­cially ex­cluded. all of this has lit­tle or noth­ing to do with bit­coin it­self, they say. and they don’t want to con­flate blockchain with bit­coin. It is clear that the task of how best to sup­port de­vel­op­ments in blockchain technology while con­tain­ing un­fore­seen risks from cryp­tocur­ren­cies is likely to keep them busy for years to come.

tser­ing Nam­gyal is a jour­nal­ist based in in­dia who writes on fi­nan­cial ser­vices and reg­u­la­tory is­sues.

Newspapers in English

Newspapers from Cambodia

© PressReader. All rights reserved.