Can Bitcoin survive central banks’ scrutiny?

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A Bitcoin (virtual currency) coin is seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, June 23, 2017. REUTERS/Benoit Tessier/Illustration – RTS18BSL

 

KUALA LUMPUR:  With threats of serious financial crime looming with the emergence of new technologies, including cryptocurrencies, can bitcoin survive scrutiny from central banks globally?

Amid growing warnings of a market bubble, central banks, such as that of China, have restricted cryptocurrencies trading, which sent the virtual currency dropping as much as 40 per cent since reaching a record high of US$4,921 on Sept 1, cutting about US$20 billion in market value.

This is following a crackdown by Chinese regulators on cryptocurrencies trading, including bitcoin, which according to the authorities have become a tool for speculation among investors and also serves as a payment conduit for illegal fundraising and money laundering.

Vietnam’s central bank is also prohibiting the use of bitcoin and other cryptocurrencies in payments.

The trading of bitcoin has been growing in orders of magnitude despite the short-term ups and downs and is now deteriorating as the cryptocurrency, among others, has been slammed as fraud by JPMorgan Chase & Co Chief Executive Officer Jamie Dimon.

“I do agree that bitcoin bears all the shortcomings of a highly-speculated commodity, subject to bubbles. Then again, so are some of ASEAN’s mainstream currencies in the early decade (case in point, the rupiah).

“I believe Dimon’s use of the morally-charged term ‘fraud’ should be interpreted as bitcoin being unsuitable or unready to take on the utilitarian role of mainstream fiat currency, at least just yet,” IDC Financial Insights (IDC) Senior Market Analyst Sui-Jon Ho told Bernama.

Fiat money is currency that a government has declared to be legal tender but is not backed by a physical commodity, rather its value is derived from the relationship between supply and demand.

To recap, bitcoin was designed by an unknown individual or group, known simply by the pseudonym Satoshi Nakamoto, who or which emerged in the aftermath of the 2008 financial crisis.

It is a digital currency that enables individuals to transfer value to each other and pay for goods and services bypassing banks and the mainstream financial system.

Bitcoin is the first, as well as the biggest cryptocurrency and also a decentralised tradable digital asset.

The lack of any central authority makes bitcoin remarkably resilient to censorship, corruption — or regulation.

The digital coin is scarce as it has to be ‘mined’, which involved solving complex mathematical algorithyms that secure and verify transactions over the network globally.

According to reports, the combined market value of all cryptocurrencies in circulation has reached US$170 billion by end of August 2017, which is 850 per cent higher from the beginning of the year and also could potentially disrupt conventional market such as international money-transfer service, which is deemed to be slow and expensive.

IBM Venture Capital Group’s Director for Software Strategy Deborah Magid said bitcoin was specifically developed to be completely global and anonymous, and to bypass all governments and banks with no intermediaries.

“There are literally hundreds of cryptocurrencies, with this being the original and most widely used one. Bitcoin Cash was developed very recently to deal with some issues, including the ability to scale, for example.

“In any case, the volatility of bitcoins and the extreme growth in value over a short period of time, has created quite a bit of hype. It is safe to say we are seeing a bubble,” she told Bernama in an email interview.

Magid pointed out that it would not be helpful to lose many of the things that made bitcoin what it was, like its completely digital and global nature, but it was very likely to stabilise over time and a little regulation would not hurt.

“My own opinion is that bitcoin and perhaps a few others, like Ethereum, will stabilise over time. We are just starting to see some mainstream uses — some merchants accept bitcoin and some automated teller machines dispense it. This trend will probably make its use less scary to the general public as we see more cases like that,” she added.

Nearer home, Bank Negara Malaysia plans to issue guidelines on cryptocurrencies by year-end, in particular those relating to anti-money laundering and terrorist financing, and mulling the move to ban cryptocurrencies altogether in Malaysia.

The move came after the Securities Commission issued a warning to the public of risks related to the use of cryptocurrency-based investments or crowdfunding schemes, such as initial coin offerings or ICO — a term closely resembling initial public offering.

Fortinet’s Network and Security Strategist Gavin Chow said cryptocurrency trading in Malaysia was relatively young, and most investors might not fully understand the high risks associated with its volatility.

“Malaysia has the right digital infrastructure to support blockchain technologies, however, getting the right people to develop and secure this infrastructure is critical in making it successful,” he added.

Chow stressed that an investor should understand some basic concepts of cryptography and how they should protect their cryptography keys associated with their cryptocurrency investments from getting compromised.

Following moves by China and Japan to regulate digital currencies, Australia had recently attempted to crackdown on money laundering and terrorism financing with plans to regulate bitcoin exchanges.

This is by proposing a set of reforms to reduce the gap of regulation and bring digital currency exchange providers under the remit of the Australian Transactions of Reporting Analysis Centre (AUSTRAC).

The reform bill is intended to strengthen the Anti-Money Laundering and Counter-Terrorism Financing Act and increase the powers of AUSTRAC.

IDC’s Ho said it would be worth determining how central banks today could actually ‘regulate’ bitcoin as it is in principle, unregulated, free-floating cryptocurrency whose value is completely determined by demand and supply.

“However, central banks can still influence the ‘value’ of such currencies by regulating their access in markets within their jurisdictions — having a wallet of US$X in bitcoin or ethereum means very little to a literal consumer if there are no local exchanges or acceptance points.

“However, it should be noted that the value of most cryptocurrencies are speculative in nature,” he added.

Ho pointed out that China’s checkered history with bitcoin, dating back to late 2013 with intervention on financial-stress index, exchanges, and more recently, initial coin offerings had resulted in short-term dips in bitcoin value.

“(It is) not because the People’s Bank Of China ‘directly’ regulates the value of bitcoin, but the actions of regulators in markets as large as China inevitably impacts global investor confidence on bitcoin as a commodity.

“This would be a nightmare for consumers in smaller countries to have their wealth beholden to the actions of completely foreign and indifferent forces. In such regard, the transparency of cryptocurrency is, ironically, an inhibitor for its potentially larger role as mainstream currency,” he added.

Ho also pointed that inflation had been put on a downtrend as the mineable supply of bitcoin was finite and introduced predictably to the market.

“On one hand, this rate is still at an annual four per cent, which is considered ‘high’. On the other, the predictability of inflation is more valuable to policy-making, thus rendering bitcoin in this limited regard a good candidate for mainstream currency,” he added. – Bernama