The View

Is the end nigh for cryptocurrencies, crippled after central bankers, regulators and global and regional banks call for them to be wiped out?

There are 800 cryptocurrencies worth about US$96bn. Their aggregate value is still small when compared to the nominal value of paper dollars issued by the US Federal Reserve, about US$1.4tn

PUBLISHED : Thursday, 14 September, 2017, 3:01pm
UPDATED : Thursday, 14 September, 2017, 3:53pm

Central bankers, regulators and global and regional banks all seemed to arrive at the same decision last week- that bitcoin and other cryptocurrencies must be extinguished.

They’re not scared of bitcoin, but are scared of what it represents. What it promises is costless freedom. But, talking about it and being it are two different realities. Because it is hard to be free if you are bought and sold in the marketplace.

Banks and governments are now in the process of shutting down bitcoin while maximising its underlying technology: the blockchain ledger.

Not wanting to suffer the same fate that befell almost all mainframe computer makers who succumbed to the cruel advancement of personal computing devices, financial institutions are developing regulations to control and cultivate their own cryptocurrencies and their foundation technology.

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Last week SCMP reported Chinese regulators are planning to close the country’s cryptocurrency exchanges.

That’s a decisive move that will eventually close the market for trading of all digital currencies and the recent digital tokens issued though “initial coin offerings” (ICOs).

China is presently a major market for cryptocurrency trading. At its peak the country accounted for over 90 per cent of global trade volume in bitcoin. The authorities would significantly roll back the growth of global cryptocurrency trading markets by declaring a ban.

The official Beijing announcement implies that regulators believe that bitcoin is not a “store of value.” And it is not widely used enough to be accepted as a dependable medium of exchange.

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Banks and non-banks using an authorised cryptocurrency must have central banks supporting the payment platform. Ultimately, blockchain ledger will force banks and central banks to improve the efficiency of their domestic currencies.

In August, four major international banks announced the creation of a new blockchain-based digital currency. They hope to convince central banks to make it the global standard for settlements in 2018.

It is called the “utility settlement coin” and it comes from UBS, Deutsche Bank, Santander, and BNY Mellon. All four are members of the R3 consortium of 50 financial institutions that are exploring models to develop proprietary distributed ledger technology.

The underlying dilemma, which can be found in all their recent policy papers, is the growing uncertainty about how disruptive technology will affect the entire banking and payments system.

One goal is to reduce the costs of trading different currencies by using a common unit that is transacted through blockchain. Bitcoin threatened this lucrative business with free trades.

Banks would rather control and lower the costs on their own terms. So forex dealers should be worried about their jobs.

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Few threats to financial regulators and central bankers will provoke as much fear and loathing than the possibility of losing any control of their national currency.

The underlying dilemma, which can be found in all their recent policy papers, is the growing uncertainty about how disruptive technology will affect the entire banking and payments system.

So far, clients in asset management and foreign exchange remittance have benefited the most from new technologies that drive lower transaction and portfolio management costs.

Beyond those areas, fintech innovators in banking services have struggled to achieve disruption. One reason is the almost insurmountable and costly obstacles represented by the barriers in this highly regulated industry.

JPMorgan’s Jamie Dimon says bitcoin ‘is a fraud’

However, developments show that fintech threatens to undermine the importance of bank lending as non-banks are enabled by technology to perform peer-to-peer lending just outside the traditional regulatory domain. This threatens regulatory authority over systemic risk.

At a recent CNBC sponsored conference JPMorgan Chase CEO Jamie Dimon berated bitcoin saying the cryptocurrency “is a fraud.”

He added, “It’s just not a real thing, eventually it will be closed. My daughter bought bitcoin, it went up and now she thinks she’s a genius.”

Presently there are 800 cryptocurrencies worth about US$96 billion. The aggregate value of all cryptocurrencies is still small when compared to the nominal value of paper dollars issued by the US Federal Reserve- about $1.4 trillion.

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But, if bitcoin became a parallel currency it will threaten the ability of central banks to control and monitor payments and capital flow. Central banks would face the nightmare of losing management of their country’s money supply as physical, fiat currency is displaced or subsumed.

The blockchain itself is “trust free” meaning there is no single point along the process where you need trust for accurate record keeping because everyone in the network has a copy of your transaction. This makes it almost impossible to commit fraud.

But, this is the essence of the political threat posed by the blockchain.

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In the past, banks and governments have exercised central control over the entire body of financial and personal data on its users. Blockchain destroys this monopoly on information as it is only necessary to possess just enough data to verify the users and transaction involved.

Blockchain technology will democratise the global financial system by giving everyone improved and equal access to financial services. It represents the ascent of a new political and economic order imposed on the financial system.