Cryptocurrencies like bitcoin can’t be beaten, so why not join them?

Henry Law says the decentralised nature of cryptocurrency makes it the way of the future. That doesn’t mean it’s perfect, but its flaws are all the more reason for government cooperation and regulation, not repression

PUBLISHED : Sunday, 29 October, 2017, 1:01pm
UPDATED : Sunday, 29 October, 2017, 6:25pm

In an age of financial reform, decentralisation enables the removal of third-party intermediaries, as bankers’ and politicians’ words give way to maths, conferring objectivity while preventing anyone in the network from becoming too powerful.

One of Friedrich Hayek’s last publications, Denationalisation of Money , argues that governments should not enjoy the exclusive right to issue currencies. The 2008 financial crisis caused competitive devaluations of fiat currencies to make exports more attractive, inflating national debts at the cost of ordinary people’s savings.

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Such trends have helped fuel the explosive growth in cryptocurrencies outside central banks’ control, and this growth will continue long-term, given that exchange-traded funds for bitcoin and ethereum are expected to materialise.

Compared to rivals like Singapore, Hong Kong is still one of the best places for growth and development of the blockchain industry due to its laissez-faire approach, low tax rate and internet infrastructure. Recently, China has sought to stem the flow of initial coin offerings and ban all trade in digital currencies. With very different legal institutions and administrative constraints, Hong Kong has been largely immune from impulsive edicts that create disturbances in the private sector.

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Yet these characteristics are not without their downsides. Anyone who has observed thriving fintech and start-up sectors in neighbouring cities cannot deny the “regulation inertia” in fully developed economies like Hong Kong. Many poorer countries with no regulations catering to the old financial establishment leap from having no banking sector or landline phones to using mobile payment tools for daily transactions in bitcoin as a substitute for hyperinflated fiat currencies, while Hong Kong, championed as the global favourite for traditional corporations, lags behind.

Despite cryptocurrencies’ great promise, they are still in a primitive phase, where bad actors can go unchecked. One obstacle is that hacking online exchanges remains very profitable. Digital coins by nature are hard to trace, while most exchanges’ websites have less-than-adequate security measures.

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Many speculate that 2018 will see a “Wall Street wave”, with big institutions throwing capital into bitcoin and its cousins. Bitcoin has outcompeted both gold and fiat currencies in terms of portability, storage of value and limitation of supply, with none of their downsides. Government attempts to exert draconian controls over these networks will go nowhere, while those who can come up with efficient rules and legal enforcement will probably attract more such capital next year.

Henry Law Cheong-Chak is an executive committee member of the Hong Kong Young Liberal Party