Bitcoin was a little-known instrument trading at the fringes of financial markets until 2017. Its value, which was valued at just US$2 in December 2011, rose close to US$1,000 around year end.
But 2017 made the cryptocurrency’s name. It skyrocketed until it peaked at an all-time high of $19,783.06 in December 2017. Then it crashed. By December 2018, it was back below US$4,000.
During its surge, Bitcoin became known not as money but as a way of making money. Its purpose was pure speculation, not the transactions outside the banking system that it was designed to serve.
So does the volatility and meteoric rise of Bitcoin mean it’s the easy track to Easy Street? Does its subsequent crash mean it’s too unstable to use sensibly? Will cryptocurrency in general emerge as a viable alternative to central-bank controls, a global currency we can all trade?
Asia fast to adopt
Asia is adopting cryptocurrency faster than the authorities can master. Like many new technologies, Bitcoin and its peers are viewed with suspicion rather than welcomed with open arms.
China has been an early adopter of the industry. The Middle Kingdom is home to the largest Bitcoin-mining operations, where computers validate transactions in the digital currency in return for reward in the form of new coins. But the process is highly energy-intensive.
The digital miners located their operations near real coal mines, making Xinjiang and Inner Mongolia favoured locations. Yunnan and Sichuan provinces, where hydropower is available in the rainy season, are also choice bases of operation.
China has tight restrictions on its energy business. It has even tighter controls on its currency, and isn’t keen to accept an alternative that operates entirely outside the control of its central bank. As a result, China tightly restricted the trading and even mining of cryptocurrency, only for a Chinese court to recognize Bitcoin legally as digital property. Amid the muddle, Beijing claims it is about to introduce its own state-sponsored digital currency.
India has pending legislation that would also restrict the use of Bitcoin. Meanwhile, other countries are positioning themselves as “cryptocurrency valleys” to attract investments from financial technology (fintech) companies.
Cryptocurrency 101
But first, what is cryptocurrency and how does it work?
Bitcoin, around for just over a decade, has ushered in an era of digital cryptocurrency. They are unregulated and decentralized monies that can be sent to any location in the world without middlemen like banks and financial institutions.
This freedom from regulation is a huge part of what captured the imagination of Bitcoin’s initial investors. But it’s also the reason why cryptocurrencies like Bitcoin and Ethereum can be so volatile. Like any other asset, cryptocurrencies are driven both by day traders who buy, churn and speculate, while long-term investors buy and hold. Unlike assets such as shares or bonds, though, the market is not mature, and values are more arbitrary.
Meet blockchain
Other types of cryptocurrency, like Ripple, were designed for specific purposes. Ripple is seen as a business-to-business tool that facilitates banking transactions across different currencies in a way that’s cheaper, faster, and more secure.
Blockchain is the technology that makes it possible to spend, sell, and buy Bitcoin and other digital currencies online without intermediaries. Think of it as a shared encrypted ledger that records and verifies transactions as they happen.
Blockchains are kept secure by a network of servers, computers, and other digital devices that verify transactions by “lending” their computing power to solve mathematical problems. This process is known as mining, and each miner who helps solve the problem is rewarded with a small amount of digital currency.
Opportunities in Asia for investors
In some of Asia’s emerging markets, such as Vietnam, Indonesia, and the Philippines, cryptocurrency and blockchain technology are seen as the keys to bringing new digitalised services to the masses.
In the Philippines, the government has established the Cagayan Special Economic Zone and Freeport in the north the country. The facility’s centrepiece is the “Crypto Valley of Asia,” or CVA, a US$100 million blockchain hub that’s home to nearly 200 companies. They are building products related to blockchain, cryptocurrency, digital payments, artificial intelligence, and other fintech tools. The CVA is seen as a sandbox for disruptive technologies, all while bringing much-needed foreign investment into the country.
Vietnam is also betting big on fintech. According to Solidiance, an Asia Pacific-focused consultancy firm, the Vietnamese fintech market was valued at US$4.4 billion in 2017, and is expected to reach US$7.8 billion by 2020. Cryptocurrency has been instrumental in driving this fintech boom, according to the white paper FinTech in Asean: The Next Wave of Growth. “Demand for an alternative currency will continue to exist if the unbanked population remains high,” the paper notes, suggesting emerging Asia is fertile ground.
South Korea is by some measures the most-wired nation in the world, with the highest rates of broadband penetration. Demand for cryptocurrency was so high that at one point in January of 2018, Korean Bitcoin prices were 50% higher than in the United States. Won Hee-ryong, governor of Jeju Province, has been keen to woo investors to Jeju, which he envisions as South Korea’s cryptocurrency and blockchain hub.
Meanwhile, Singapore’s status as Southeast Asia’s technology leader also makes it the region’s de facto hub for blockchain and cryptocurrency. Earlier this year, the BlockVenture Coalition, an association of venture-capital funds and universities across the United States, partnered with Sutler Ventures, a node of Singapore’s Internet Of Services Token (IOST) blockchain network. The partnership seeks to bring resources, projects, and infrastructure to IOST.
Theft and fraud a problem
While the business sector and consumers have been quick to embrace cryptocurrency, the government reaction has been tepid. They have been slow to react. Yet concerns over theft, fraud, data breaches, and currency volatility have all put pressure on governments to create regulatory frameworks for this burgeoning industry – whether they like it or not.
At the end of 2017, the South Korean government threatened to ban both initial coin offerings (ICOs), the typical way for new currencies to launch and for blockchain companies to raise capital, and also cryptocurrency trading. The announcement came after three exchanges – Youbit, Bithumb, and Coinrail – were hacked and lost millions of dollars. Recognising the value of cryptocurrency to its economy, the government has announced plans to bring crypto exchanges under direct government regulation, to combat issues like money laundering.
In Southeast Asia, peer-to-peer lending, a decentralized method of connecting borrowers and lenders through blockchain technology, is regulated for the protection of participating parties. Governments in the region are learning from problems in China, where unregulated P2P lending was associated with Ponzi schemes and predatory lending practices.
The revolutionary nature of cryptocurrency and blockchain technology all but secures the future of digital currency. Unfortunately, many governments, failing to completely understand the potential of the technology, choose to focus on its negative side. Crime, terrorism and tax evasion are valid concerns. But they can only be remedied with sensible regulation rather than a blanket ban.
A ban would not only be difficult to enforce, driving the use of digital currencies into the “dark web,” but it would also lead to lost economic opportunity. According to one expert, India will miss out on US$13 billion if the government pushes through with legislation to ban cryptocurrency.
Apart from government action, the crypto industry itself must also find ways to address the concerns of regulators while still meeting the appetite of businesses and beneficiaries. This move to self-regulate is crucial if the industry wants to support the adoption of the technology into the existing ecosystem in Asia.