The crypto cypherThe fad has not faded. The craze over cryptocurrency simmered from last summer. It raised concerns when the daily turnover at Bithumb, the biggest exchange in South Korea, exceeded that of the secondary Kosdaq stock market. A computer system crashed due to an overload in trade.
Still, the bizareness of this new form of investing did not immediately get the attention of authorities. When the price of Bitcoin and other popular cryptocurrencies rose 10-fold after the beginning of the year, the government was reminded of the 2006 craze for Ocean’s Story online gambling and had the justice ministry announce a crackdown with the option of outright banning the trade in so-called virtual tokens. It said it was nothing more than reckless gambling.
The government was indifferent to the early frenzy over digital coins on the theoretical belief that they could not replace real currencies. It thought the bubble would eventually burst. There is a limit to the ascension of virtual currencies because of the reserve system. Although the United States never admits to the minting cost, it is believed that it costs about 200 won (20 cents) to print a $100 note. The seignorage — the difference between the value of the money and the cost to produce and distribute it — is a major income source for the U.S. government. Uncle Sam enjoys free riches thanks to its predominant reserve currency status.
The United States would hardly want to part with the prerogative. Federal Reserve Chair Janet Yellen, who recently retired, called Bitcoin a “highly speculative asset” without a stable source of value. She might as well have been speaking for the federal government and other monetary authorities. Cryptocurrencies do not have legitimate currency value in any parts of the world.
Governments are tightening regulations on crypto coins. The United States prohibits the purchase of virtual coins through credit cards. China and Russia ban their trading. Japan is relatively sanguine about cryptocurrencies, but allows it to be used for digital settlements only.
It is premature to jump to conclusions about cryptocurrencies. It remains to be seen whether they will meet the infamous doom of tulip mania in the 17th century or the disastrous bursting of the dot.com stock bubble or pose as formidable a threat to the legitimate monetary system. Central banks weigh both possibilities. They may never replace legitimate hard currencies, but their influence could become bigger.
The Bank for International Settlements has begun discussing issuance of a central bank-backed digital currency. The Bank of Korea formally joined the global movement and launched a study on the impact of crypto coins on the monetary and settlement system. It won’t be accepting the existing of digital money, but develop one backed by the central bank’s digital ledger.
The immediate future of cryptocurrency is in limbo. For one, Bitcoin, the best known in the 1,400-plus crypto coin community, has become increasingly difficult to mine. A miner cannot even yield a 7,000 won worth block even after 24-hour-long brain-jamming digging work. Some people in their 20s or 30s, who have put all their money and hopes on what they believed to be digital gold, are taking extreme measures after the crash of Bitcoin, which has now come down one-fourth from its peak levels. Some big Bitcoin owners — dubbed “whales” — are believed to have already cashed out.
Serious investors are now kicking the tires. Internet giant Naver launched a cryptocurrency business in Japan. Messaging and mobile app leader Kakao and leading game publisher Nexon have made equity investments in cryptocurrency exchanges. They have their eyes on the underlying peer-to-peer blockchain technology that could have major potential. Many of the virtual coins will go extinct. Without all the hype, crypto rewards may show their true implicit values. But that sound you hear is a major crash.
JoongAng Ilbo, Feb. 9, Page 32
*The author is an editorial writer of the JoongAng Ilbo.