Despite my objections to Bitcoin and my negative views about it (see this and this), I think Singapore is right to undertake due diligence to understand it properly.
Singapore keeps pushing ahead while the West stagnates: there is a culture of deep innovation in its public sector (which is essentially private). Singapore does not ignore new technologies. It tries to understand them and take advantage where possible.
Following this lead from Singapore, I've also put a tiny bit of money into bitcoin and one other alternative currency, so I can understand what is going on. I also managed to read up quite extensively about these alternative currencies. This is money well spent to get a better understanding of cryptocurrencies.
My concerns are largely regulatory, and many of these concerns still remain. But I find that regulators have had a very long time and done NOTHING about Bitcoin. Therefore, this has now grown too big to deal with. It is a REAL thing, that needs to be given real consideration.
LESSONS TO DATE:
I've purchased these cryptocurrencies through a Hong Kong based exchange. There was very diligent validation of identity by the exchange. That should help lower money laundering risk. I had transferred AUD through my bank, so this is a fully recorded transaction.
BUT I understand that customers of the exchange can plunk in their bitcoins directly into the exchange (i.e.not through banks). These bitcoins, being totally anonymous, could have been purchased/ mined in any number of ways unrelated to the regulatory system – including through drug/corrupt money.
My question is: how can any regulator even possibly deal with this issue? Maybe that's why they are sitting on the sidelines, confused about what they can do.
The exchange can be regulated and can check ID, but how can anyone identify "black-money" bitcoins? All bitcoins look the same, like drops of water in the ocean.
I can report the following:
1) There is THICK trading – very active trading of bitcoins in the Hong Kong based exchange. Spreads are very small, as a result. Trading is instantaneous.
2) There is very THIN trading in alternative currencies: only a few of them are convertible into dollars, only very small amounts are traded, with very wide spreads.
3) Most alternative currencies that are traded (very few are) have been declining in value over the past many months.
4) Bitcoin volatility has dramatically reduced over the past few months.
5) Bitcoin market capitalisation is around $8 billion compared with the nearest competitor, Litecoin, at $200 million.
6) Hundreds of thousands of businesses accept Bitcoin, compared with almost none for most others.
- Just like Facebook displaced Myspace and Okrut comprehensively and totally, so also the "eyeball" factor, the thick trading factor, and the assurance that the black money and corrupt industry of the world will always act as a "base" for the bitcoin market, have meant that alternative currencies are being wiped out, even as Bitcoin is now becoming more of a "store of value" and more likely to be used/traded across the world. Alternative currencies are fighting a losing battle. This is not about the First Mover advantage, but about the acceptance and hence liquidity and credibility of the market.
- There is not much to distinguish between various crypto-currencies, some minor technical matters notwithstanding. As commodities, it is now merely a matter of consumer preference (thickness of markets) that will dictate which one "wins".
- Regulators have had plenty of time to resolve the money-laundering and black-money issues that plague Bitcoin, but they simply CAN'T. They've thrown up their hands. Therefore, bitcoins are likely to flourish regardless of what regulators do.
- Bitcoin has started behaving more like an asset (an appreciating store of value) than currency. I don't have a digital wallet yet and don't see the need to create one. That will require me to hold bitcoins at my own risk and I could lose them if I lost my digital wallet. Much better to store them in a digital exchange, like an asset.
- As bitcoin is increasingly seen by more people as an asset that increases in value, demand for bitcoins could increse, leading to a self-fulfilling explosion in value. THE MORE THE PEOPLE THAT BUY BITCOIN, THE MORE THAT WILL BUY IT, AND THE MORE ITS VALUE WILL INCREASE.
- Bitcoin is increasingly likely to become part of people's diversified portfolios.
- The moment any two or three governments "validate" bitcoin (through regulatory means), its "desirability" will radically increase, thereby causing a RUSH TO BUY, which will dramatically increase its value, and therefore desirability.
- Regulators are likely to realise that they best way to regulate Bitcoin is to work out agreements with Bitcoin exchanges to share data of their citizens. E.g. the Hong Kong exchange could provide data to Australia about my purchase – and particularly when I sell Bitcoin. Regulators will increasingly seek to enforce money laundering and other laws at the point when Bitcoins are converted into dollars, being largely unable to control conversion from dollars into Bitcoin.
- Bitcoin – once it has reached 'critical mass' – is unlikely to lead to a 'run on the bank' – i.e. panic sale, which is a relatively common problem with paper money.
- People are more likely to want to be paid salaries in Bitcoin once it has become established as an alternative currency-asset (it has both properties).
If regulators aren't able to "ping" Bitcoin rather quickly now (they've already taken too long), then I expect Bitcoin to become a very disruptive technology. Its impacts could be very far reaching and completely unprecedented. Vast economies could come into existence that never convert Bitcoin into dollars, and trades occur through internet/electronic means, totally invisible to regulators. E.g. if people in the peer-to-peer (e.g. TaskRabbit/ Uber) economy prefer to be paid in Bitcoin and more businesses accept Bitcoin as payment, which means many transactions will become invisible to the economy.
[I doubt, though, that regulators will allow large assets, e.g. homes or cars, to be ever purchased through Bitcoin. Payments to employees in the visible economy could also be restricted to "official" currencies - but to date, regualators seem to have not done anything concrete to stop the runaway train that is Bitcoin. Furture regulation could prevent the purchase and sale of property in Bitcoin - or at least requiring full disclosure of exchange value in local currency on the date of transaction. - one way is to use an anti-avoidance clause that allows stamp duty to be charged on a higher value if there is a low consideration paid.]
This could mean the rapid decline of taxes and the growth of economies (and even legal systems) entirely invisible to the government.
Do I recommend BitCoin now? No, I still recommend great caution, just in case a big regulator somewhere manages to find a way to shut it down. But the risk of any regulatory closure of Bitcoin is fast diminishing. At best, it is likely to be regulated and therefore "regularised" (hence made more popular: once that happens, Bitcoin will shoot up in value to astronomical levels).
Bitcoin is potentially the reverse of a Ponzi game, as it relies on (a) limited issue of coins and (b) complete absence of regulatory disruption. Therefore, once enough people "believe" in it, it only has an upside, not downside.
BITCOIN: GOING FROM DECEPTIVE TO DISRUPTIVE
Deciphering the cryptic world of bitcoin, July 13, 2014