Bitcoin Remains Resilient Despite Establishment Backlash

Just this week, JP Morgan Chase CEO Jamie Dimon came out strongly against Bitcoin.  Calling it a “fraud“, claiming that “it is worse than tulip mania”, and declaring that he will fire any employee who trades the cryptocurrency for being “stupid”. (While somewhat amusingly admitting that his daughter invests in Bitcoin.)

Also this week, several China-based Bitcoin exchanges including BTCC, ViaBTC, Yunbi, OKCoin and Huobi have been ordered to stop trading by the end of September. This news follows a decision by Chinese authorities earlier in the month to ban fundraising through Initial Coin Offerings (ICOs).

The price of Bitcoin dropped by around 32% during September, before rocketing 27% in a single day on Friday.

What’s going on here?

At least three things.

Firstly, Bitcoin can function without a trusted financial intermediary, which means it may take business away from established financial institutions like JP Morgan. Bitcoin is a cryptocurrency; that is, a digital currency which records transactions in the blockchain, a decentralised shared public ledger stored on computers connected to the Bitcoin network, and secured using cryptography. As a result, transactions can take place between any users on the network without needing to pass through a trusted financial intermediary. As it happens, JP Morgan Chase often plays the role of a financial intermediary, from which it earns substantial revenues [pdf]. This may help to explain why Jamie Dimon, the firm’s CEO, has been so critical of Bitcoin. It is a technology which could disrupt his bank’s business model, which makes it a potentially serious threat that needs to be squashed.

Secondly, Bitcoin allows anonymous transactions worldwide, which makes it difficult for governments to monitor and control. Jamie Dimon is skeptical that authorities will ever allow a currency to exist without state oversight, and this may explain China’s crackdown. China is likely concerned that people are using Bitcoin to shift money out of the country in violation of its capital controls.  China is also likely worried, and legitimately so, that Bitcoin and ICOs could be used for things like terrorism financing, money laundering, and organised crime. As cryptocurrencies like Bitcoin become more mainstream, we should expect increasing levels of government oversight and regulation. America’s SEC, Australia’s AustracJapan’s Financial Services Agency, and others have already started to do this. My feeling is that the crackdown in China may be a temporary measure, which could be followed by the People’s Bank of China issuing a brand new government backed cryptocurrency that the government is able to control.

Thirdly, unlike fiat currency, Bitcoin is designed to have a strictly limited supply. No more than 21 million Bitcoins are ever expected to be issued. Assuming people continue to have confidence in Bitcoin, this artificial scarcity will help to guarantee its value. This may explain why Bitcoin’s price increased by 27% on Friday, even though there has been a lot of negative news coming from China and Jamie Dimon.

In response to Jamie Dimon’s comments, John McAfee, CEO of MGT Capital Investments, responded by saying, “you called Bitcoin a fraud? … I’m a Bitcoin miner. We create Bitcoins. It costs over $1,000 per coin to create a Bitcoin. What does it cost to create a U.S. dollar? Which one is the fraud? Because it costs whatever the paper costs, but it costs me and other miners over $1,000 per coin. It’s called proof of work.”

Bitcoin’s artificial scarcity could encourage investors to buy Bitcoin as a hedge against inflation rather than buying dollar denominated assets like government bonds. If the market for Bitcoin becomes big enough, this could make it more costly for some governments to borrow. Traditional currencies usually experience inflation because central banks tend to print more money than is required to facilitate economic activity, leading to higher prices. Inflation allows governments to borrow money today, and repay debts in future with money that is worth a little bit less. If Bitcoin becomes a global reserve currency, some governments may face pressure to issue debt denominated in Bitcoin. As a result, they would no longer be able to print money to repay their debts. For a country like America, which controls the world’s reserve currency and runs consistent budget deficits, this would represent a significant change from the status quo.

Bitcoin remains resilient despite this week’s establishment backlash.  However, the biggest risk for Bitcoin in the short to medium term would appear to be regulatory risk. Will other governments follow China’s lead by banning Bitcoin exchanges and seeking to establish their own state backed cryptocurrencies?

My feeling is that in Western countries, the free market will prevail. However, even if this is the case, we should anticipate much more government scrutiny, supervision, and regulation going forwards.

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Battle of The Central Banks: China Declares ICOs Illegal

As I have been writing in this space of late, the days of the Wild West for cryptocurrency are absolutely at an end. The writing has been on the wall all summer.

The latest news to hammer the point home? As September dawned last week, six more major banks joined a UBS-led effort to create the Utility Settlement Coin (USC).  This looks set to be a new form of digital cash for clearing and settling financial transactions using blockchain, the technology behind bitcoin.  Unlike bitcoin, however, the USC will not be a new standalone digital currency. It will instead be the digital cash equivalent of major real world currencies backed by central banks.  It is unclear whether the USC project is intended to compete or cojoin with Ripple. However, UBS is in discussions with central banks and regulators. They are aiming to release an initial version of the USC by the end of 2018.

What does all this mean?

The big western banks have formally conceded that cyber currency is here to stay and they are now taking active steps to stake their claim within the quickly evolving cyber currency landscape.

Less than a week later, however, came another piece of news.

The Central Bank of China has now banned all Initial Coin Offerings (ICOs) – including ones that are in the process of raising money. ICOs are essentially a way of fundraising using cryptocurrency.  They are a financial digital hybrid, a cross between crowdfunding and an initial public offering that involve the sale of virtual coins mostly based on the ethereum blockchain.  Interest in ICOs and funds invested in them have exploded in 2017, and so has the price of bitcoin.  There are many who believe that these events are not unrelated. In fact, the gains bitcoin made earlier in the year when the new fork in its code was announced might well be wiped out by the new Chinese decision to ban ICOs. Beyond bitcoin specifically, China’s decision to ban ICOs has negatively affected the value of all cryptocurrencies.

Given the huge amounts of money at stake, it is no surprise that ICOs have attracted cyber criminals and attention from regulators.  According to Chainanalysis, cyber criminals have stolen as much as 10% of the money intended for ICOs in 2017 (more than $100 million). Governments are keen to put a stop to this kind of activity.  And so, the Chinese ban is not wholly unexpected.  Jehan Chu, managing partner at Kenetic Capital, believes China will allow ICOs in future on approved platforms.  Perhaps future ICOs in China will also need to use an officially sanctioned cryptocurrency issued or controlled by the Chinese government.

It is unclear whether the Chinese government will create their own cryptocurrency. If it does, this will raise new questions that have to date been much posed but never definitively answered. In fact, Chinese dominance of the bitcoin market has been one of the biggest boogeymen in the vertical since its inception.

What further developments can we expect in the fourth quarter of 2017?

Regulations Are Coming Fast

Cybercurrency is not at risk of disappearing, and it is becoming increasingly clear that it will play a pivotal role in the transformation of finance over the coming decade.  However, the key institutions responsible for steering development of the technology, and the laws, regulations and policies that govern the space are in the process of changing.  As a result, cyber currency will not be able to replace central banks, nor sidestep regulations. And that is an important milestone to reach.  Especially as the conventional wisdom in the world of cyber currency has long predicted that this would never happen. Or that if it did, it would be the “end of bitcoin”.

The world of cyber currency has entered a new phase. It’s not the end of the world. And its future will be much more regulated.

Marguerite Arnold is the founder of MedPayRx, a blockchain healthcare startup in Frankfurt. She is also an author, journalist and has just obtained her EMBA from the Frankfurt School of Finance and Management.

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