Treasury Today Country Profiles in association with Citi

Cryptocurrencies: acceptance and acceptability

Gold bitcoin floating in a bubble

Uncertainty and volatility have been characteristics of bitcoin and its offspring, making many financial professionals wary of cryptocurrencies. Is it time to rethink this attitude?

Will 2018 be the year that treasury departments start taking cryptocurrencies seriously? For many financial professionals bitcoin and its many progeny are still regarded in much the same terms used to describe Lord Byron – “mad, bad and dangerous to know”.

Bitcoin also has no shortage of high-level detractors such as veteran investor Warren Buffett, who for the past five years has regularly argued that it’s a non-productive asset producing only more buyers looking to sell. Last year that worked well for an increasing number of investors, despite periodic setbacks bitcoin began the year at less than US$1,000 and by December was touching the US$20,000 level.

The past eight months have proved an anti-climax by comparison. Bitcoin has fallen back from these heights and more recently has been moving in the US$6,000 to US$7,000 range. Other popular cryptocurrencies such as Ethereum, XRP and Bitcoin Cash show similar declines.

Add to this the fact that the world’s two biggest economies are less than friendly towards cryptocurrencies and you could conclude that the hype has been far greater than the reality. China, which has never recognised them as legal tender, is intensifying its crackdown on local exchanges and cryptocurrency-related fundraising such as initial coin offerings (ICOs) – even to the extent of blocking WeChat accounts that discussed such activities.

Meanwhile, in the US the Securities and Exchange Commission (SEC) has adopted a less hostile, but still wary stance by turning down authorisation for innovations such as bitcoin-backed exchange traded funds (ETFs). There are, however, signs of dissent in the SEC ranks. Hester Peirce, who joined the regulator last January as a commissioner, has recently spoken of how “we’re not great with respect to innovation as an agency” and that the US risks falling “behind the curve” in not being more receptive to the cryptocurrency industry.

She has reason to be concerned. Cryptocurrencies are inextricably linked to blockchain technology, which even China is keen to encourage. A growing number of regulators around the world are deciding that standing in the way of cryptocurrency innovation is a Canute-like activity and devising basic guidelines instead will prove rather more productive.

Delaying the inevitable

China’s recent crackdown increasingly looks like a move to delay the inevitable as other Asia Pacific economies look to accommodate cryptocurrencies. Japan was the first country to accept bitcoin as legal tender back in April 2017 and has recognised more than a dozen companies as registered cryptocurrency exchange operators in the past year. Japanese banks are reported to be working on their own digital currency, the J-coin, to be launched in time for the 2020 Olympics and to wean consumers off cash.

Japan’s lead was quickly followed by Australia, where bitcoin has been officially accepted for just over a year and the Australian Securities and Investment Commission (ASIC) is proving proactive on issues such as the treatment of ICOs.

Add to these pioneers other APAC locations, such as South Korea, which is fast becoming a major cryptocurrency hub that accounts for 14% of the bitcoin market and Thailand, which has just announced the launch of Project Inthanon, a proof of concept trial for developing a national cryptocurrency.

Asia Pacific might lead the pack, but other regions are closely following. This week the Jerusalem Post reported that Israel’s Finance Ministry and the Bank of Israel are reviewing the possibility of developing a state-backed cryptocurrency, the digital shekel, which would be employed in the government’s campaign against tax evasion.

It’s clear that the momentum is building and the increasing automation of life over the next few years will pave the way for the greater acceptability of crypto – particularly as it affords consumers the opportunity to cut out the middleman when making payments.

Time to reconsider?

For corporate treasury departments, cryptocurrencies have carried too many negative connotations, including price volatility and their use in activities such as scams and money laundering. However, just as the dotcom boom to bust of two decades ago saw survivors develop into today’s major tech names, the merits of cryptocurrencies may now come to the fore if they no longer offer a means to get rich quick.

The big question is whether they will steadily supplement – or even in time replace – fiat currencies? The progress that many countries are making towards a cashless society and the imminent disruption that automation will cause to everyday purchases and bill payments, suggest that crypto is here to stay.

If the resistance of bitcoin deniers such as China gradually melts away, a more unified regulatory approach could develop worldwide. This would open up possibilities such as using cryptocurrencies as an international payment method and avoiding FX, once they become commercially accepted.

A recent KPMG study concluded: “It is evident that a ‘serious crypto-community’ is taking shape whose ambition is to bring cryptocurrencies out of the shady, highly speculative niche they have occupied to date.” As this year’s conference season nears, it’s a prospect likely to be widely debated over the coming weeks.