Currency that you can’t touch, that isn’t regulated by financial institutions, and exists only in the form of encrypted code. It might sound outlandish, straight out of Blade Runner 2049 – but cryptocurrencies are taking the world by storm. With both the number of users and the number cryptocurrencies rapidly increasing in recent years, this article hopes to shed light on what cryptocurrencies are, and what they mean for ASEAN moving forward.
What are cryptocurrencies?
Cryptocurrencies, like any traditional currency, are a means of valuation and exchange between different parties. The difference, however, lies in that they are completely digital and secured by encryption (to prevent both theft of the currency and unauthorised creation of new units).
How many cryptocurrencies are there?
As of 12 January 2018, there exist an estimated 1,136 cryptocurrencies. This number is constantly changing.
What is Bitcoin?
Bitcoin is the first cryptocurrency ever created, with its initial proof of concept developed in 2009. As of 12 January 2018, it is also the world’s most valuable cryptocurrency, with more than 16,000,000 units in circulation.
What does it mean when we say that cryptocurrencies are typically decentralised?
Traditional currencies are issued, managed, and regulated by state governments. In these ‘centralised’ systems, for example, central banks manage monetary policy (increasing and decreasing money supply) to achieve macroeconomic objectives.
Part of what makes cryptocurrencies so different is that they have tended to follow Bitcoin’s ‘decentralised’ functioning. Such cryptocurrencies are what we describe as peer-to-peer (P2P) systems, which are run by user interactions rather than managed by a central authority. This means that no group or individual owns or controls these currencies. Since governments and companies do not control these cryptocurrencies, they can neither create new units of them, nor alter their supply.
What is Blockchain?
Just as an accountant holds a ledger to track all transactions coming in and going out, decentralised cryptocurrencies need an equivalent to prevent fraudulent transactions or illicit creation of new units. This is where the ‘crypto-’ in cryptocurrency takes meaning.
Blockchain is the technology by which Bitcoin is secured, and it is what we could term as a ‘distributed ledger’. To simplify this complex technology, we describe it as ‘distributed’ because everyone has access to it, and ‘ledger’ because it acts as an ever-expanding record of transactions involving Bitcoin. Blockchain and other ‘distributed ledger’ technologies are the keys to securing and managing cryptocurrencies.
What are Miners?
No, we’re not talking about Minecraft here. Since cryptocurrencies are not managed by any central group of people, who manages the ‘distributed ledger’ technology, wielding the power to create new units and verify transactions? Miners, of course.
Blockchain and other ‘distributed ledger’ technologies are run using the computing power of a network of users – users that we call miners. When put together, this network of computing power verifies transactions and manages the creation of new units of the currency. Manipulation of the ‘ledgers’ is not likely, given that each computer manages a small portion of the network infrastructure, and miners have no incentive to trust one another. Since they receive new units of the cryptocurrency for helping to maintain the system, it is in the interest of miners to prevent any foul play.
Can I get a physical version of a cryptocurrency?
In the past, there have been attempts to create physical versions of cryptocurrencies. For example, the Casascius Coin was an attempt to create physical versions of Bitcoin. The coins themselves were collectible and held no value, but were embedded with redeemable key codes that would grant the owner access to existing digital Bitcoin. However, these ceased to be produced due to the complications arising from domestic legislation necessitating a producer to be registered as a money transmitting business. Today, many of the ‘physical’ versions of cryptocurrencies are purely commemorative.
What are the risks of cryptocurrencies?
There are several complications when dealing with cryptocurrencies.
Since cryptocurrencies are decentralised and unregulated, there is a high risk of scamming and theft. For example, Chinese Bitcoin trading platform Global Bond Limited (GBL) shut down abruptly in 2013, leading to users losing an approximate cumulative total of USD$5,000,000 in Bitcoin.
Much like the pre-2008 real estate bubble, there has been speculation that surging cryptocurrency values in 2017 represent a bubble that will burst in the near future. Investment in cryptocurrency remains a risky affair, with unpredictable value fluctuations.
The trading of cryptocurrencies is also not legal in many countries, as states grapple with the difficulties arising from a currency they cannot regulate. South Korea has recently announced plans to ban the trading of cryptocurrencies, joining a group of countries that include the likes of Morocco and Bangladesh.
Why are states wary of cryptocurrencies?
The key concern lies in the decentralised nature of such cryptocurrencies.
If adopted widely, they could act as competition to national currencies, limiting the ability of central banks to shape macroeconomic objectives through monetary policy.
Cryptocurrencies could also affect a government’s ability to tax and spend. Since transactions via cryptocurrency are difficult to regulate and tax, widespread adoption could prevent states from raising sufficient funds for national budgets.
As a decentralised currency, there are also concerns that cryptocurrencies could empower criminal activities, ranging from money laundering to tax evasion to financing terrorism.
What do cryptocurrencies have to do with the ASEAN region?
Southeast Asian governments as a whole have looked on cryptocurrencies with skepticism. In 2018, both Indonesia and Vietnam will seek to ban the trading of cryptocurrencies, in part to protect their own local currencies. Singapore and Thailand have both issued warnings cautioning against the risks arising from investment in cryptocurrencies. In spite of this, there have been attempts to create cryptocurrencies for the region, such as BitASEAN, though the successful adoption of such region-specific cryptocurrencies has yet to be seen.
On the other hand, cryptocurrencies have potentially beneficial applications in the region. For example, the use of cryptocurrencies for income remittances between ASEAN nations has been proposed to reduce transaction fees. The use of ‘distributed ledger’ technology has also been seen as promising as a model for improving the way transactions are conducted in the financial sector.
But for all the potential applications of cryptocurrencies in ASEAN, it remains to be seen how the challenges of a decentralised digital currency can be overcome, and if cryptocurrencies can ever standalone alongside their national counterparts in member states.
Written by: Mock Yi Jun
Yi Jun is a Research & Publication Analyst for ProspectsASEAN.com and a Politics & International Relations undergraduate at the London School of Economics and Political Science (LSE). ASEAN’s future in a changing world is of great interest to him, particularly in the fields of emerging technologies, sustainable development, and international security. Yi Jun is a Queen’s Young Leader, an alumni of the U.S. Mission to ASEAN Young Southeast Asian Leaders Initiative, and has had his writing commended by the likes of Foreign Affairs Magazine and the Lee Kuan Yew School of Public Policy.
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