Bitcoin Still Causing Confusion
BI in December 2017 made a statement indicating that it did not recognize bitcoin, or other digital currencies, as a means of payment.
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From the news in the printed media it appears that "bitcoin" and the like, digital or virtual money/cryptocurrencies, are still creating confusion. Statements made by a number of experts and financial authorities still show a variety of opinions and attitudes that imply an absence of unity about its significance.
In Indonesia, related authorities seem to have different opinions on bitcoin and other digital money. Bank Indonesia (BI) in December 2017 made a statement indicating that it did not recognize bitcoin, or other digital currencies, as a means of payment because it contravenes existing laws, in particular Article 34 of BI Regulation 18/40/PBI/2016 concerning the implementation of payment transaction processing.
It is also understood that BI does not recognize bitcoin and other digital money as an object of trade because it is considered too risky, as well as in order to maintain business competition and provide consumer protection.
The statement made by BI Governor Agus Martowardojo was reaffirmed recently by the head of the central bank’s communication department Agusman Zainal.
On the other hand, the Futures Exchange Supervisory Agency (Bappebti) is conducting a study to determine whether or not to allow the trade of bitcoin on the futures exchange. Thus, according to our monetary authorities, bitcoin and other digital currencies are not financial assets and are not a means of payment, while Bappebti has not yet decided whether or not to accept or reject bitcoin trade in commodities futures, or its status as an investment instrument like other financial assets. Therefore, there is an appeal to them to hold the same perception.
Back to bitcoin
In my article on bitcoin in Kompas (Jan. 12/2017), I emphasized the need to distinguish between the two different meanings of bitcoin. The first, is bitcoin as a digital/virtual currency or cryptocurrency.
According to Bloomberg, cryptocurrencies are worth about US$200 billion. In this case, it is about Bitcoin with a big B. This is the focus of the discussion I mentioned earlier and in this newspaper.
The second, is bitcoin as a currency issued/created by a computer using a blockchain algorithm, or bitcoin in the sense of money creation techniques. However, it is not the money as issued by financial authorities (central bank or government), but money which is created by people through the algorithm in the blockchain.
It is said to have first been created by an unknown person or group of people called Satoshi Nakamoto, a pseudonym. Although there is another version of the story.
The money is encrypted using a computerized algorithm and is uploaded on a website where others may become bitcoin owners. The activity of completing the computation algorithm is called mining, such as mining to find gold or other minerals.
The bitcoin can then be transferred among those who have succeeded in the mining process. The transfer in ownership is carried out transparently because all transactions are recorded in a ledger, a kind of balance sheet in accounting, called a blockchain. Because everything is transparent, bitcoin has the nature of money, and is trusted by those who use it.
Conventional money has a nominal value, such as one dollar, one hundred dollars, one hundred thousand dollars, and so on. The nominal value is accepted by the community solely on the basis of trust (fiat) that the money has the purchasing power stated by the nominal value on the currency because people have confidence in the issuer (a central bank or government).
Bitcoin is different. It can be issued after other parties do the mining. So, there is a decentralization in the creation of digital money. They all trust in bitcoin because those who participate in it are transparently recorded. For example, a bitcoin, cannot be sold more than once. If A sells a number of bitcoins to B, the transfer of ownership is recorded in the ledger transparently so that A will not be able to sell the bitcoin again because it already belongs to the other party. Thus, trust (fiat) is necessary to bitcoin transactions.
The initial creation of a coin is done through what is referred to as an Initial Currency Offering (ICO).
The main requirement for something to be used as a currency, a medium of exchange, is that it is accepted by all parties who agree to its value.
Prior to the use of banknotes, many countries used precious metals, such as gold and silver, because people believed in the value of the metal. It was a factor of trust. Banknotes gain trust because people trust the issuers, which are governments or central banks.
Banknotes, the nominal value of which is far greater than their intrinsic value (the value of the paper), are accepted by the public because they trust the issuer.
As a means of exchange or an investment tool, bitcoin has a value measured in conventional currencies—how many dollars or pounds etc. per unit. The value is virtual, and becomes real if it is exchanged (bought or traded) with ordinary money. A prohibition on trading, buying and selling bitcoin, can eliminate its value and role as a medium of exchange or investment.
In my previous article, I mentioned that as a much more sophisticated technology to cope with increasingly widespread crypto-crime, bitcoin is an innovation that gives hope for improvements to financial protection.
The definition of bitcoin as a digital currency that can be used as a means of payment or investment must be further elaborated before making a decision as to whether it should be accepted or not.
A collection of Bitcoin (virtual currency) tokens are displayed in this picture illustration taken December 8, 2017.
Effective digital money management
If you are still unclear about digital money, either bitcoin or anything else, or about blockchain technology, you are certainly not alone. From what we have learned from the media, it is understood that there is still no unity among financial authorities or countries on what to do about bitcoin.
Bhima Yudistira Adhinegara, an economist at the Institute for Development Economics and Finance (Indef), made a recent appeal for Bappebti and Bank Indonesia to come together to hold the same perception on bitcoin. This is reasonable.
As reported in the media, the value of bitcoin increased sharply last year. However, in less than a year, it also dropped tremendously. This instability appears to be the reason why the monetary and financial authorities and governments of many countries have prohibited or at least imposed limits on its use. This was stated, among others, by Paul Mampilly, a financial expert in his analysis "Governments Crack Down on Cryptocurrencies" in Currency (Jan/1/2018). In short, the Financial Industry Regulatory Authority (Finra), the regulatory authority of the financial industry in the US, announced it would focus on financial arrangements for digital money/cryptocurrencies.
The Chinese government announced it would issue a rule to end bitcoin mining activities. While the South Korean government has begun to require those who trade and use bitcoins to state their names clearly.
The Indian government is responding to bitcoin trading by limiting the funds used by those who trade it. Bank Negara Malaysia does not recognize bitcoin. France destroys bitcoin networks, Japan has declared that bitcoin is not a currency, and so on. These are examples of statements or regulations that restrict or prohibit bitcoin.
I agree with Paul Mampilly\'s view that the most effective way of suppressing and even combating the trade of bitcoin and other other cryptocurrencies, is by severing bitcoin and the like from official currencies.
But how can this be achieved? Bitcoin transactions and other digital currencies, or even other commodities, have a value that can be measured in conventional money. However, the value is only virtual, and only becomes real when a transaction is made and a transfer of ownership takes place, followed by the exchange of money as payment based on the virtual value.
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Soedradjad Djiwandono
Thus, the virtual value is not real unless an exchange with ordinary money can be carried out, and this can be prevented by a restriction imposed by a government or central bank, which have the right to do so.
One kilogram of gold has a value of several million US dollars or billion rupiah. However, even if there was a prohibition on exchanging gold for money, the value would remain as 1 kilogram of gold. Bitcoin, on the other hand, is only data in a computer, until it is exchanged for money. It has no value on its own. This arrangement, I believe, is the most important factor for determining whether or not to recognize bitcoin and other digital currencies as an investment tool, financial asset, or means of exchange.
J Soedradjad Djiwandono
Emeritus Professor of Economics at University of Indonesia, Professor of International Economics, RSIS, Nanyang Technological University, Singapore
