Questioning Bitcoin

Kompas/Heru Sri Kumoro

Tony Prasetiantono

Bank Indonesia (BI) has officially banned the use of cryptocurrency as a tool of payment in Indonesia. One of the most famous cryptocurrencies is bitcoin. The Finance Ministry also supports the decision. Bitcoin has triggered controversy since its first introduction in 2008 by an individual or a group calling itself Satoshi Nakamoto (reportedly a pseudonym).

BI’s stance is the same as China’s. Meanwhile, the response of many countries, including the United States, tend to be perplexed or ambiguous, saying they are “still assessing it.”

Why can’t we accept bitcoin? Unlike other universally accepted currencies, bitcoin has no authority such as a central bank, like The Fed (US dollar), European Central Bank (euro), Bank of Japan (yen) and BI (rupiah). Why do we need an authority? Because the first requirement for a currency is a mechanism to maintain its stability. Without stability, a currency cannot be credible and people will not use it. The central bank is tasked to guarantee its currency is stable.

The fact is the value of bitcoin is not stable. It is extremely volatile. During 2017, the value of bitcoin increased over 1,000 percent. For those who own and support it, of course, this was pleasing. They became rich overnight. The cryptocurrency’s value tends to fluctuate wildly without any underlying basis. This means the value of bitcoin can skyrocket without any fundamental change.

Under the existing financial system, if the rupiah weakens BI will intervene by releasing its foreign exchange reserve (which now stands at US$120 billion). Meanwhile, in the case of bitcoin, when its value falls there is no authority to support it. This is because bitcoin has no authority, supervisory or entity, which is held accountable.

Consequently, those who own bitcoin will suffer losses and cannot file protest. After all, there is no authority responsible for bitcoin. This is different from the central bank system, which is supported by tight regulation and supervision. So to is the trading of equities on the stock market, which is under an authority with tight supervision to protect investors.

The problems gets worse when the company servicing cryptocurrency trading (exchange agencies) also become the target of hacking. The latest news reported Japan’s Financial Sector Authority (FSA) imposed punishment on cryptocurrency exchange agency Coincheck for losing 58 billion yen or Rp 7 trillion (Reuters.com, 29/1).

Yale University economist Robert Shiller (CNBC, 19/1) said the phenomenon of bitcoin was like the “tulip mania” in the Netherlands in February 1637. Tulip mania saw the dramatic increase in the price of tulips, with a single tulip priced 10 times the annual salary of a worker. Shiller predicted the price of bitcoin would be corrected and collapse in time.

Paul Krugman said bitcoin was basically a financial bubble that was like a Ponzi scheme (Business Insider, 15/12/17). A Ponzi scheme is fraudulent investment operation in which participants who join early are those who enjoy the benefits, while later participants suffer big losses. For Krugman, bitcoin is a Ponzi scheme with an advanced appearance based on advanced technology that makes it look attractive and sophisticated.

An economist who accurately predicted the global financial crisis in 2008, Nouriel Roubini (Business In- sider, 8/11/17), said bitcoin was a speculative action that created a gigantic speculative bubble. Roubini is convinced bitcoin will soon come to an end. Other countries need to follow China and ban it.

kompas/didie sw

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Change of establishment

For former Fed chairman Ben S Bernanke the cryptocurrency phenomenon was an effort to change the traditional system where the government and the central bank control money circulation. Bernanke believes this phenomenon will fail (Fortune, 16/10/17).

For Joseph Stiglitz, bitcoin was not needed. He made the statement during the World Economic Forum 2018 in Davos, Switzerland. (Bloomberg, 24/1). If bitcoin is intended to be a virtual currency, the current banking system has also used it, hasn’t it? The only advantage of bitcoin is the secrecy of its users. Bitcoin transactions are not traceable.

It seems as if the greatest appeal of bitcoin is for users who do not want their transactions to be traceable. However, the financial sector is getting more transparent. The banking industry in Switzerland, which was known for its secrecy, is now being made transparent. Now, there is no place to hide. So, the argument that bitcoin is prone to illegal transactions, such as drug trade, terrorism and corruption, is justified.

Indonesia is among the countries that have swiftly responded to the bitcoin issue after China at a time when other countries are still debating it. It is a preventive action before there are more victims like in Japan.

I too support the decision and believe the solid arguments from my favorite economists: Shiller, Krugman, Stiglitz, Bernanke and Roubini.

A TONY PRASETIANTONO

Head of the Center of Economics and Public Policy Studies of Gadjah Mada University