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Economy

An Asian trade revolution in the making?

 TOKYO -- Skeptics say the collapse of Mt. Gox shows that the cryptocurrency bitcoin cannot work.

Yukio Noguchi

     But some experts see the innovations behind bitcoin, which allows for economic exchanges without escrow, as having great potential.

     The Nikkei recently interviewed Yukio Noguchi, a former Ministry of Finance bureaucrat and an adviser to the Graduate School of Finance, Accounting and Law at Waseda University, about the bitcoin's future.

Q: How do you see bitcoin's future?

A: Mt. Gox has long been seen as a questionable exchange. Some people say the elimination of such an exchange is good for the future of the bitcoin.

     The problem of Mt. Gox occurred outside the bitcoin system. It is important to distinguish whether a problem occurred inside or outside the system. The exposure to external problems will help increase the use of bitcoins in the long run.

     The so-called "block chain" is the core of the bitcoin system. Mt. Gox is no more than an exchange outside the block chain. It is unreasonable to deposit real money in an exchange where bitcoins are traded for yen and other currencies.  After the Mt. Gox scandal, other bitcoin exchanges stressed that they, unlike Mt. Gox, would not keep coins on behalf of clients.

Q. What potential does bitcoin have in Asia? 

A: Bitcoin has a high chance of being used for trade settlements. International remittances are troublesome and costly. In emerging Asian nations, remittances are often impossible because of the absence of banks.

     In countries such as Myanmar and Bangladesh, there are companies wishing to export the goods they produce. But if they actually try to exports their products, they find it impossible to collect payments. While a banking system needs to be created to resolve the problem, bitcoin can bypass the process. The trade structure of Asia will be greatly changed as a result. I think this will be the biggest impact of bitcoin.

    Bitcoins are an example of technology allowing less emerging nations to "leapfrog" the conventional process of technological development.  In China, cellphones achieved widespread use before the creation of fixed-line phone networks is completed, another example of leapfrogging. Britain was late to adopt electricity because its streets were lighted by gas lamps. Germany and Japan used electricity from the beginning.

     The same thing is highly likely to occur in the financial system.

     If Myanmar and Bangladesh gain power as exporters, Asia's trade map will be greatly affected. In such circumstances, big business opportunities will be created in the bitcoin infrastructure field.

     Worldwide merchandize trade amounts to 1,500 trillion yen ($14.63 trillion) per year. Commission fees are at least 3%, or 45 trillion yen. The fees alone will create a huge market as far as the bitcoin is concerned.

     Merchandize trade is not the only source of international remittances. Capital transactions, which are usually made through the banking system, involve much larger remittances. A shift in capital transactions to bitcoin will not take place anytime soon, because banks' involvement in the cryptocurrency system is strictly restricted.

     If bitcoins are used for capital transactions, a world beyond imagination will be created.

     Commissions from international transactions are produced through spreads on foreign exchange rates. The bitcoin creates no spreads of such a kind. I don't know what will happen to banks but I'm sure that credit card and remittance businesses will be greatly affected.

Q: What do you think of the Japanese government's stance on bitcoins?

A: I don't think the government has said anything new. The government said the bitcoin is "not a currency," but that is natural. Japan's legal currency consists of Bank of Japan notes and coins issued by the government. Japan's stance on bitcoin in terms of taxation and application of the capital gains tax to bitcoin transactions are nothing new.

     The tax issues surrounding bitcoin are a result of government failure to keep tabs on transactions. This is not a tax-code problem. Banks cannot handle bitcoin. As banking services are regulated, the government merely explained its conventional legal interpretation.

Q: Do you think it is favorable for the role of government to become smaller as a result of the bitcoin?

A: Libertarians think so. Extreme libertarians have long called for the gold standard in order to do away with government involvement in currency exchange. Friedrich Hayek even did not accept the government's exclusive right to print money. He argued that banks should issue their own currencies.

     But most people agree that the right to print money is bestowed on central banks and governments. They also accept central banks' arbitrary policies. However, concerns are growing about the unruly supply of money by central banks since the currency crisis.

Q: Do you expect a large-scale flight from legal currencies to bitcoin?

A: The flight of capital from Argentina and Turkey occurred recently. A flight from the Chinese yuan to bitcoin occurred. It may be fair to say the bitcoin proved a winner in China and Cyprus. Accurately speaking, funds fled to the dollar and other foreign currencies via bitcoin.

     People are worried about a collapse of the financial system because of unlimited credit easing. Given the case of China and Cyprus, the bitcoin may serve as a ratchet against unruly monetary policy.

Q: China began to control bitcoin.

A: China is reining in banks' involvement in bitcoin. Many people misunderstand it. A large number of people in China now have and use bitcoins. Unless the use of the Internet is banned, the bitcoin cannot be banned.

Q: What problems does bitcoin need to overcome to become a means of savings?

A: The high risk of price fluctuations is the problem. Wild price fluctuations, rather than trustworthiness, are the problem. Derivatives based on bitcoin may be created in the near future. If futures are launched, for example, the volatility of bitcoin will likely become as small as that of more traditional currencies.

Interviewed by Nikkei deputy editor Hidemitsu Kibe

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