Asia’s Cryptocurrency Faultlines
Beyond the headlines of Bitcoin’s phenomenal rise and volatility, hitting US$17,069 at the time of writing, there are foreign policy considerations outside of finance and investment, especially within Asia. Fault lines have opened across the region in how to regulate crypto trading, whether Bitcoin itself is a fad or foundation of a new era.
How individual nations approach this will be of growing importance to the region’s geopolitics.
While nation states may grow stronger militarily, and their reach through digital tech and surveillance has never been higher, we’re also in a new era of individualism and a truly globalized economy in which the concept of citizenship has been diluted.
Due to Bitcoin’s decentralized nature, global reach and complexity surrounding its operation, it is difficult for governments to regulate. That is why some Asian governments look upon the crypto revolution with anxiety. Not only is the rise of Bitcoin a potential alternative to traditional fiat currency, but over time it could challenge the ability of governments to maintain control over their national economy.
Some governments accept the new financial reality and are seeking to get out ahead of it. Others seek the innovations but want to maintain control and business as usual. The chief divide in approach is between China and Japan.
The Communist Party of China’s approach is a study in contrasts, mirroring its approach to global engagement as a whole. While Beijing seeks to maintain a fierce grip on crypto trading domestically, it also seeks to be a leader in the growth of blockchain technology, provided the party oversees it.
China has restricted trading of Initial Coin Offerings (ICO) and Bitcoin trading in recent months, effectively stopping it in September while devoting considerable governmental resources to the research of distributed ledger technology, and its potential uses.
Although the shutdown is justified by the prevention of money-laundering and capital flight, in fact the development of blockchain and a party-backed cryptocurrency is aimed at ultimately seeking new ways to challenge the US dollar as the primary reserve currency, a goal shared by Russia and regarded with interest among the BRICS. It is here that China, like Russia, faces tension between its domestic political climate and foreign policy goals.
While the long-term profitability of Bitcoin remains uncertain, other cryptocurrencies are expected to be developed and traded more widely. So too shall more uses for blockchain be devised and enacted. At its core, leadership will thrive with free-form creativity, ambitious innovation, and a national culture in which such aspirations can be pursued. That requires allowing citizenry a free hand in creation.
On a technical level the issue can be illustrated by the difference between permissionless and permissioned blockchains. Whereas permissionless blockchains like Bitcoins are public and accessible by all, permissioned blockchains are restricted. It is no shock to hear that the CPC prefers the latter along with its capacity to control it although the open and deregulated nature of a permissionless blockchain fosters a stronger culture of innovation and growth.
This culture is not something the party can just create on a whim. It’s also unlikely to be interested in doing so in an era where the hawkish President Xi Jinping has sought to silence the earlier CPC’s flirtation with a more liberal and open society.
Despite the September shutdown, the scale and rapid growth of the Chinese economy means Beijing will undoubtedly be a key global player in the story of digital currency. Nonetheless, while China has shown it could build an open economy while denying political freedoms, the growth of cryptocurrency will create new trials for the party’s aim to have their cake and eat it too.
While China’s approach may be complex – broadly defined as anti-Bitcoin but pro-blockchain, the party’s recent moves have damaged China’s standing on the cryptocurrency. Its actions have also benefited its chief economic rival in the region, Japan.
While at the start of the year more than 90 percent of cryptocurrency was traded within China, China’s September crackdown propelled Japan into becoming the world’s largest Bitcoin market, accounting for more than 50 percent of global crypto trading. More worryingly for the CPC, many Chinese exchanges that were unable to continue trading have now looked to relocate to Japan.
In recent months, while the CPC has constricted cryptocurrency trading, the Japanese government began looking into the creation of a native digital currency, the J-Coin. True, the People’s Bank of China is also working on a currency of its own, which may in fact be released before the J-Coin, to what extent the CPC can make up for lost time is questionable.
This owes in no small part to Japan’s greater offerings to the cryptocurrency community as a whole. After the government announced it would accept Bitcoin as legal currency in April, by June more than 260,000 Japanese retailers were made Bitcoin-ready. Then, in mid-September, Japan became the next safe harbor for banned Chinese Bitcoin platforms that needed to open up shop elsewhere.
Weeks after the China ban, Japan’s government officially recognized 11 cryptocurrency platforms as registered exchange operators, giving them an umbrella of legitimacy. It also requires an operator to adhere to certain provisions such as strong user identification checks to prevent money laundering.
It’s envisioned the J-Coin could not only serve as a government-backed digital alternative to fiat currency, but ultimately to bring about the elimination of coin transactions. For a country that has long been famous for its heavy cash-based economy, the creation of the J-Coin could see an overnight shift from straggler in currency modernization to leader, with implications well beyond hobbyist trading.
Thus the story of Bitcoin trading on the blockchain in China at its core is an issue of the CPC seeking to determine how it can reap the benefits of a new global economic tool, without having to recognize wider political freedoms while for Japan, there’s an absence of this central tension, and readiness to lead.
These divisions could also grow greater, as right now the CPC is supportive of blockchain technology if not trading, but this too could change. In tandem to also trading the world’s second most famous cryptocurrency, the blockchain for Ethereum, a Bitcoin-like distributed public blockchain network, has the potential to bring about a new level of transparency in government dealings.
In time, its proponents say, innovations like Etherium could not only do away with the ability of governments to maintain an overarching bureaucracy over its citizenry, but also deliver greater transparency about government actions.
This is surely bad news for a Xi-led government seeking to continue to open up China’s economy while winding back internet freedom and access. Tokyo by contrast is ready to seize anything that spurs growth. Bitcoin and blockchain won’t do that alone, especially given Japan’s population sclerosis, but Japan’s approach offers a distinct advantage as it seeks to return to growth.
Japan and China not only hold a complex rivalry and historic tensions, but also a markedly different approach to diplomacy and soft power. Japan is forever seeking to project itselfas a hyper-modern Asian nation that can outpace any competitor. The CPC by contrast seeks to intertwine growth ideology, in which China’s historical leadership at ‘the center of the world’ must be pursued.
These fault lines in Asia are not confined only to Japan and China. South Korea has joined with China in banning Initial Coin Offerings, commonly referred to as ICOs. This was reaffirmed in December as Seoul reportedly issued a ‘pre-ban’ on Bitcoin futures trading. The Japanese government has indicated it retains misgivings surrounding ICOs, as has Taiwan.
It’s ultimately possible Japan could one day go down a similar path to China, just as the CPC could surprise the world and change course although neither appears likely now. The CPC’s problem with Bitcoin and digital currency is not chiefly a matter of technology but ideology. Similarly, Japan’s global leadership in accepting Bitcoin payments‚ the associated industries that have emerged‚ and the new role it has delivered the nation in the global economy means turning its back on its progress would be painful. Tokyo may be wary about cryptocurrency, but it is set to face it.
Futurology is a dangerous path, and the future of investment especially so. Notwithstanding, some cautious conclusions can be drawn:
Bitcoin is highly volatile and its future remains unclear
Beyond Bitcoin alone, there’s little doubt blockchain technology will continue to grow
Alongside Bitcoin, existing and emerging cryptocurrencies will continue to attract investors
A global uniform policy towards cryptocurrency is unlikely now. Each nation will seek to regulate (or not regulate) cryptocurrency in its own way
Nations that restrict or look to strongly regulate cryptocurrency will find their local industries look beyond their shores
How the CPC and Japan’s government respond will not only determine the future of their cryptocurrencies but go a long way to influencing the global market. If Bitcoin is to be the first chapter of a truly digital economy, then Asia’s two biggest economies are taking different paths.
Ed Kennedy is a journalist from Melbourne, Australia. He can be found on Twitter at @Edkennedy01'