2017-12-06 19:49
Bitcoin could pose threats to financial stability
By Kim Jae-kyoung

Digital currencies such as Bitcoin could pose serious threats to financial stability if not properly regulated, Katrina Ell, economist at Moody’s Analytics, warned, Wednesday.

She suggested that Korea’s financial authorities should come up with necessary measures to limit Korean investors’ exposure to this speculative asset.

“Korea has become a more popular market since local authorities decided not to regulate the digital coin market,” said Ell in a recent interview. Moody’s Analytics is the research arm of the global credit ratings agency Moody’s Investors Service.

She pointed out that it’s a risk that households and other local investors could pile into this speculative and risky asset, potentially driving the price higher over a short period of time and bringing significant risks to financial stability.

“Regulation is a sensible path given the increasing exposure of investors to this asset class and the risks it poses to the financial system,” she said.

Her warning came as the Korean financial regulator is moving toward controlling transactions of decentralized virtual currencies, including Bitcoin.

On Monday, the Korean government established a taskforce to investigate the methods of regulating the trading of cryptocurrencies, a major shift from its earlier stance that it had no plans to regulate the market.

The shift seemingly came as Bitcoin has gained wider use and attracted more speculators for short-term gains despite its wild fluctuations.

PricewaterhouseCoopers’ Hong Kong offices announced last week that they started receiving payments for their accountancy service in Bitcoin.

The leading digital currency is also being increasingly embraced by the financial world. The Chicago Mercantile Exchange will start trading bitcoin futures beginning Dec. 18. The Tokyo Financial Exchange also plans to trade Bitcoin futures.

“Bitcoin’s aggregate transaction volumes have been growing significantly recently, with investors more open to using digital currencies,” she said.

“As demand rises with more people embracing Bitcoin, the price will push higher, when gold does not.”

Regarding China’s decision to shut down exchanges of cryptocurrencies, Ell said that the move was also aimed at preventing Bitcoin from becoming a threat to its financial system.

“The exact motivation behind the Chinese regulators' bid to quell cryptocurrency trading is unclear. A sensible explanation is that Bitcoin trading in China has boomed and investors and speculators have driven the price significantly higher over a short time,” she said.

“So regulators are trying to manage the potential financial risks, given the rising exposure of households to this risky, speculative market.”

Not alternative to gold

Despite its growing popularity and finite supply, the Australia-based economist expects that Bitcoin, dubbed as “digital gold” by some market players, is unlikely to become an alternative to gold as a long-term store of value.

“It’s too early for Bitcoin and other cryptocurrencies to be considered alternatives to gold,” she said.

She explained that even though Bitcoin and gold have frequently displayed notable correlation during some occurrences of economic uncertainty, the relationship breaks down once market conditions return to normal.

According to her analysis, Bitcoin has been more popular in specific markets when local currencies have been volatile or unpredictable.

“For instance, demand for Bitcoin in India rose not long after demonetization began in November 2016 when uncertainty about the disruption and impact of removing 86 percent of the currency in circulation was rife,” she said.

But she pointed out that as the initial shock of demonetization faded, so did the Bitcoin price differential between India and global markets.

“Similarly, in the lead-up to the Brexit vote in June 2016, the price of Bitcoin spiked,” she said. “It did so again in November 2016 around the U.S. presidential election.”