Intriguingly, the PBoC has indicated that it is considering releasing its own digital crypto-currency. The Bank of Japan (BoJ), too, has publicly announced that it is investigating the possibility of designing a digital currency of its own, based on Bitcoin’s concept of distributed ledger technology (DLT), like the blockchain. The new Japanese law lays down tough net worth considerations: Any entity that wishes to use Bitcoin as legal tender will hold $100,000 in reserve, pay a licence fee, accept oversight by financial authorities and submit data for audits. These regulations raise barriers in practice but the law does recognise Bitcoin as legal tender in theory and it is treated as hard currency, which can be exchanged for other currencies.
This opens the door for Japanese corporates operating in conflict zones, or in nations with hyper-inflation, to use Bitcoin rather than deal in local fiat currencies. In a sense, it formalises growing Japanese interest. Over 5,000 Japanese businesses (including local power utilities and restaurants) accept Bitcoin and the market in Bitcoin-Yen (BTC-JPY) trading generates large volumes. The PBoC is attempting to plug gaps in the regulatory regime that allow capital flight, which was estimated to amount to a mind-boggling $700 billion-equivalent in 2016. Currency controls prevent the yuan (CNY) from being directly exchanged for other currencies.
Until now, Bitcoin was treated like a digital objet d’art, not as currency. Mainland speculators would buy Bitcoin for the yuan and then sell Bitcoin for dollars. But Bitcoin lends itself to multi-layered anonymous trades, which enables such transactions without attracting regulatory attention. Chinese trades of BTC-CNY used to contribute the largest global segment of Bitcoin trades, although trading volumes have crashed since the new regulations came in.
To set up its own digital currency, China is consulting fin-tech experts from Deloitte, Citibank, etc., to establish modalities. The BoJ has also said it is “seeking to understand distributed ledger technology” and set up a partnership with the European Central Bank to “jointly experiment”. The Federal Reserve published a recent paper outlining its thoughts on distributed ledger technology and Bitcoin. Even the Reserve Bank of India (RBI), which has not said much about Bitcoin, recently tested blockchain technology at the Institute for Development and Research in Banking Technology. India also generates significant rupee-Bitcoin volumes and capital flight must be a concern for the RBI as well.
Bitcoin’s exchange rate crossed $1000/ BTC in January 2017. It gained 10 per cent versus the US dollar in 2016. In fact, Bitcoin was the only global currency (if it can be so described) to gain against the dollar in 2016. The acknowledgement from central banks may seem grudging but central banks issuing crypto-currencies themselves counts as a very sincere form of flattery. There will never be more than 21 million Bitcoins in circulation and restricted supply makes usage cumbersome. Distributed ledger technology also makes it hard to deploy traditional fractional-reserve banking models. Central banks and fin-tech advocates must step around these challenges if a new generation of digital crypto-currencies backed by central banks is to become popular.
