In Defense of Cryptocurrency

The plunge in cryptocurrency prices is continuing. Bitcoin, which topped 20 million won at the end of last year, has now fallen below 7 million won, at one point dropping to just a quarter of its peak value. This sudden downturn in cryptocurrencies began as governments around the world moved one after another to tighten regulations.

Last year, China declared initial coin offerings outright illegal and shut down cryptocurrency exchanges. More recently, it even blocked access to overseas websites entirely. In Korea, the government barred new participants from entering the market by freezing new accounts and bank accounts that could be linked to cryptocurrency transactions. In advanced countries, banks have even banned cryptocurrency purchases using credit cards.

Although each country has responded differently, these measures generally stem from a negative perception of cryptocurrencies. There is an underlying view that cryptocurrencies are primarily a vehicle for speculation and a breeding ground for illegal activity. In particular, in less developed countries such as China, one reason for regulation is the fear that the sharp rise in cryptocurrency prices has allowed some people to make large fortunes, and that if many others invest and suffer heavy losses, it could lead to social unrest. In other words, it is seen as a political burden. But such regulations are in fact increasing price volatility, fueling investor dissatisfaction.

In reality, voluntary investment means accepting risk. Since both profits and losses belong entirely to the individual, it is not something a third party should intervene in or interfere with. Nevertheless, the claim that cryptocurrencies are excessively overvalued has led to regulations that threaten trading itself and create market instability.

It is not a desirable policy to make trading more difficult or even impossible simply because prices have surged. Rather than treating trading itself as the problem, the government should first examine whether it has neglected to establish institutional safeguards to protect market participants’ property rights and transactions. The government must also take active steps to improve the institutional environment. In particular, it should ensure that sound investors are not exposed to illegal activities or hacking. What the government ought to do is to ensure that contracts and transactions can take place freely and that their terms are securely protected. That is what will enhance market stability and protect investors.

Cryptocurrencies based on blockchain are highly likely to usher in a new paradigm through innovation. Historically, whenever major innovations have emerged, they have often been accompanied by investment booms that seemed excessive. In fact, during the early stages of industrialization in the West, the railway boom was enormous. The internet and IT boom of the 1990s was also tremendous. Investment booms, often criticized as speculation, have served as catalysts helping such new worlds arrive more quickly.

In that sense, cryptocurrencies have not yet created much value. But that does not mean preemptively blocking or suppressing investment is the right answer. Considering the convenience and value-creation potential such innovation may bring, it may be better to allow a path forward toward future innovation. There is no need for special support. We simply must avoid the folly of delaying and blocking it.

Sung-no Choi, Vice President, Center for Free Enterprise (CFE)

---

Original title: 암호화폐를 위한 변명

Author: Sung-no Choi

Date: 2018-02-07

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=26&idx=10808