Cryptocurrencies on the road to nationalization

Growing activity of national regulators has been one of the key trends observed on the global cryptocurrency market since the second half of 2017. Venezuela’s recent decision to issue the world’s first national cryptocurrency might seem strange: that country is facing a serious economic crisis and has found no other way to save its financial system but to tie its cryptocurrency to the oil price. But Venezuela is not alone. Dozens of other countries have already announced plans to issue own digital money, with national regulators getting more and more active on the market – even tough speculators are still the key players there.

Signs of sideways trend

After establishing a record of $19,515 on Dec 17, 2017, Bitcoin fell to $7,000 in early February 2018, to jump again to $11,550 on Feb 20 and to drop back to $10,000 over the last days.

You can see that Bitcoin is very volatile but all of its attempts to soar back to the last year’s record have failed and its best result this year has been $11,000.

Perhaps, now, after the last year’s rises and falls, Bitcoin is experiencing a sideways trend. The same is true with the second biggest cryptocurrency, Ethereum: on Jan 13, it registered an all-time high rate of $1,448. But later, it plummeted just to grow back to $800-1,000.

Stock Markets Group notes that things are not very clear in the market for the moment. On the one hand, lots of new players have joined the game recently and this has helped Bitcoin to register a 40% growth over the last week. On the other hand, today Bitcoin is not as volatile as it was before and is no longer able to grow quickly.

Stock Markets Group notes that even though Bitcoin is growing again after its fall to $9,500, it will be hard for the currency to overcome the “psychological” barrier of $10,000. This will require a big effort from all players. Should Bitcoin fall to $8,000, it may face a new wave of sales and a slump to $7,000 and even less. “Under current conditions, we recommend taking time and waiting for Bitcoin to overcome the range of $9,000-10,000,” says Sergey Titov, Stock Markets Group expert.

Korean factor

As bitcoin was falling, more and more national financial regulators and big financial institutions were expressing concerns about its possible effects on the global economy.

Deutsche Bank's Chief International Economist Torsten Slok believes that Bitcoin’s fall may become the key risk for the global economy in 2018. According to Slok, the key problems of Bitcoin is that it is highly volatile, uncontrolled and non-transparent.

The concerns of the South Korean authorities were among the highest. Until recently, South Korea has been quite tolerant to cryptocurrencies and it was there that most of cryptocurrency market players moved after China’s ban on initial coin offerings.

“As a result, in late 2017, South Korea recorded the third biggest bitcoin turnover in the world. Shortly afterwards, the local authorities announced plans to legalize cryptocurrencies and to issue own digital money for inter-bank operations,” says Igor Chepkasov, President of the Russian National Cryptocurrency Development Fund.

“But then, all of a sudden, the South Korean authorities changed their attitude and are now going to adopt a law banning cryptocurrencies and toughly restricting their owners. Their key argument is that lots of South Koreans have been drawn into cryptocurrency pyramids and that some cryptocurrency owners may be dodging taxation. Quite recently, Facebook also informed its users about a wave of illegal cryptocurrency practices and its decision to stop advertising digital money on its pages,” Chepkasov says.

South Korea’s ban caused a slump in cryptocurrency rates. As a result, in late Feb 2018, the cryptocurrency market totaled just $390 billion against as much as $500 billion in mid Dec 2017.

Venezuelan precedent

The major topic on the cryptocurrency market today is plans to create national digital money. The Central Bank of Sweden is already considering the possibility of issuing E-krona as a weapon against private cryptocurrencies. The Chinese authorities are planning to issue a cryptocurrency jointly with local companies. Similar plans are on agenda in Iran and Turkey. All these reports followed the issue of the world’s first national cryptocurrency, El Petro.

The Venezuelan authorities claim that each El Petro is backed by one barrel of oil. This looks like a challenge to the global financial system existing since 1971, when the United States decided to leave the gold standard. Investors and analysts welcomed the news. As a result, during the Feb 20 presale, El Petro received bids worth several hundreds of millions of US dollars. “Today, a cryptocurrency is being born that can take on Superman,” said Venezuelan President Nicolas Maduro, one of the authors of El Petro.

“This measure could provide a positive precedent, demonstrating an example of how to correct the shortcomings of the existing international monetary system,” the Chinese Dagong ratinf agency said, adding that due to such emissions “it is possible to recover the underlying cost structure of the currency on a global scale.”

One more stimulus for the financial authorities to get more active is the suspicion that the cryptocurrency market may be used as a cover for criminal capital flows. In early Feb 2018, Russian citizen Sergey Medvedev was arrested in Thailand on suspicion of selling false credit cards, illegal financial data, drugs, arms and rare animals online for cryptocurrency. Following that incident, the Bank of Thailand urged all local financial institutions to stop using digital money.

A few days ago, IMF Managing Director Christine Lagarde said that the cryptocurrency market needed to be controlled as more and more entities were using digital currencies for laundering money or sponsoring terrorists.

Between innovation and speculation

Nationalization of cryptocurrencies will hardly be an easy process considering the existing structure of the market and the motives of its players. According to Yahoo Finance, last year, as many as 53% of Bitcoin buyers bought the currency for investment purposes only, 37% regarded it as both an investment and a means of payment and only 4% used it exclusively for purchases. That is, initially created as alternatives to conventional money, cryptocurrencies have now turned into speculative assets.

“Let’s not forget who owns this market. Obviously, there is a very small group – some 2-3% - of ‘cryptocurrency oligarchs’ who controls almost the whole bitcoin turnover and can influence both the prices and the market,” Chepkasov says.

Just one example: the restrictions imposed by the Chinese authorities on bitcoin caused just a 4% drop in its rate. “Today cryptocurrency rates depend mostly on the moods of speculators. Once attractive only to experts and enthusiasts, now they have become easy money for miners and sectarians from different financial pyramids. Those people are hot for fast buck and ignore any expert recommendations, not mentioning warnings,” Chepkasov says.

Concerning the opinion that once day cryptocurrency will stop being volatile and will no longer be a deterrent for investors, central banks and public officers. “This will happen only when the number of institutions caring more for technological progress than for speculations prevails. For the moment, prevalent are traders and startups rather than companies developing innovative technologies,” Chepkasov says.

In other words, the cryptocurrency market has not taken shape yet and may still give us lots of surprises. Recently, we have received a couple of reports about people buying real (and legal) assets using cryptocurrencies. A batch of 50 luxury flats were offered for sale in Bitcoin (within a range of 15-45 Bitcoins or $130,000-$380,000) in Dubai in Feb 2018 and all of them were sold. In Russia, buyers of real estate are offered a crypto asset (a golden token) against a mortgage.

“If you google, you will find lots of deals and startups involving cryptocurrencies and this may become a system very soon,” Chepkasov says.

Nikolay Protsenko, specially for EADaily