By Kang Ji-Hyun
Cryptocurrencies will benefit only a few people, but all society will have to bear their enormous cost in the end. Therefore, the Korean government should act on them before it is too late, economists say.
Speaking to The Korea Times, Andrew Sheng, distinguished fellow of the University of Hong Kong's Asia Global Institute and former chairman of the Hong Kong Securities and Futures Commission, said cryptocurrencies have already created a huge bubble that will certainly burst. When that day comes, he warns, everyone will blame the government.
"I worry about an unprecedented bubble that will cause the public to lose more trust in the government, if the regulators do not act responsibly to stop this," he said. "The market cap of all cryptocurrencies is already around $700 billion, which is roughly half of official gold reserves at market price. At least there is physical metal registered with central banks or with custodians in the case of gold. We are going to talk about billions of losses when the next cryptocurrency bubble collapses."
According to surveys, many cryptocurrency investors here are young people who appear to have put a big chunk ― if not all ― of their money and hope in it. Korea's largest cryptocurrency exchange, Bithumb, said nearly 30 percent of investors are people in their 20s.
"The cyber currency bubble will be a huge loss for many retail investors who cannot afford to lose their savings," Sheng said. "But what is too good to be true, is also not true. I think it is a giant Ponzi scheme. If the government allows it without proper supervision or regulation, there will be government responsibility."
A Ponzi scheme refers to a fraudulent investment arrangement where the operator generates returns for earlier investors through revenue from new investors rather than from legitimate business activities or profits from trading.
Top-ranking government officials, including Justice Minister Park Sang-ki and Jung Ki-joon, a senior official at the Office for Government Policy Coordination, said the government won't let the cryptocurrency bubble continue to grow. But they have not decided what measures to take, other than scaring off investors with warnings.
Obviously, the risk of cryptocurrencies is enormous. "Suppose you find tomorrow that you cannot access your account because it has been hacked, blocked or ‘ransomed'," Sheng said. "Who do you go to for complaints of fraud and losses? What if hundreds of thousands of people complain about losses at the same time? Cryptocurrencies do not have custody or registration where you can check or sue that your custodian has not looked after your property."
Another issue is that cryptocurrencies have been used for illegal transactions such as buying drugs and money laundering.
"There are still many people who will want to use cryptocurrencies despite the risk, in part because of its convenience for large anonymous transactions which people may be trying to hide from tax authorities or other regulation," James Hamilton, economics professor at the University of California, San Diego, said. "Then certainly it is appropriate for the government to try to regulate them."
Some macroeconomists, including Joseph Stiglitz, a Nobel laureate and former International Monetary Fund economist, fear that the government and the established monetary system will lose control over policy and protection for real money.
However, scholars The Korea Times contacted said the distributed ledger, better known as blockchain, needs to be discussed separately from what status cryptocurrencies should have.
Asked whether he would want to invest in the cryptocurrency market, Hamilton said no. "An investment you make in it could double in value or shrink to practically nothing … That's not the kind of asset I'm interested in."
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