Bonanza or bubble?
Bitcoin and other cryptocurrencies, initial coin offerings (ICO) and virtual tokens are creating a buzz worldwide and Asia is no exception. Practical daily applications are already emerging, some as mundane as paying for a Big Mac in Thailand, while governments wrestle with the bigger issues related to security and financial regulation.
The value of bitcoin last week briefly passed US$19,000 and on Friday it was trading around $17,400, compared with just under $1,000 at the start of 2017. While some economists warn that the frenzied speculation is bound to lead to a correction that will be painful for many ordinary people, others believe that the sooner the financial system adapts, the better.
Cryptocurrency is a digital or virtual currency that uses cryptography for security, making it almost impossible to counterfeit. Given their decentralised nature, cryptocurrencies are often viewed as the polar opposite of conventional money regulated by central banking systems. The fact that many early adopters of cryptocurrencies were criminals underlines the regulatory challenges.
Still, retail investors by the millions are now jumping on the bandwagon. Most treat cryptocurrencies mainly as an alternative asset that they hope will appreciate more rapidly than others.
Apart from bitcoin, other cryptocurrencies -- ethereum, ripple, litecoin and dash are also popular -- have risen dramatically this year. Each has different characteristics that allow investors or users to treat them differently. For example, bitcoin sees itself as an alternative to central bank currency, whereas ethereum is "crypto-fuel" not intended to be used as a currency. Meanwhile, ripple is software built specifically for the financial markets.
Bans no deterent
In any case, investing in digital currencies has become a 24-hour rollercoaster ride, with double-digit price increases and decreases common. That doesn't seem to worry some investors, most notably in South Korea, which is now the third largest market for bitcoin and the largest market for both ethereum and bitcoin cash.
According to CoinMarketCap, South Korea is home to two of the top 10 bitcoin exchanges by volume and has emerged as a hub of trading activity in crypto assets. However, the government banned new ICOs in September, and it is now working with exchanges on rules that will improve transparency, disclosure and investor protection.
"There are cases in which young Koreans including students are jumping in to make quick money, and virtual currencies are used in illegal activities like drug dealing or multi-level marketing for fraud," Prime Minister Lee Nak-yeon warned last month.
In China, trading in virtual currencies is illegal unless the exchanges operate offshore. As a result, Huobi, one of the top three bitcoin trading platforms, stopped all activity in China and moved its business to Singapore, Hong Kong and South Korea.
"Many of those Chinese investors are either buying cryptocurrencies in offshore accounts or investing directly in startups by purchasing the tokens they issue in those ICOs. The only actual change in the situation is that the funds will be transferred via peer-to-peer transactions rather than via direct deposit," said Scott Freeman, CEO of C2CX, a digital asset exchange registered in Luxembourg but designed for the Chinese market.
He said banning local cryptocurrency exchanges was not a good idea as money laundering still can be done offshore and will be even harder to prevent.
However, Chinese regulators insist they are not giving up on blockchain, the uncrackable distributed-ledger technology that underpins cryptocurrency trading, since it has many other valuable uses.
The ICO ban and regulatory crackdown in China have made cryptocurrency in Japan a more interesting story. Japan this year recognised bitcoin as a legal form of payment and bitcoin trade in the country accounts for about half the volume of global trade, compared with about a quarter in the United States.
According to the Nikkei, more than 45,000 retail stores in Japan accept digital currencies and the number is expected to increase dramatically. Nevertheless, Mai Fujimoto, a blogger and crypto evangelist known as "Miss Bitcoin", believes every day use is still a long way off.
"Although regulations have built trust in the currency, bitcoin won't be replacing cash anytime soon, as it's still considered an investment rather than an everyday currency in Japan," she explained.
Yet the rise of cryptocurrencies in Japan has not come without problems. The National Police Agency reported 170 cases of money laundering in the six months following the passage in April of regulations requiring the country's 11 licensed exchanges to flag questionable activities.
Trading of bitcoin is legal in all countries in Southeast Asia but regulations vary. Only Singapore imposes value-added tax on virtual currency trading.
In the overall scheme of cashless payment, fewer than 5% of respondents in a Financial Times survey of the Asean-5 markets reported using cryptocurrency in the past three months. That compared with between 25% and 45% for online payment and e-wallets, and 10% or less for card-based e-money, it said.
Singapore is the indisputable cryptocurrency leader in the region. The rise of bitcoin prices has trickled down to others such as ethereum and litecoin, and cryptocurrency mining activity has become popular among Singaporeans.
Experts see Singapore as a perfect environment for cryptocurrencies and blockchain technology to thrive, given its world-class communication networks, its status as a regional financial hub and aggressive promotion of financial technology (fintech) innovation. The city-state is home to several cryptocurrency startups, including CoinGecko, which runs the third largest cryptocurrency data website in the world with 13 million monthly page views.
In October, the Monetary Authority of Singapore (MAS) said it would not regulate cryptocurrencies, but would closely monitor activities and decide what risks exist and what actions are required.
Malaysia, meanwhile, offers examples of how cryptocurrencies can work in everyday life. According to a report in The Star newspaper, the noodle stalls at a food court in Bandar Puchong Utama in Kuala Lumpur already accept both bitcoin and ethereum.
"We are the first stall in Malaysia to accept both bitcoin and ethereum as payment," said Andrew Leong, the shop owner who also an active member of the cryptocurrency community.
A few other outlets in the country also accept payment in digital currency but most are limited to bitcoin. Mr Leong says only a handful of customers are using bitcoin now but he expects such payments to become mainstream in the next five years or so.
The Malaysian central bank is expected to issue a directive to regulate the use of digital currencies in early 2018. The rules are intended to prevent abuses of the system for criminal and illegal activities as well as to maintain the stability of the financial system.
Interest is also strong in Thailand, where many seminars on blockchain and related issues have attracted interested audiences in the past year or two. Several bloggers and digital currency investors openly publicise their views on these developments.
The Securities and Exchange Commission (SEC), meanwhile, says it recognises the potential of ICOs in meeting the funding needs of startups. But if an ICO constitutes an offering of securities, it says, the issuer must meet all applicable regulatory requirements.
The SEC issued a consultation paper in October on ICOs and is now awaiting responses.
On the consumer side, practical applications are now available in Thailand from OmiseGo, which uses public ethereum-based technology that can be linked to a traditional digital wallet.
"We see the pain point of the existing mobile wallet platform, which has not taken off, and the use of e-wallet services has been limited due to its closed platform," said Ezra Don Harinsut, chief operating officer and co-founder of Omise, a Southeast Asian payment gateway and the parent of OmiseGo.
Holders of OmiseGo tokens are granted the right to participate in validating the transactions that go through the OmiseGo network, earning validation fees in the process. According to CoinMarketCap, its market capitalisation currently stands around $1 billion.
McDonald's Thailand has partnered with Omise to manage its payment gateway.
Several other digital currencies in Thailand are now planning ICOs. Among them is HotNow, a token-based system aimed at making digital marketing accessible for all retail businesses while optimising the value of money for consumers through a gamified experience.
As a promotion discovery platform that provides merchants with an effective tool to reach customers, the application has gained sizable credibility among top retail brands in Thailand, as well as among customers happy to get discounts.
In partnership with Axion Ventures, a game developer and investment group listed in Canada, HotNow says it will utilise its successful experience in game and make use of gamification network to make the usage of its tokens popular.
"We will create an economy where HoToKeN will be rewarded to all network participants who perform economic activities deemed to contribute to the network," said Varoon Aroonsit chief operating officer of HotNow (Thailand).
"By utilising our strength in a gamified network such as mission-based games, users can enjoy being part of the new economy."
Betting that cryptocurrencies will ultimately revolutionise the world just as electronics and the internet did, a lot of investors are looking to jump in and chase the next big wave.
However, it is still too early to predict which way that the future will unfold. Amid the growing number of ICO fundraising campaigns, investors still need to be discerning and do their own due diligence before diving in.