China Financial Times comments on Bitcoin: Rising and falling are short-term, but governance is long-term

"The grass does not thank the spring breeze for its prosperity, and the tree does not complain about its fall in autumn." Driven by the international financial crisis and the explosive expansion of Internet finance, Bitcoin has become a temporary substitute after the temporary collapse of monetary credit. However , given its inability to carry transaction demand, lack of endogenous stability and lack of solvency, Bitcoin will ultimately find it difficult to achieve complete monetary functions. This round of Bitcoin price plunge is the product of credit return and real recovery, and is also a prelude to systematic adjustments in the financial market . In an era of accelerated technological evolution and monetary policy from loose to tight, Bitcoin prices show a negative correlation with the VIX index, and thus become a more sensitive representation of potential changes in financial market sentiment. In essence, "decentralization" is the most prominent feature of blockchain applications represented by Bitcoin, but it is also a "double-edged sword". Tighter supervision is conducive to its long-term healthy development. In the context of technological progress driving the further evolution of the connotation and extension of digital currency, adaptive supervision needs to shift to diversified and collaborative long-term governance. It can be foreseen that the demand for increasing governance effectiveness will promote changes in digital currency-related governance entities and international norms, and diversified and open governance model innovations will continue to emerge.

The explosive expansion of Internet finance has increased the popularity of Bitcoin, but its lack of stability and solvency has restricted it from becoming a real currency . 2017 was a year of Internet finance explosion. The price of Bitcoin, the most prominent representative of digital currency, also rose from about $1,000 at the beginning of the year to a historical high of more than $19,000 at the end of the year. As a virtual currency generated by open source software, Bitcoin, which was born during the international financial crisis, is regarded by many as a possible direction of currency evolution because of its characteristics that are different from credit currency, such as "decentralization", super sovereignty, fixed total upper limit, increasing marginal production costs, and simple transaction circulation. This has also made it continue to be sought after by international capital. However, from the perspective of its essential attributes, Bitcoin is only a temporary sustenance after the temporary collapse of currency credit. First, the popularity of Bitcoin is far from enough to carry the needs of daily economic transactions. Before accepting a currency, people will first consider whether it can be used for transactions, which is itself affected by network externalities. Although the explosion of Internet finance has made more people aware of Bitcoin, and the accumulation of 9 years has also made the number of Bitcoin users exceed 10 million, compared with traditional currencies, the scenarios of using Bitcoin for daily transactions are few and far between. As the price of Bitcoin soars, it becomes more difficult to further expand its popularity. Second, the sharp fluctuations in Bitcoin prices lead to its lack of intrinsic stability. After accepting a currency, people will be concerned about whether the purchasing power of the currency can be guaranteed. Only when the purchasing power remains stable in the long term can people feel at ease to hold and frequently use this currency. As a virtual commodity, the price of Bitcoin fluctuates, and it does not have the function of value representation and wealth storage, and there is no way to talk about the stability of purchasing power. Third, Bitcoin lacks the ultimate recycling object and is therefore not repayable. Before people are ready to switch from short-term acceptance to long-term use of a currency, they will consider whether it contains a long-term commitment to pay off the price, so as to get a certain degree of protection after unforeseen events occur. Bitcoin does not have intrinsic value like gold and silver, nor is it backed by national credit like paper money, so the possibility of repayment is almost zero.

The rise and fall of Bitcoin has become a more sensitive risk indicator. Its price plunge is a prelude to the systemic adjustment of the financial market brought about by the return of credit and the recovery of the real economy. No matter how technology advances, human nature is always the same. Since September last year, we have been emphasizing that after the VIX index has been in a historically absolute position of "fearlessness", a systemic adjustment of the financial market is inevitable. In fact, compared with major asset classes such as stocks and bonds, the lack of intrinsic value of Bitcoin means that it has the attributes of a highly speculative asset. In the environment of high market risk appetite and low volatility in 2017, Bitcoin has become a new high-risk investment target. Its price and VIX index showed a negative correlation in the second half of last year, and it has also become a more sensitive representation of potential changes in market sentiment. With the real universal recovery of the global economy, the global competitive loose monetary policy has gradually faded away, the credit of traditional sovereign currencies has been strengthened, and the one-way rise in the subjective risk appetite of the financial market has finally given way to objective concerns about the shift in the growth rate of the real economy. As an indicator of the market trend, Bitcoin has been on a downward track since the end of last year, indicating that risk appetite has begun to reverse. The rise and fall of market sentiment has gradually brought about adjustments in the overvalued market. The recent decline in global stock markets led by US stocks is the next link in the chain. As the real general economic recovery is driven more by the real economy, the marginal tightening of monetary policy will test the gold content of the real recovery. The market accustomed to "loose paralysis" has to accept the systematic adjustment of risk pricing. The VIX index with a low center of gravity will gradually move closer to the rational center, and corresponding real investment opportunities will also emerge in large numbers. It will be even more difficult for Bitcoin prices to return to their highs.

Bitcoin is a symbol of a revolutionary technological paradigm innovation. Tighter regulation is conducive to the long-term healthy development of digital currencies. Digital currencies represented by Bitcoin are the starting point of the birth of blockchain technology. In 2008, a paper written by a scholar under the pseudonym Satoshi Nakomoto, "Bitcoin: A Peer-to-Peer Electronic Cash System," is generally considered to be the origin of blockchain technology. Using peer-to-peer networks and cryptography technology, blockchain transforms the centralized accounting model into a distributed accounting model with multi-node participation through a consensus mechanism. This is one of the most revolutionary technological and regulatory innovations in the current global technological progress. It has great potential to link virtual and physical, old economy and new economy, and will profoundly change many industries in the fields of big finance, public services, and the Internet of Things. "Decentralization" is the most prominent feature of blockchain applications represented by Bitcoin, but it is also a "double-edged sword". On the one hand, it solves the traditional problem of information asymmetry; on the other hand, it also gives digital encrypted currencies the possibility of bypassing the traditional regulatory system, increasing the risk of being used for illegal and gray transactions. For example, the anonymous attribute of Bitcoin brings about the lack of user identity identification and the difficulty of anti-money laundering. In addition, the extreme distribution of Bitcoin holdings, exchange liquidity risks, and resource consumption caused by "mining" have also raised questions about the sustainability of the Bitcoin market. In this case, adapting to technological progress and filling regulatory gaps have become an indispensable part of promoting the healthy development of the digital currency market. In 2017, major countries around the world significantly strengthened their supervision of digital cryptocurrencies, and China, South Korea, India and other countries have released strong regulatory signals.

In the future, simple restrictions on digital currency transactions will shift to diversified and collaborative governance. In essence, since the distributed ledger system on which most digital cryptocurrencies rely does not require permission, this also leads to the lack of legal entities that bear responsibility in the entire system. In the future, technological progress will promote the further evolution of the connotation and extension of digital currency, and the relevant governance system also needs to be improved urgently. In particular, in addition to imposing restrictions on the transaction process, it is necessary to build a non-institutionalized digital currency governance infrastructure to cooperate with legal rules, so as to embed regulatory standards into the technical rules that run through the entire process and are constantly upgraded. At the same time, in order to regulate the behavior of market participants and protect the rights and interests of investors, measures such as combating digital currency market manipulation, banning illegal securities activities involved in ICOs, and strengthening data privacy and credit management are also essential. In addition, since digital currency itself does not have national boundaries, only through global collaboration can "regulatory enclaves" be truly avoided. It can be foreseen that the demand for increasing governance effectiveness will promote the emergence of digital currency-related governance entities and international norms. In the long run, the "decentralized" nature of digital currency will rely on the innovation of diversified and open governance models, and strike a balance between digital currency governance and supervision, legal rules and technical rules, and encouraging innovation and resisting risks. This will also provide positive experience for the governance of the entire blockchain field.

(Cheng Shi is Chief Economist, Managing Director and Head of Research at ICBC International; Wang Yuzhe is Senior Economist at ICBC International)