Rise of blockchain speculation is a cause for concern

By Xu Weihong Source:Global Times Published: 2018/1/22 23:38:40

Illustration: Luo Xuan/GT

After Chinese securities regulators suspended the trading of some blockchain-related companies and queried their recent price surges, the share prices of these companies plunged last week. While the regulatory crackdown may cool the blockchain fever for the time being, it won't be easy to completely eliminate speculation.

Blockchain is not a new concept, and the recent enthusiasm for it in the A-share market is mainly due to growing global investor interest in Bitcoin, which relies on the technology. Moreover, since the beginning of this year, the Chinese mainland stock market has seen bullish performance, supported by strong macroeconomic data. This has attracted speculative funds, especially in the blockchain-related sector.

In fact, with blockchain known as the technology behind it, Bitcoin is essentially a kind of financial "innovation," a decentralized anarchic financial system that is completely different from the existing government credit-based currencies. As a virtual credit center is applied to the monetary system, it offers the promise of a financial utopia. Such a system can easily lead to speculation because its participants are not interested in the technical value of blockchain, and are more concerned about what they can gain from the cryptocurrencies that rely on the blockchain technology. Some institutional investors even hope to use their professional judgment and control over market sentiment to profit from such speculation.

The domestic market is never short of cases of retail investors being exploited amid the hype for new financial concepts, such as the Ponzi scam operated by the Fanya Metals Exchange in 2015. The platform allowed investors to fund the trading of rare metals like indium. As the price bubble of rare metals became too big to sustain, the exchange had to rely on the new input from smaller investors to keep its operations going. In the end, rather than experts who used to advocate "financial innovation and global financial pricing power," only investors who were too lazy to think about the risks suffered heavy losses.

The same is now true of the blockchain-based Bitcoin speculation. Perhaps most speculative investors still believe that as long as the market is big enough, there will always be someone who will pay compensation for any losses.

However, it should be noted that the emergence of blockchain finance is not suitable for speculation. The creators of Bitcoin are a group of anarchists under the guise of neoliberalism. In economics, neoliberalism, applied to macroeconomic governance, led the UK and the US to overcome the stagnation dilemma during the 1970s and 1980s to achieve prosperity, giving birth to the globalization drive. While neoliberalism advocates trade liberalization and market pricing, insisting that the government should reduce unnecessary controls over the economy, it is not anarchic and it doesn't advocate lack of control over capital in the virtual economy. That is an essential difference with the virtual innovation of blockchain finance.

The anarchic blockchain-based monetary system has allowed cryptocurrencies to be separated from the existing social order and structure, trading only in the virtual world. When a government gets seigniorage from the issuance of a currency, it also assumes the basic responsibilities of social governance, such as national security, public security, social welfare and aid for disadvantaged groups. If Bitcoin replaced this traditional seigniorage, the public responsibilities of governments would be withdrawn and the lack of services would inevitably lead to social chaos.

The latecomer advantages of China's reform and opening-up have led to a situation in which the country's financial regulators encourage innovation, supporting paperless financial transactions and currency information technology. But they oppose speculation in such concepts, judging financial innovation based on whether it can benefit the real economy. In China, financial technology has already benefited ordinary people. For example, Tencent's WeChat Payment and Alibaba's Taobao and Alipay have made people's lives more convenient, promoting trade facilitation for the whole of society and reducing economic transaction costs.

However, a series of initial coin offerings (ICOs) for Bitcoin, Ethernet and Litecoin haven't become part of the real economy, with trading taking place only in the virtual world. In September 2017, China's central bank, as well as other departments, jointly defined ICOs as illegal fundraising activities that should be halted immediately. Therefore, in the face of the recent fever surrounding the blockchain concept, it is advisable that all parties should keep a clear mind. Financial exchanges and intermediaries should reduce unnecessary advertisements to avoid misleading small investors, and all retail investors should be alert to the potential risks.

The author is chief economist at AVIC Securities Co. bizopinion@globaltimes.com.cn

Posted in: INSIDER'S EYE

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