Barbarians at the Monetary Gate By Andrew Sheng and Xiao Geng*

Posted by AsiaViews | Sep 18, 2017 | 0 |

CHINA

China Daily

Sept 15, 2017

One factor could further destabilize an already-tenuous leverage- and liquidity-based system: digital currencies. And policymakers and regulators have far less control on this factor.

The concept of private crypto-currencies was born of mistrust of official money. In 2008, Satoshi Nakamoto — the mysterious creator of bitcoin, the first decentralized digital currency — described it as a “purely peer-to-peer version of electronic cash”, which “would allow online payments to be sent directly from one party to another without going through a financial institution”.

A working paper by the International Monetary Fund last year distinguished digital currency (legal tender that could be digitized) from virtual currency (non-legal tender). Bitcoin is a crypto-currency, or a kind of virtual currency that uses cryptography and distributed ledgers (the blockchain) to keep transactions both public and fully anonymous.

However you slice it, the fact is, nine years after Nakamoto introduced bitcoin, the concept of private electronic money is poised to transform the financial market landscape. This month, the value of bitcoin reached $4,483, with a market cap of $74.5 billion, more than five times larger than at the beginning of 2017. Whether this is a bubble, destined to burst, or a sign of a more radical shift in the concept of money, the implications for central banking and financial stability will be profound.

At first, central bankers and regulators were rather supportive of the innovation represented by bitcoin, and the blockchain that underpins it. It is difficult to argue that people should not be allowed to use a privately created asset to settle transactions without the involvement of the state.

But national authorities were wary of potential illegal uses of such assets, reflected in the bitcoin-enabled, dark-web marketplace called “Silk Road”, a clearinghouse for, among other things, illicit drugs. Silk Road was shut down in 2013, but more such marketplaces have sprung up. When the bitcoin exchange Mt Gox failed in 2014, some central banks, such as the People’s Bank of China, started discouraging the use of bitcoin. By November 2015, the Bank for International Settlements’ Committee on Payments and Market Infrastructures, made up of 10 major central banks, launched an in-depth examination of digital currencies.

But the danger of crypto-currencies extends beyond facilitation of illegal activities. Like conventional currencies, crypto-currencies have no intrinsic value. But, unlike official money, they also have no corresponding liability, meaning that there is no institution like a central bank with a vested interest in sustaining their value.

Instead, crypto-currencies function based on the willingness of people engaged in transactions to treat them as “negotiable instruments”. With the value of the proposition depending on attracting more and more users, crypto-currencies take on the quality of a Ponzi scheme.

As the scale of crypto-currency usage expands, so do the potential consequences of a collapse. Already, the market capitalization of crypto-currencies amounts to nearly one-tenth the value of the physical stock of official gold, with the capability to handle significantly larger payment operations, owing to low transaction costs. That means crypto-currencies are already systemic in scale.

There is no telling how far this trend will go. Technically, the supply of crypto-currencies is infinite: bitcoin is capped at 21 million units, but this can be increased if a majority of “miners” (who add transaction records to the public ledger) agree. Demand is related to the mistrust of conventional stores of value. If people fear that excessive taxation, regulation, or social or financial instability places their assets at risk, they will increasingly turn to crypto-currencies.

Last year’s IMF report indicated that crypto-currencies have already been used to circumvent exchange and capital controls in China, Cyprus, Greece, and Venezuela. For countries subject to political uncertainty or social unrest, crypto-currencies offer an attractive mechanism of capital flight, exacerbating the difficulties of maintaining domestic financial stability.

Moreover, while the state has no role in managing crypto-currencies, it will be responsible for cleaning up any mess left by a burst bubble. And, depending on where and when a bubble bursts, the mess could be substantial. In advanced economies with reserve currencies, central banks may be able to mitigate the damage. The same may not be true for emerging economies.

An invasive plant species does not pose an immediate threat to the largest trees in the forest. But it doesn’t take long for less-developed systems — the saplings on the forest floor — to feel the effects. Crypto-currencies are not merely new invasive species to watch with interest; central banks must act now to rein in the very real threats they pose.

*Andrew Sheng is a Fellow at the Asia Global Institute at the University of Hong Kong and member of the UNEP Advisory Council on Sustainable Finance. And Xiao Geng, president of the Hong Kong Institution for International Finance, is a professor at the University of Hong Kong. Project Syndicate article.

(http://www.chinadaily.com.cn/opinion/2017-09/15/content_32024579.htm )

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EXTRICATING NDONESIAN CHILDREN FROM ISIS INFLUENCE ABROAD

Indonesia urgently needs to revisit the possibility of repatriating the neediest of its young citizens stranded abroad, whose families had earlier joined ISIS. Most of these children are in camps in northern Syria but there are also small numbers in the Philippines, Afghanistan and Iraq. “Extricating Indonesian Children from ISIS Influence Abroad”, the latest report from the Institute for Policy Analysis of Conflict (IPAC) argues that the government could begin by bringing back small groups of unaccompanied children under ten years of age, who pose minimal security risk and are most vulnerable to deteriorating conditions in the camps.“The problem is that health and security conditions are worsening by the day in the Syrian camps, and the children are growing older,” says Dyah Kartika, IPAC analyst. “They need access to schools, a nurturing environment, and medical attention. If the government waits too long, the children will be further exposed to ISIS ideology.” The new report examines a 2019 list of Indonesians in camps and prisons run by the Kurdish Syrian Democratic Forces (SDF). The Indonesian government has been trying to verify their citizenship, but with pseudonyms, misspellings and bad transliterations, it is a daunting task. At the time the data was collected, between March and June 2019, there were 555 Indonesians in SDF camps and prisons, including 367 children. Among the children, approximately 277 were under the age of ten and 34 were unaccompanied. In June 2021, there are fewer than ten children who are both unaccompanied and under the age of ten that could be prioritized for return. Bringing back children of ISIS families is no easy task. The report analyses the main challenges faced by the Indonesian government. These include definitional issues, bureaucratic competition, the difficulty of verifying nationality, evaluating the toll of exposure to conflict, assessing security risk, and finding relatives or others willing to provide care once the children are returned. In addition, COVID has meant stringent restrictions on travel, placing further obstacles in the way of repatriation. There are several models for rehabilitation of children exposed to violent extremism in Indonesia that could be modified to accommodate the needs of children repatriated from abroad. The report examines these models and argues that the government does not need to have every detail of rehabilitation programs in place before it starts extricating children from ISIS influence. It can start by bringing back the most vulnerable children and then modify programs as needed.

“It’s important that the government see these children as victims” says Dyah. “They deserve a chance to be children again.”

Barbarians at the Monetary Gate By Andrew Sheng and Xiao Geng*