lunes, 26 de marzo de 2018

Global Economy / Hidden dangers in global virtual currency boom. Go ahead !

By Kensuke Nakazawa / Yomiuri Shimbun Staff Writer


On Feb. 20, the Venezuelan government issued the world’s first state-run virtual currency, the “petro,” going on to raise about $5 billion in under three weeks. This fact indicates once again the dangers of virtual currencies and raises the question of what path this industry, which has now come to a turning point, should proceed along in the future.

Gaining attention

According to the announcement by the Venezuelan government, 1 petro is linked to the price of one barrel of crude oil produced by the country, and in Venezuela, it can be used to pay taxes and for public services. At 300 billion barrels, Venezuela’s oil reserves are said to be the most plentiful in the world. It is thought that Venezuela’s aim is to use that backing to persuade investors that the petro also has value.

The petro has gained the world’s attention by virtue of being a virtual currency issued by a nation. President Nicolas Maduro claims he has been able to gather about $5 billion in funds from 186,000 investors in 127 countries, including Japan and the United States.

In financial markets and among experts, however, the petro’s reputation is less than stellar. This is because the economy and public finances of Venezuela, the currency’s issuer, are nearly bankrupt.

As a result not only of the 2014-16 fall in crude oil prices but also of economic sanctions imposed by the United States, the Venezuelan economy has continuously shrunk for the four years through 2017. The rate of decline for each of the last two years is expected to exceed 10 percent.

Venezuela’s budget deficit has reached nearly 20 percent of its gross domestic product and prices have skyrocketed, multiplying 27 times in one year. The value of the bolivar, Venezuela’s legal tender, has crashed. Government bonds have been rated as being in “selective default,” and it is nearly impossible to raise funds in the financial markets.

According to a local university survey, 90 percent of the population has fallen into poverty, and 60 percent of them cannot buy sufficient food. As a result, the physical body weight of Venezuelans fell by an average of 11 kilograms in 2017.

Backed by oil?

“How can a country that can’t issue bonds raise funds with a virtual currency?” Financial markets and experts alike have cast a skeptical eye toward the petro. “How is that different from a bond?” Based on the Venezuelan government’s announcement, the following realities about the petro become clear.

First, it bears no interest and the monetary sum paid into it does not return to the currency’s owner after reaching maturity. With a bond, the bond owner receives interest and, as long as the issuing country does not go bankrupt, the principal is returned to the owner once the bond reaches maturity. For investors, the petro comes with less favorable conditions. The Venezuelan government claims “it’s backed by crude oil,” but does not guarantee that the petro can be exchanged for crude oil.

Furthermore, even as a “currency,” its functions are deficient.

According to Bloomberg News and other media, for the time being, the petro will only be purchasable with currencies such as dollars, euros or bitcoin, with the local bolivar currency excluded. But the petro can only be used domestically. There is a contradiction here in the fact that even though the people who will purchase the petro are mainly foreigners, the only place it can be used is in Venezuela.

Yet the petro could still gather $5 billion in funds for no other reason than because it is a virtual currency. Prof. Naoyuki Iwashita of Kyoto University pointed out: “If Venezuelan government issued bonds directed toward foreign investors, it wouldn’t receive a single dollar. The petro is a ‘state-run ICO.’” (See below)

ICOs are permeating the world as a way for start-up companies to raise funds easily when starting a new business without assuming responsibilities like granting voting rights or paying dividends, which are needed when issuing shares. Insofar as funds that are raised through the petro can be used freely without any obligation of repayment or paying interest, it is the same as an ICO.

On the other hand, there have been conspicuous fraudulent cases of companies that have raised large sums of funds abandoning their businesses and fleeing immediately after funds were raised, and many countries regard ICOs as a problem.

Right path forward?

The market capitalization of virtual currency inflated over 30 times in value the past year. However, this growth has been overshadowed by accompanying problems such as fraud, digital currency theft and issuance of incomprehensible currencies by nations. “There is doubt about whose interests ICOs and virtual currencies serve,” Iwashita says.

The Financial Services Agency has reached a significant turning point, shifting its emphasis from promoting the industry to strengthening regulation of it.

Where will virtual currencies head in the future? Many experts argue that along with strengthening regulations, blockchain technology, which is the basis of virtual currency, needs to be refined.

Blockchain technology has the characteristic of making it difficult to falsify data. As a result, the world’s financial institutions have advanced research on the technology because they believe it can improve on existing financial practices.

In Japan, three banks, including Resona Bank, announced on March 7 that they would begin offering money transfer services using blockchain this autumn. In Japan, use of blockchain for services other than virtual currency has been almost entirely limited to demonstration experiments, but they have now finally reached the stage of practical application.

Smartphones could be used to transfer money easily 24 hours a day, 365 days a year. Banks could also set money transfer fees 10 percent or lower than the usual ones. If payment flexibility increases, it will lead to the creation of new businesses. Takashi Okita, chief executive officer of SBI Ripple Asia, which acts as a central office for money transfer services, said, “Japan is at the forefront of blockchain technology; this is a chance to lead in technology again.”

Difficult to falsify

Due to its characteristic of making data difficult to falsify, research is being advanced on blockchain’s uses for the distribution history of food products and real estate registration. Walmart and IBM of the United States announced last December that they would embark on managing food product distribution history in China. Their aim is to improve food safety. There are also expectations of blockchain being applied to minpaku private residence vacation rentals and “shared services.” 

Prof. Masashi Nakajima of Reitaku University observed that if blockchain “spreads beyond the financial sector, it could possibly change the world.”

At a time when irrational exuberance for virtual currency is being called into question, what is needed now is not a boom, but efforts that have their feet on the ground and serve the interests of real life.

ICO

An abbreviation of Initial Coin Offering. A system in which a start-up company starting a new business issues a digital coin called a “token” and raises funds from investors using existing virtual currencies such as bitcoin. When funds are raised by issuing shares, the start-up company is subject to legal regulations and grants voting rights to shareholders. In contrast, the regulations for ICOs are unclear, and there is no need to attach voting rights to tokens.

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