Bitcointhe new monetary system and global economy

Will they tolerate anonymous payment systems that facilitate tax evasion and crime? Will they create digital currencies of their own? For now, the regulatory environment remains a free-for-all. Japan, on the other hand, has enshrined Bitcoin as legal tender, in an apparent bid to become the global center of fintech.

The United States is taking tentative steps to follow Japan in regulating fintech, though the endgame is far from clear. Importantly, Bitcoin does not need to win every battle to justify a sky-high price. In Silicon Valley, drooling executives are both investing in Bitcoin and pouring money into competitors.

After Bitcoin, the most important is Ethereum. Behind the top three are dozens of fledgling competitors. Most experts agree that the ingenious technology behind virtual currencies may have broad applications for cyber security, which currently poses one of the biggest challenges to the stability of the global financial system. But it is folly to think that Bitcoin will ever be allowed to supplant central-bank-issued money. It is one thing for governments to allow small anonymous transactions with virtual currencies; indeed, this would be desirable.

But it is an entirely different matter for governments to allow large-scale anonymous payments, which would make it extremely difficult to collect taxes or counter criminal activity. Of course, as I note in my recent book on past, present, and future currencies, governments that issue large-denomination bills also risk aiding tax evasion and crime.

But cash at least has bulk, unlike virtual currency. It will be interesting to see how the Japanese experiment evolves. The government has indicated that it will force Bitcoin exchanges to be on the lookout for criminal activity and to collect information on deposit holders.

Still, one can be sure that global tax evaders will seek ways to acquire Bitcoin anonymously abroad and then launder their money through Japanese accounts. Carrying paper currency in and out of a country is a major cost for tax evaders and criminals; by embracing virtual currencies, Japan risks becoming a Switzerland-like tax haven — with the bank secrecy laws baked into the technology.

Were Bitcoin stripped of its near-anonymity, it would be hard to justify its current price. Perhaps Bitcoin speculators are betting that there will always be a consortium of rogue states allowing anonymous Bitcoin usage, or even state actors such as North Korea that will exploit it.

The United States is taking tentative steps to follow Japan in regulating fintech, though the endgame is far from clear. Importantly, Bitcoin does not need to win every battle to justify a sky-high price. In Silicon Valley, drooling executives are both investing in Bitcoin and pouring money into competitors. After Bitcoin, the most important is Ethereum. Behind the top three are dozens of fledgling competitors. Most experts agree that the ingenious technology behind virtual currencies may have broad applications for cyber security, which currently poses one of the biggest challenges to the stability of the global financial system.

But it is folly to think that Bitcoin will ever be allowed to supplant central-bank-issued money. It is one thing for governments to allow small anonymous transactions with virtual currencies; indeed, this would be desirable. But it is an entirely different matter for governments to allow large-scale anonymous payments, which would make it extremely difficult to collect taxes or counter criminal activity. Of course, as I note in my recent book on past, present, and future currencies, governments that issue large-denomination bills also risk aiding tax evasion and crime.

But cash at least has bulk, unlike virtual currency. It will be interesting to see how the Japanese experiment evolves. The government has indicated that it will force Bitcoin exchanges to be on the lookout for criminal activity and to collect information on deposit holders. Still, one can be sure that global tax evaders will seek ways to acquire Bitcoin anonymously abroad and then launder their money through Japanese accounts.

Carrying paper currency in and out of a country is a major cost for tax evaders and criminals; by embracing virtual currencies, Japan risks becoming a Switzerland-like tax haven — with the bank secrecy laws baked into the technology. Were Bitcoin stripped of its near-anonymity, it would be hard to justify its current price. Perhaps Bitcoin speculators are betting that there will always be a consortium of rogue states allowing anonymous Bitcoin usage, or even state actors such as North Korea that will exploit it.

Would the price of Bitcoin drop to zero if governments could perfectly observe transactions? Finally, it is hard to see what would stop central banks from creating their own digital currencies and using regulation to tilt the playing field until they win. The long history of currency tells us that what the private sector innovates, the state eventually regulates and appropriates.

There is no reason to expect virtual currency to avoid a similar fate. The co-author of This Time is Different: This article is published in collaboration with Project Syndicate.