Cryptocurrencies have been around for some time now. Bitcoin, one of the earliest (and most hyped) cryptocurrencies, came into being in early 2009. Today, there are several hundred cryptocurrencies (with 18 major ones being traded), and the mass media – not to mention the general public – is beginning to wake up to their possibilities.
Of course, much of the media coverage of Bitcoin – and cryptocurrencies as a whole – concentrated on cryptocurrencies being used for illicit purposes, as well as having several big Bitcoin exchanges dramatically fail. The Mt. Gox debacle was just one of the more sensational ones, but many other such stories exist.
So what allure do cryptocurrencies hold for their proponents, and can they ever be of any real use, especially in Malaysia? Given that 1 Bitcoin is currently worth around RM800 (as of April 2015), it certainly seems so.
Here is a Q&A to help you get up to speed on some of the salient points of cryptocurrencies.
Q: Why do we use money?
A: Underlying money’s use is the concept of economic interdependence. Alone, nobody can generate all the goods and services necessary for himself. Otherwise, there would be no need for any sort of trade, commerce or finance.
Since everyone requires each other’s productivity and output, this leads to the exchange of the fruits of one’s labour for that of others. In the past, this was done through barter. This process takes time, and had to be endlessly repeated with each and every person who produced something of value.
This is where the use of money makes sense, as a ‘medium of exchange’. Now, everyone could agree to a single item by which all other products were denominated.
Q: What is (or has been) considered money?
A: Past items which were used for money usually had intrinsic value, making it valued for itself beyond its use as money, or were relatively rare. This included various precious metals and gemstones. Other types of money include cowrie shells and even large stones.
The Chinese were first in using paper money, which was easier to move around, and today forms a significant fraction of what we call currency, which is perhaps the most liquid form of money.
Q: What are the benefits of currency?
A: Its ease of transport, general acceptability (or ‘legal tender’), and – which isn’t on most people’s minds – its anonymity. For whatever reasons, people value their privacy when carrying out certain financial transactions.
Q: What are the drawbacks of currency?
Today, most national currencies are fiat currencies; they have value because governments say they do. Generally speaking, therefore, the only sources of currency are governments, which are also the ones producing it.
Over the past few years, reserve banks in both the USA and the EU have been attempting ‘quantitative easing’ – essentially, increasing the money supply – to improve their economies. To some people, this suggests that fiat currencies have no real value even as a medium of exchange.
Q: So what’s good about cryptocurrencies?
A: Most cryptocurrencies are based on what is generally accepted to be the first, Bitcoin (BTC), and hence share a number of traits that make them very attractive for people who want hassle-free global electronic transactions.
Initially, since Bitcoin is purely a bunch of bits, it might seem to be a fiat currency. However, Bitcoin production (called ‘mining’) is designed to be both hard and have a production ceiling, beyond which BTC can no longer be mined, only traded. It is also infeasible to have ‘fake’ Bitcoins. These traits were engineered to make Bitcoin closer to precious metals.
In addition, cryptocurrencies are easy to transfer. For instance, Bitcoins are held in ‘wallets’ (which can be stored on the user’s local computer, mobile phone or even a USB stick), and can be directly transferred from wallet to wallet without necessarily incurring any fees. This greatly simplifies cross-border transactions.
But the primary trait of cryptocurrencies remains their effective anonymity, provided all the necessary precautions are taken. It is because of this that Bitcoin was the exchange medium of choice on the infamous underground marketplace Silk Road.
Q: What is the Malaysian experience with cryptocurrencies?
A: Malaysians are gradually becoming more aware of cryptocurrencies, although it still seems to be mysterious and unclear to many. The government’s stance is ambivalent. For instance, while warning about it, Bank Negara has also declared that Bitcoin (and by extension, all other cryptocurrencies) are not legal tender, and hence not subject to monetary and financial regulations. In other words, the industry is free to develop in a laissez-faire manner for the time being.
Already, infrastructure more often associated with a more mature banking and financial system have started cropping up in Malaysia. While far from commonplace, cryptocurrency exchanges, ATMs, payment gateways and even physical and Malaysian-based online merchants who accept cryptocurrencies do exist.
It is still too early to say whether cryptocurrencies will gain greater public acceptance in Malaysia, or whether it will stay a niche market for enthusiasts and the IT-savvy. Certainly, the day that you can pay your cukai to LHDN in a cryptocurrency is still far away. But there is definitely a strong – albeit perhaps small – community in Malaysia that’s committed to seeing the widespread adoption of cryptocurrencies. Neighbouring Singapore is more certain that cryptocurrencies are not just a fad, having issued tax guidelines for them.