Japan, home of the some of the world’s biggest cryptocurrency exchanges and a population of emphatic users, has recently been pouring cold water on what it sees as an overheated market.
Last week it issued warnings to unregistered cryptocurrency companies, forcing the exchange Binance to relocate, and just this week the Bank of Japan (BOJ) set up an unflattering Q&A style webpage based around cryptocurrency education.
Entitled “Lets talk about virtual currencies” on their consumer financial advice website the BOJ’s tone is certainly foreboding. Under the following headings the BOJ infers a scorecard on cryptocurrency’s validity as an investment and a product, summarised below.
How useful is virtual currency?
BOJ grade: Fail.
Citing Bitcoin as the preeminent token which it describes “as designed as a mechanism to conduct cheaper and more reliable "remittance".
“At this time, there are few cases where the virtual currency is used for its original purpose. Even in Japan, there are stores that can pay in virtual currency such as bitcoins, but it seems that they are not used much in practice. Many holders are buying a virtual currency because it is "likely to rise" rather than what the original use is. If so, it means that it is a waste to use what is now going to be used for payment now.”
Is virtual currency profitable?
BOJ grade: D
Although it admits that big profits have been made, it believes crypto speculation has surpassed Japan’s infamous asset bubble in the 1980s, which was followed by the "Lost Score", a 20-year period of stagnation the country is still recovering from.
How is the value of virtual currency determined?
BOJ grade: Fail
It concludes that “virtual currency has not established standards for evaluating economic value such as corporate performance forecast in shares.”
“The value of goods (monetary assets) with monetary value is usually determined by what merit is given to the holders. For example, if it is a stock, shareholders can receive the benefit of dividends.. . By predicting how much dividends you can receive you can derive the economic value of the stock.”
“If it is used for the original use (remittance, for example), you can think about the economic value of it, but since it is not currently used for its original use in the present situation ... the price of the virtual currency is currently considered to be strongly supported by people's expectation that ‘future price will rise’.”
It is hard to argue that people’s expectations of “Future Value” of cryptocurrencies hasn’t been at the extremes of optimism - and most investors probably don’t realise they are using the intuitive calculations in the first place.
Although the BOJ warns consumers that cryptos currently fail under the definition of a ‘currency’, the tone softens when it comes to regulation and the question of whether the BOJ would be better off banning digital currencies.
The bank is also sanguine towards the blockchain technology: “if future technology develops sufficiently, a new mechanism that will make people's lives dramatically convenient may be created. To that end, it is important to actually try it in the world, there is a reason to believe that it will allow us to use existing virtual currency, accumulate cases and promote further technical development.”