Bitcoin has no fundamental value and is likely to end in tears once speculators discover how hard it can be to extricate their cash, Singapore’s financial watchdog has warned.
Sopnendu Mohanty, Fintech chief for Singapore’s monetary authority (MAS), said there was a crucial difference between Bitcoin and rival crypto-currency Ethereum, but it is far from clear whether either improves day-to-day transactions or has much potential as a tool for central banking.
“Bitcoin has no natural intrinsic value. Can you buy a house with it? Can you use it for daily interactions? It may be valued at $18,000 right now but what I want to know is how you convert it into fiat currency and realize that value. The risk comes at the moment of conversion," he told the Daily Telegraph.
The lapidary verdict on the Bitcoin craze carries some weight. Singapore's city-state is the leading Fintech hub in Asia. The MAS is currently carrying out the most far-reaching research into blockchain and distributed ledger technology by any central bank or monetary authority in the world.
Its 'Project Ubin' is systematically investigating what the Fintech revolution means for equity and bond trades, cross-border settlements, the banking system, as well as control of the money supply and credit creation.
There are well-publicised cases of people carrying out real transactions with Bitcoin - including two recent house purchases in England - but these are essentially stunts that mostly whither under scrutiny. They do not reconcile the fundamental contradiction facing those e-coins that keep surging in price: either they are a speculative asset or they are a stable currency, but they cannot be both.
Mr Mohanty, recruited from Citigroup to spearhead Singapore's Fintech drive, said Ethereum has some social utility and plausible market value. It can be used for 'smart contracts' and to secure access to valuable computing power. "It at least has economic value. You can exchange ether to run software in the cloud," he said.
Fintech experts say the higher that Bitcoin soars, the greater the incentive for sophisticated cyber-criminals to hack the exchange platforms such as Coinbase that make it practical for people to buy and sell crypto-currencies. It is only a matter of time before a major exchange is badly compromised.
Speculators would risk seeing paper wealth vanish instantly in a market with little liquidity, and limited legal recourse. Sir Howard Davies, former head of Britain's Financial Services Authority and now chairman of RBS, said people should assume that they will lose everything. The advice should be explicit: "Abandon hope all ye who enter here’ – I think that’s probably what’s needed,” he said.
To the extent that investors can exchange their Bitcoins directly in 'peer-to-peer' trades, they may face trouble trying to deposit the money in a bank. They will risk triggering money-laundering or tax evasion enquiries by the judicial authorities once they start to handle large sums.
Central banks and governments have a further pressing concern. The current value of Bitcoin makes it worthwhile for 'miners' to crank up computer power on an industrial scale to act as 'auditors' (ie. solve the mathematical puzzle) and earn the Bitcoin rewards.
“The energy-consumption is insane. If we start using this on a global scale, it will kill the planet,” says Alex de Vries, a PwC analyst and founder of the Digiconomist blog.
These miners are already thought to be consuming energy each day equal to the entire power use of Denmark. Much of this 'mining' takes place in China where electricity is effectively subsidized and relies heavily on coal - to the point where it is distorting the data used by economists to track underlying shifts in Chinese industrial output
One Bitcoin mine in Inner Mongolia has 21,000 machines housed in seven buildings that run off power from local coal-fired plants. They are charged four cents per kilowatt/hour, according to an eye-witness report by Quartz.
The carbon footprint of Bitcoin is rapidly becoming a global environmental issue. This in itself is almost certain to lead to a draconian regulatory riposte and has therefore become an added 'political risk' for those playing the market.
Singapore's Project Ubin suggests that talk of impending issuance of e-coins by central banks has run ahead of reality. "We are struggling to find compelling reasons to issue digital currencies," said Mr Mohanty.
The MAS has teamed up with the Massachusetts Institute of Technology to explore the idea further and will release its findings next year. "We're conducting deep research based on cutting edge technologies. We’ll make choices on empirical data, not some 'white paper'," he said.
Mr Mohanty said the real value of Fintech probably lies elsewhere. "People are overly focused on crypto-currencies. There are bigger needs out there."
Singapore is developing a pilot project with Hong Kong for trade finance based on distributed ledger technology that will go live in 2018.
A joint study by the MAS and Deloitte concluded that cross-border payments are currently "marred with expensive and uncertain transaction fees, long processing times and opportunity for fraud". Blockchain-style systems could slash costs and time dramatically.
The real worth of Fintech probably lies in boring, bread-and-butter changes. The crux is often helping banks and finance houses to move from a 'closed-loop' system that cannot easily absorb new technology to a 'plug-in' model that is far more flexible.
"The banks have legacy systems and don't have enough capital to upgrade everything. We're looking at the magic middle layer that allows Fintech to be plugged in," he said.
Telegraph Media Group Limited