Analysts split over future of cryptocurrency

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Volatility is biggest barrier for bitcoin to become legal tender

By Lee Kyung-min

Antonio Fatas, an economics professor at INSEAD

Opinion is still split over whether cryptocurrency is likely to become a legally recognized currency.

While experts largely agree the high volatility will remain the largest barrier to making it a recognized currency, some expressed optimism that the currently underappreciated, new digital asset will inevitably be a part of regular payment systems in the future.

Antonio Fatas, economics professor at INSEAD, described cryptocurrency exchanges as a market with very limited volume where some individual players seem to be able to move prices with strategies that are impossible in other financial markets.

"There is also a lack of transparency about the functioning of some of the largest bitcoin exchanges," Fatas said.

The critical view comes as the bitcoin price recovered recently to over 16 million won ($13,800) on June 27 thanks to a series of moves to bring the virtual coin into the financial system. The price hovered around 14 million won Monday.

The INSEAD professor does not believe that cryptocurrency will be recognized as a legal currency.

"At this point I do not see this happening. There is not yet a project that looks credible enough to challenge traditional currencies," he said.

Fatas views that the marginal activity on some cryptocurrencies driven by what he called "the dream of some to become rich overnight" is close to gambling.

"That's not what a currency is about," he added.

Xu Xiao Chun of Moody's Analytics

Xu Xiao Chun of Moody's Analytics expressed similar views, saying the very nature of cryptocurrency fails to carry out the function "store of value," one of key characteristics for a currency like the U.S. dollar or the Korean won.

"Although cryptocurrency has captured the world's imagination, it has remained too volatile to be taken seriously as a form of money as it violates the rule of store of value," he said.

Such a concern over fundamentally questionable characteristics of the asset is shared by Sohn Sung-won, a finance and economics professor at Loyola Marymount University in Los Angeles.

"Cryptocurrency is so volatile that very few would want to store wealth in it," Sohn said.

Not too many businesses would want to accept the currency, either, given its volatility, another reason cryptocurrency would fail the "medium of exchange" test.

"Cryptocurrency fails both tests. These are the reasons cryptocurrency would only be accepted by a very tiny sliver of the economy," Sohn said.

Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School

The economists said the recent spike in the cryptocurrency price came as a result of a series of news reports that sought to bring it into the financial system, not because they have fundamentally new, game-changing values or characteristics.

The recent bitcoin price jump will, therefore, last only for a limited period of time, they noted.

"The rebound of the bitcoin price has likely to do with new offerings by well-recognized companies like Facebook and J.P. Morgan Chase," Xu Xiao Chun of Moody's Analytics said.

The view came in response to Facebook's release of its white paper explaining Libra and its testnet for working out the kinks of its blockchain system before a public launch in the first half of 2020.

'Digital tokenization'

Similarly, the management at J.P. Morgan Chase is reportedly planning to begin testing its highly anticipated cryptocurrency, called "JPM Coin."

"It gives cryptocurrency a facade of legitimacy, though it remains to be seen how it will pan out in the long run," the Moody's analyst added.

However, Fatas of INSEAD expressed a view slightly more favorable to "digital tokenization" of such currencies.

In his view, that is what JPM Coin is about. It uses the U.S. dollar as a currency and translates it one for one into a digital token to be used within its platform.

"This might succeed but this is not too different from what we have been doing for decades ― most of our financial transactions today take place digitally," INSEAD professor said.

Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School, has a more upbeat view.

"Bitcoin is staging a comeback because there is an opening now," he said.

"Facebook's announcement has made it clearer that there is a crypto future, even if regulators raise concerns. Also, near-zero interest rates make them more attractive as assets."

Sohn Sung-won, a finance and economics professor at Loyola Marymount University in Los Angeles.

Crypto's future course?

Guillen of Wharton School is of the most hopeful view that the digital currency will have its future.

Following the classic fiat principle, he judges, governments can issue cryptocurrencies that come in different types including the decentralized bitcoin, Facebook's Libra or JP Morgan's JPM Coin backed by reserves.

"I am convinced that cryptocurrencies will be widely used in the future along with fiat currencies. But they will need to be trustworthy and convenient to use if they are to succeed.

Sohn of Loyola Marymount University said the central bank involvement will be ― although in the far distant future ― an inevitable step required in the digital world.

"At some point, the central banks will have to get in the game of cryptocurrency because that is what the digital world needs," he said.

With government involvement, Sohn added, there will be something backing the value of the cryptocurrencies, enabling them to be more broadly accepted.

"There will also be more regulations governing the issue and use of the currencies. However, it will take many years before key central banks issue cryptocurrencies. Don't hold your breath. In the meantime, Libra could be the next best thing," he said.