Playing Whack-a-Mole With Bitcoin

Trying to bring the hammer down on bitcoin is like playing Whack-A-Mole. It tends to just pop up somewhere else. Still, regulatory action, while not fatal, does make life a little less easy for the crypto-faithful.

South Korea is the latest country to mull a straight ban on cryptocurrency trading via exchanges, after China’s own anti-bitcoin targeting of exchanges and ban on Initial Coin Offerings (ICOs). Asia represents the lion’s share of global crypto-trading and some governments are getting twitchy, issuing warnings on consumer risks and criminal activity. That should, all things being equal, put the brakes on bitcoin—and there have been signs of more New Year moderation.

Regulatory Scrutiny

Bitcoin’s euphoric wave of gains has peaked as regulators start to shift their positions

Source: Bloomberg

But for every politician worried about the dangers of playing at the crypto-casino, there’s another who spies riches. Japan, for example, has followed its own path, recognizing bitcoin as a legal means of exchange and ramping up oversight of exchanges rather than banning them. Like the U.S., Japan is mulling Bitcoin futures. Almost four years after it suffered the collapse of the world’s largest Bitcoin exchange, Mt. Gox, on its shores, Japan is deemed the “heart of bitcoin.”

What this means in practice is that bans have a habit of pushing trading activity elsewhere, rather than killing it outright. China’s example is instructive. Trading moved from exchanges to over-the-counter, and activity leaked from China to places like Tokyo. Bitcoin’s very nature as lines of code makes it hard to stop at the border. “We are registered in multiple locations and we have people in multiple locations,” one exchange chief said last year. “We will never be affected by one regulatory body.”

Regulatory actions can still hurt, though, even if they’re not fatal. Cryptocurrency prices are falling in response to Korea’s plans, exacerbating recent losses as traders book profits after a euphoric 2017 and try to rotate gains into smaller tokens. Bitcoin, Ripple, Ethereum and Litecoin are all down between 4 and 12 percent.

This Wasn’t Supposed To Happen

Cryptocurrencies are falling across the board today, as traders seek to cash in rapid gains

Source: Bloomberg

If crypto’s value is supported by being able to use it for nefarious purposes, anything that tends towards more oversight is negative. Critical comments and crackdowns can dissuade wannabe traders too.

As we head toward a G20 meeting that might take a common position on the bitcoin mania, there’s nothing yet to suggest it will be easy to bring the more open-minded Japan approach closer to the hard-line position of China. But if Korea goes ahead with the ban, it might start to tip the balance.

While it would probably take another Mt. Gox to spur global governments into concerted punitive action, any shifts in sentiment have an outsized importance in a hair-trigger market like this. Every little bit hurts.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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