Bitten by the bitcoin bug

lead-in: photo: 123rf

Atit Lertkiatpanit does not carry bundles of banknotes, but his wealth is assured by his digital wallet. The 26-year-old entrepreneur is an active cryptocurrency investor. He remains unfazed by the fact that bitcoins are not recognised by the Bank of Thailand. He started collecting bitcoins a couple of years ago and the intangible currency now accounts for 70% of his portfolio.

"When I first bought them two or three years ago, one unit was only around 9,000 baht, but now it's about 40,000 baht," Mr Atit told Spectrum in an interview last month.

"I do not plan to sell them soon. I think the price will rise further. If I sell them now, I may not be able to buy them at a low price again."

Although a number of international companies accept bitcoins as a medium of exchange, the legal status of bitcoins in many countries remains a grey area.

Thailand's central bank has not officially banned the cryptocurrency but does not accept it as legal tender. Consumers therefore have to bear the inherent risks as the virtual currency could simply be electronic data whose value depends on the whims of the market.

Mr Atit shrugged off such caution. "Any government would naturally try to protect people from what they don't understand, particularly bitcoins, which will transfer their power to control the medium of exchange to the cybersociety."

Welcome to the world of virtual currency. Lifewire.com summed up bitcoins as "a form of digital public money that is created by painstaking mathematical computations and policed by millions of computer users called miners".

It added: "Bitcoins are, in essence, electricity converted into long strings of code that have money value."

Forget traditional currency transactions via intermediaries like banks and financial institutions; bitcoins are enabled by blockchain technology that provides the ledger system to prove online transactions have occurred.

Under the protocol, the sender and receiver require a matching password to unlock the transfer of value, while other online miners verify the transaction by using computer codes.

"I used to be sceptical about bitcoin. I thought it was a kind of scam. But after I studied it, I realised that the transaction is secured by a tamper-proof ledger," Mr Atit said.

Mr Atit also uses bitcoins in his daily transactions. "I just transferred some money to my brother overseas by bitcoin. It is very convenient and safe, even better than gold, which is not conveniently portable," he added.

It is also a matter of privacy. "When using a credit card, we have to verify our ID and disclose personal information. But we don't have to reveal our personal information when transferring money via bitcoin," he said.

In spite of high fluctuations in bitcoin prices partly due to the US Securities and Exchange Commission failing to approve the physical bitcoin ETF, Mr Atit said: "Bitcoin will die if the internet is shut down. But it is unlikely soon because they cannot shut down all the carriers," he said.

METEORIC RISE AND CONTROVERSIES

Founded by an individual under the alias Satoshi Nakamoto, bitcoin was originally known mainly within tech circles when it was launched in 2009. The underlying blockchain technology decentralises authority from financial intermediaries to the cybernetwork.

Within a couple of years, bitcoin witnessed a meteoric rise followed by price swings. More and more companies such as Virgin Galactic and Microsoft now accept bitcoin as payment.

It became more popular among people who want to get rid of intermediaries and wire money overseas without bearing the cost of remittance fees and exchange differentials. Users don't have to go to the bank but can keep their virtual currency secure in their computer.

The irony is that some could lose their money by forgetting the computer code. In 2013, a man in Britain lost 7,500 bitcoins when he dumped his old laptop in the rubbish landfill. He failed to recover the hard drive that contained the code for his digital wallet.

However, due to its unregulated nature, bitcoin has generated controversy as it has been used by criminals to transfer money off the grid to avoid law enforcement oversight.

"Criminals tend to have better knowledge of how to utilise technology for their high-risk operations. Technology itself is not bad, it depends on how we use it," Jirayut Srupsrisopa, the founder of PrivateChain.co, said.

Mr Jirayut, an Oxford graduate, said people tend to have negative feelings towards new technology, citing the Red Flag Traffic Law in Britain as an analogy. The law or Locomotive Act was introduced in the 1890s to protect pedestrians from traffic accidents during the early days of vehicles.

Under the law, cars had to be led by a pedestrian waving a red flag to warn bystanders of the vehicle's approach, disrupting Britain's effort to develop its automotive industry, he said.

"The law might look absurd now. But it shows how people tend to react negatively to new technology when it is first introduced," said Mr Jirayut, a 26-year-old executive who runs a blockchain consulting company.

In the medium term, digital currency is a transactional protocol, Mr Jirayut said. But in the long run, it can be a new monetary system in the same way as the Gold Standard or the Bretton Woods system.

"Digital currency can ease inflationary pressure because the number of bitcoins is capped at 21 million units. It can also ease deflationary pressure because one bitcoin can be divided into eight decimal points," he said.

"Bitcoin has a simple logic. Everything is based on maths. If you believe in the maths, you believe in the system."

He said bitcoin is nothing new. In fact, the cryptography has been around for 40 years and the cryptocurrency has been around some 20 years. Mr Satoshi merely unlocked the final jigsaw to create bitcoin, said Mr Jirayut.

He said digital currency is inevitable. "The largest demographic is the internet nation," he said. "It is just a matter of time."

Mr Jirayut said bitcoin is enabled by internet technology which could dispense with the costly intermediary process.

"Around 40-50 years ago, people had to pay 40-50 baht per minute to make a phone call because the portal companies had to invest in the infrastructure. But the first phase of TCP/IP (Transmission Control Protocol/Internet Protocol) technology allows people to share information immediately, like Skype, Line and Facebook. People can send anything online such as PDF files, photos or emails, but they still have the original copies on their computer."

Blockchain is the second layer. "If we can send 1,000 baht online and cannot keep an original copy, we can send it directly without going via an intermediary. Blockchain technology allows users to send the value that we store. The original copy will disappear," he said.

Even before the advent of bitcoin, he said about 50% of monetary transactions were conducted online. "People transfer millions of baht online without seeing a banknote but they know the value is there," he said.

"Instead of denying it due to a lack of understanding, the regulators should try to grasp its potential."

Asked what he would recommend to investors, Mr Jirayut said investors should be cautious. "Better invest with their disposable income."

FOR WHAT IT'S WORTH

As in most Southeast Asian countries, the legal status of bitcoins is unclear in Thailand. The central bank in 2013 briefly banned trading in bitcoins. Early in 2014, the Bank of Thailand lifted the ban on its usage but would not be held responsible for any losses incurred in digital holdings. It also issued a statement warning consumers that it is not a currency and it comes with inherent risks.

"Bitcoin is electronic data. Thus, it's not considered a currency and can't be used for payments, and is not considered legal tender like money. With no actual worth, the value of such data varies based on the needs of the market. Bitcoin changes in value very quickly and it could become something of no value if no one desired it," the Bank of Thailand said in a statement in 2014.

In response to Spectrum's request for an interview on bitcoins last week, an official from the central bank said: "We are not in a position to give any official views on bitcoins as such."

The official added: "There is much more work to be done in terms of understanding these developments and the implications for policies, especially consumer protection."

Meanwhile, the central bank is in the process of creating the supportive regulatory environment to promote the adoption of financial technology (fintech) to promote the capacities of service providers and users. It remains to be seen how the regulatory framework would affect the bitcoin and blockchain.

In spite of a lack of clear-cut policy on bitcoin, some financial institutions have already embraced blockchain technology. Kasikornbank, for instance, recently joined forces with IBM to further develop blockchain technology to streamline its financial services.

Korn Chatikavanij, former finance minister and chairman of the Thai FinTech Association, said bitcoin was inspired by people who wanted to promote efficient transactions. Cryptocurrency can be managed flexibly and allows swift transactions. However, some investors also collect bitcoins for speculative purposes.

Asked whether investors should be cautious when trading bitcoins, Mr Korn said: "The high volatility of bitcoin prices answers that particular question."

Mr Korn said demand should depend on the actual need to use bitcoins as a medium of exchange. "I think the recent fluctuations in bitcoin prices reflect, more or less, unusual demand for bitcoins," he said.

Asked whether the digital currency would become more popular, Mr Korn said: "The question is whether there will be more cryptocurrencies in different forms. The number of people who use it has grown."

He said digital currency is part of the money revolution. Money is whatever people agree to use as legal tender. Mr Korn cited the example of an island which uses pebbles as the medium of exchange. The pebble with the highest value comes from the seabed.

"If you look at the physical form of money, banknotes are made of paper but they depend on trust. The signature of the central bank governor on the banknote gives it sanctity. But people can use anything as money as long as they accept it as the unit of measurement."

Money has evolved from shells to coins to pieces of paper. The value of the money does not depend on its physical aspect but the value that people agree to store in order to trade goods and services.

Digital currency is based on the same concept. "It depends on what people chose to store the value on. One day people may decide to place the value on something else. Then its value will disappear," he said.

Mr Korn said he is not interested in investing in bitcoins. However, he said what is more interesting than the bitcoin phenomenon is the blockchain technology which can be applied to many other financial instruments. "People tend to overlook the capacity of blockchain technology, which can be applied to other financial-related products, not just cryptocurrency," he said.

Blockchain technology decentralised computer ledgers that confirm the transactions.

Bitcoin is a part of fintech, which helps develop financial services.

"As long as you have the technology, you have access to financial opportunities," Mr Korn said.

"In the past, only rich people had access to financial services or gained attention from bankers. But now you can do investment transactions on your smartphone.

"In the future, the technology should help bridge that discrepancy. Financial centres will be spread everywhere."

QUENCHING DEMAND: Bitcoin is increasingly welcomed at commercial establishments across the globe, such as this bar in Sydney, Australia. photo: reuters

Korn Chatikavanij. photo: Phrakrit Juntawong