Sands have been shifting at an ever-increasing rate in cryptocurrencies, a US$3 trillion industry of which there is little awareness in Taiwan.
On Sunday, El Salvador’s young president, Nayib Bukele, announced plans to issue the world’s first bitcoin-backed sovereign bonds valued at US$1 billion, while Indian Prime Minister Narendra Modi recently voiced support for fast-tracked crypto regulations by February next year, a 180-degree turn from the failed ban a couple of years ago.
In the US, the New York and Miami mayors have elected to have their salaries paid in bitcoin, and intelligent regulations are getting drafted by thought-leading lawmakers such as US Senator Cynthia Lummis to ensure the US’ lead in this strategically important asset to fend off the Chinese Communist Party’s (CCP) currency war against the US dollar.
Meanwhile, in Taiwan, most of crypto policy guidance has come from the central bank, unlike the examples in El Salvador, India or the US.
Worse, public comments by Taiwanese central bank officials have been factually incorrect in describing crypto, for example, that it is used for illicit financing or lacks medium of exchange functions.
The former has been refuted in data and even by former CIA deputy director Michael Morrell in a research publication in April. With respect to the latter, one need look no further than the real-life example in El Salvador, where bitcoin has been the national currency facilitating even the smallest transactions at street food stalls, while shielding the country from inflationary pressures.
As for having a central bank digital currency, central bank Governor Yang Chin-long (楊金龍) early this month correctly pointed out the “last mover advantage” of issuing one: Ill-prepared issuance of a digital New Taiwan dollar would be a national security risk due to obsolescence risks posed by the CCP’s much more advanced version called the Digital Currency Electronic Payment (DCEP).
However, Yang cannot be more wrong about crypto, where there is an exponential first mover advantage for early adopters.
Furthermore, Yang, as the current oracle of crypto policy in Taiwan, has failed to point out the unique need for the nation to take the lead regarding this strategic asset based on revolutionary technologies.
The first derivative benefits are straightforward: investment gains, financial inclusions to promote equality and high-paying zero-pollution employment. Therefore, game theories have been used in countries to attract crypto.
Using bitcoin, the longest-running apex crypto network as an example, this columnist would like to explore the less-discussed reasons that Taiwan must take a proactive lead in crypto, with guidance from those in the top of President Tsai Ing-wen’s (蔡英文) administration, while moving away from the legacy bureaucratic system.
China banned bitcoin mining and removed half of the network’s global computational power in the early summer, and as game theory played out in real time, much of the lucrative US$20 billion mining industry moved to the US to benefit from crypto-friendly states such as Texas.
The network continued to operate without skipping a beat — if anything bitcoin’s price almost doubled since the low of the ban.
When El Salvador borrowed US$1 billion via bitcoin-backed bonds with global instant settlement capabilities and without being tied to IMF rules, it demonstrated a much superior funding method than older systems.
Other emerging economies are likely to begin the difficult calculations to follow suit at a higher cost (of bitcoin) or be left behind completely.
These are national-interest-level considerations that Taiwan will have to face, hopefully sooner rather than later.
The China example shows that if Taipei’s policies are hostile to bitcoin, it creates disproportionate advantages for other countries based on game theory. The El Salvador example illustrates that if the government adopts bitcoin as a last mover, the costs would become disproportionately higher than for early adopters.
However, there are even more critical reasons for Taiwanese for the government to approach this strategic asset with the utmost urgency and solid research.
As alluded to in the China ban example, the bitcoin network can and has proven to resist nation-state attacks by the CCP. Bitcoin cannot be seized in times of war, whereas none of the traditional store-of-value assets would be safe: not real estate, not currency and often not even gold.
The heroic endeavor to preserve and ship gold reserves to Taiwan in 1948-1949 laid the monetary foundation of the New Taiwan dollar, but such maneuvers cannot be repeated in upcoming conflicts with the CCP. A smarter plan is needed for the digital era.
Private Taiwanese savings, if stored in bitcoin, would be unscathed in the case of a kinetic attack initiated by the CCP. In the worst-case scenario of a short occupation, the reserves of the democratic government could be preserved in the form of bitcoin, to make sure they can fight another day and rebuild.
Furthermore, bitcoin can alter the war calculation pre-emptively if the enemy knows that not much economic wealth can be obtained or destroyed via kinetic force. Antifragility begets safety. This is the reason Taiwan, more than any other country, must study and draft a bitcoin strategy for national security considerations.
There are unique economic reasons for Taiwan to have a policy framework for bitcoin.
The most urgent one: Taiwan’s housing market has become astronomically expensive. At a price-to-income ratio of more than 30 in Taipei for example, families are left either slaves to mortgage payments or completely priced out of owning a home.
If left unchecked, housing injustice will tear apart the social fabric and sow seeds of instability for the democratic government.
However, due to agency problems, the central bank cannot directly address the driver of the housing bubble without acknowledging that its price stability policy is fueling wealth inequality via low interest rates.
Taiwan’s housing bubble problem is due to the lack of a reliable Store-of-Value (SoV) system. With a bank deposit rate of 0.04 percent in an inflationary environment, there are not enough sound instruments to alleviate savings demand, and capital is therefore stored in properties, which in turn drives up prices beyond the demand dynamics of a roof over a family.
The solution is simple: Do not punish people for saving, because it is a virtue; instead, divert savings pressures away from the property sector to exclusive SoV vehicles, such as bitcoin and gold, just as batteries store electricity for productive use later.
Such a profound policy guidance must come from the top of the Tsai administration, which represents the needs of the masses, not from the unelected central bank.
It is time for Tsai to provide clarification on Taiwan’s strategy for crypto. The examples shown above have shed light on the irony of the current norm of letting the central bank take the policy lead.
Bitcoin is a strategic asset with national security value, hence the Ministry of National Defense should have input. Using bitcoin as a SoV solution to the housing injustice problem could fall under the scope of the Ministry of the Interior.
Even Yang acknowledges that crypto assets are not currencies, nor anything under the traditional regulatory authority of a central bank.
Legally, Taiwan correctly treats cryptos as tradable intangible assets, with the ability to be traded with little friction across borders. Should not Taiwan’s most capable foreign-trade agencies take part in drafting the strategy?
All of these iterations only highlight the need for a comprehensive approach in the interests of the nation, and for Tsai to provide guidance on crypto, as Modi has done in India, Taiwan’s democratic partner.
James Lee is a consultant at Mimesis Capital in Taipei.
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