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Economy ,No.46  May 17, 2018

Interview: The Future of Digital Currencies

The fluctuations in the value of Bitcoin, an Internet digital currency, are becoming more and more rapid. People can use Bitcoin as money in an increasing number of shops, but is unstable Bitcoin a currency? In the modern age, the existence of currencies that were managed monopolistically by states has been shaken by technological progress. The Asahi Shimbun asked economist Iwai Katsuhito, who is known for his theory of money, about the relationships between digital currencies, central banks and states.

After Bitcoin rose sharply to more than 2 million yen at the end of last year, from about 100,000 yen a year ago, it fell and showed volatile swings. Can we say that it is a new currency?

Prof. Iwai Katsuhito

Iwai Katsuhito: Since Bitcoin emerged in 2009, I have considered the possibility of it becoming a currency. But I have changed my mind in the last year. Now the possibility of Bitcoin becoming a currency is quite slim. Because the use of Bitcoin initially spread quietly in underground markets of drug deals and money laundering, I drew up a scenario in which if the use of Bitcoin gradually surfaced to general transactions as well, it would become a currency. But paradoxically, the fact that people began to buy Bitcoin in anticipation of price rises amid the expectation and excitement that it might become a currency actually undermined the possibility that it would become a currency. When the Cyprus crisis occurred in 2013, there were capital flights to Bitcoin. But now that Bitcoin is fluctuating wildly in value, people are unlikely to buy it even as capital flight.

What is Bitcoin lacking that would stop it becoming a currency?

Iwai: No, the opposite is true. It is because Bitcoin now has excessive values. A thing doesn’t get used as a currency because it has values in itself. It circulates as a currency only because of the “self-circular reasoning” that because everybody predicts that everybody else will also accept it as a currency, everybody accepts it. In fact, if the value of it as a thing were to exceed that of it as a currency, people would use it as a thing by themselves and never part with it at a lower value as a currency. Therefore, it would not circulate as a currency.

Now, Bitcoin became something valuable as an asset because people expect its prices would rise in the future due to its limited availability. In fact, Bitcoin became a major target of speculation in the last year. As long as people try to get Bitcoin because they anticipate gains from price rises, its value as a speculative asset necessarily exceeds its current value as a bitcoin, so that no one will use it as a means of exchange with other goods and services.

In the meantime, more shops are allowing the use of Bitcoin and there are more and more Bitcoin services. The Japanese government revised the Payment Services Act and allowed Bitcoin to be treated as something corresponding to a currency. What should we think about this gap in movements?

Iwai: You have to see a contradiction here. Some retailers have begun to accept Bitcoin because its prices are rising, whereas people do not try to use it as a currency because they anticipate gains from price rises. Of course, once people begin to think that Bitcoin prices will fall, they will rush to use it as a currency. If retailers are silly enough to continue to accept Bitcoin, they will suffer losses. Eventually, they will stop accepting Bitcoin. Speculators may, however, bet on the time lags of these movements and continue to speculate, expecting that someone else will get the worst of the deal.

Any responsible government should prepare such laws to prevent possible misuses of Bitcoin when it actually becomes a currency. But that does not guarantee the possibility of Bitcoin becoming a currency.


It isn’t easy for something to become a currency, is it?

Iwai: The process of something becoming a currency is very complex and there are many possibilities. But unless there is a steady spread of the sense of reassurance that many people will accept it as a means of exchange, it will not become a currency. So it takes many many years. For example, in Japan, when in the eighth century the Imperial Court suddenly tried to circulate wadokaichin, the oldest official Japanese coinage, it did not circulate at all. But after Japan had begun to trade with China and Korea in the Sea of Japan in the twelfth century, Chinese currencies, such as Tang coins and Sung coins, began to circulate in Japan as well, even after the Tan and Sun dynasties had perished long ago. Another example is the circulation of a key currency. Even after the United States exceeded Great Britain in economic power at the end of the nineteenth century, the world key currency continued to be the British pound. After half a century, as people all over the world came to feel reassured about other people settling accounts in the dollar, the US dollar replaced the British pound as the world’s key currency after World War II.

China closed a Bitcoin exchange last summer.

Iwai: Enclosing people in a currency zone is one of the most effective ways for creating an integrated domestic market and strengthening the governance of governments and central banks.

In Japan as well, the Meiji government abolished the scrips of Edo-period Japan and introduced the yen as a single currency, and this played a large role in forming the domestic market for Japan’s burgeoning capitalistic development. The Chinese government’s closing a Bitcoin exchange was intended to protect its governance power through the Chinese yuan.


Bitcoin is a system of jointly managing transaction records on the Internet and it was also said that it would make central banks, as currency managers, unnecessary.

Iwai: Bitcoin managed to prevent counterfeiting and double payments, two technical hurdles for digital signs to circulate as currencies, through an innovative technology called blockchain. Bitcoin is thus equipped with all the functions that are expected of currencies. In addition, Bitcoin’s remittance costs are lower than those of bills and coins and Bitcoin’s deposit management costs also became lower. Nevertheless, I think that public organizations, especially central banks, will be necessary for the stability of currency values and that Bitcoin, which is designed to make central banks unnecessary, will perish by its own design in the long term even if it should become a currency.

What do you mean by saying that Bitcoin will perish even if it does become a currency?

Iwai: A currency can have value in accordance with the self-circular reasoning that because people predict that others will accept it as a currency, they too will accept it as a currency. Therefore, if some people begin to doubt that others will accept it as a currency, they themselves will not accept it as a currency, thereby confirming their own doubt, and a currency will cease to be a currency. This is hyper-inflation. Such instability is the original sin of a currency as being the product of self-circular reasoning. As long as we live in a monetary economy, we will never be free from this possibility. Therefore, we absolutely need public organizations, especially a central bank, which regulate the value of currencies and act as the lenders of last resort in case of emergency. But the fundamental principle behind Bitcoin is laissez-faire or abhorrence of “Big Brothers,” as writer George Orwell described in Nineteen Eighty-Four, and that is the reason they introduced an Internet dispersive management technology (blockchain) that enables Bitcoin users to make sure that the Bitcoins they receive are not doubly spent without sacrificing their anonymity as individuals. Precisely because Bitcoin, which was designed to get rid of Big Brothers, does not have a Big Brother called central bank, it will surely perish even if it circulates as a currency. Of course, Bitcoin is even more likely to perish before it becomes a currency. I respect Nakamoto Satoshi as a Bitcoin designer. But, he did not have an adequate understanding of the essence of currencies that they circulate as currencies because of self-circular reasoning.


Central banks all over the world are researching public digital currencies applying Bitcoin technologies. Is there a possibility of cross-border world currencies emerging?

Iwai: Currently, the dollar is the key currency in the world economy. But I think that a system under which the currency of one state is also the key world currency is basically unstable. If the US central bank continues to implement an inward-looking monetary policy under the Trump administration, which carries out an “America First” policy, the dollar may lose confidence and face the crisis of losing its position as the key currency. If a new key currency emerges in this state of emergency, it is highly likely to be a digital currency managed by an ad hoc public organization like a consortium of central banks, because there is no time to print new bank notes. Therefore, I think that the research about digital currencies managed by a public organization more efficiently by utilizing Bitcoin technologies and correcting a laissez-faire way of managing is a necessary simulation for the coming crisis of the world monetary system.

If a public organization does come to have a digital currency, it may lead to the formation of a surveillance society that monitors transactions.

Iwai: Certainly, Bitcoin technologies are a double-edged sword. Now we have the structure of protecting the anonymity of individuals. But if their designs are altered slightly, Bitcoin can be used as a means of an ultra-surveillance society where a Big Brother can monitor all deals. Needless to say, individual freedom must be secured for a free market economy and democratic societies to work successfully. We thus need to design a new system that protects the anonymity of currency users and at the same time is able to control the entire supply of currencies. To realize this, the ideal approach is to build a system under which multiple organizations play differentiated roles in a decentralized way – one regulating counterfeit and double spending, another protecting the anonymity of users, and another adjusting entire supplies of currencies and even acting as the lender of the last resort. This is far from an easy task, and if it does not work well, it may be better to keep the current currency intact. It is unnecessary to go to extremes by introducing a digital currency managed by a center because a laissez-faire Bitcoin is no good.

If Bitcoin technologies cause us to be restrained by currencies that should have set us free, it will be ironic.

Iwai: As Karl Marx once called money “a radical egalitarian,” currencies gave people freedom. This is because once people start using money, they will be set free from communal restraints and they can trade with anyone, at any place and at any time, transcending status, sex, race, nationality, and even generations. Of course, money created inequality, but these are quantitative differences and do not amount to qualitative discrimination either as ally or enemy. But since money is the product of self-circular reasoning, the economy under which people use money is essentially unstable and absolutely needs public organizations for the sake of stability. Where should we position the balance between freedom and stability and the balance between individuality and publicness? The theater of Bitcoin, which tries to perform a laissez-faire money economy under which individuals become completely anonymous, may make us think about such a fundamental question.

[Interviewer: Yoshikawa Keiichiro, The Asahi Shimbun]

Translated from “Dejitaru tsuka no yukue (Postman’s persistence reunites a Japanese teacher with students from eighty years ago),” The Asahi Shimbun Digital, 18 January 2018 (Courtesy of The Asahi Shimbun Company). [January 2018]