Bitcoin will collapse, says economist, Kenneth Rogoff

Kenneth Rogoff is a professor of economics and public policy at Harvard University and served as the chief economist of IMF from 2001 to 2003. His recent post at discussed whether bitcoin is a bubble or not. The author is well versed on currencies and is the author of The Curse of Cash, which discusses the impact of cash on our lives and how technology is impacting it.

Cryptocurrencies are gaining traction in the past few years and have grown immensely. A single unit of bitcoin now costs over $5,000, as of October 13, 2017, and many crypto enthusiasts believe that the price will surge to even higher levels in the coming future.

Rogoff believes that the movement of cryptocurrencies, such as bitcoin and ethereum, depends on how governments will react to these currencies. Cryptocurrencies make it excessively harder for governments to track and tax transactions. There a number of possible steps the government can take, including creating their own cryptocurrencies or regulating the existing cryptocurrencies so that they become taxable. Moreover, the price of bitcoin is also dependent on how all alt-coins will progress.

Although it is easy to replicate bitcoin, it is not so easy to duplicate its established lead and the trust it has with the investors. Moreover, the current regulatory environment is loose, except for a few exceptions like China which have banned bitcoin exchanges. Whereas Japan has enshrined the bitcoin as a legal tender, the US is expected to follow suite.

Despite all the advantages that bitcoin currently has, it is unrealistic to expect bitcoin to supplement money issued by central banks. Governments may allow small scale transactions, as it is much more efficient and faster. However, when it comes to large scale anonymous payments, which cannot be traced nor taxed, governments will take actions. Large scale payments that cannot be traced will enable the criminals to easily transfer money to fund their activities.

While talking about Japan’s decision to normalize bitcoin as a legal form of payment, Rogoff states:
“It will be interesting to see how the Japanese experiment evolves. The government has indicated that it will force bitcoin exchanges to be on the lookout for criminal activity and to collect information on deposit holders.”

The author further clarifies that the global tax evaders will find a way to acquire bitcoins anonymously from other parts of the world and then launder their money through Japanese accounts. By embracing the virtual currencies, Japan risks becoming another Switzerland.

Rogoff concludes that if bitcoin is stripped of its anonymity, and the governments are allowed to observe the transactions, then it would lose its core principle and its current price would be unjustifiable. Moreover, there is nothing stopping the central banks from creating their own digital currencies and using their immense power to regulate  them.

Rogoff says:
“The long history of currency tells us that what the private sector innovates, the state eventually regulates and appropriates.”

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