The EconomistJanuary 20th 2018 Finance and economics 612 ing reserves, along with the emergence of
mass-market electric vehicles, have
changed the reckoning. There is a fair
chance that much of the world’s recover-
able oil will never be extracted, because it
will not be needed. It thus makes sense for
the five big producers in the Middle East
(Saudi Arabia, UAE, Iran, Iraq and Kuwait),
which can extract oil for less than $10 a bar-
rel, to undercut high-cost producers and
capture market share while the demand is
there. The financial logic has changed to
“better to have money in the bank than oil
in the ground,” notes Mr Dale.
Does that mean oil prices are poised to
plummet? Probably not, unless shale pro-
ducers ramp up output again. The peak in
global oil demand might be decades away,
argues Mr Dale, and it will not tail off
sharply. And for now, the big oil exporters
cannotsustain very low oil prices for long.
Their “social cost” of production, taking in
government spending reliant on oil rev-
enue, is about $60 a barrel on average. Sus-
taining an oil price close to the cost of ex-
traction will require reforms, which do not
usually happen quickly. Translated into
doublespeak: oil prices are too high; but
they may not fall, in large part because big
oil producers have got used to them. 7I
T HAS been another week of vertiginous
swings in the prices ofbitcoin and other
crypto-currencies. This time, the moves
have mostly been downwards, with some
days seeing falls of over 20%. Views on this
were as divided as they were during the
giddy climb: did it mark the definitive
bursting of a bubble as rapidly inflated as
any in history (see chart)?
Asia provides both an explanation of
this week’s sell-off and a glimpse of crypto-
currencies’ future. The threat of a ban in
bitcoin-trading in South Korea was the
proximate cause of the plunge. As to the fu-
ture, the question iswhich Asia? At one
end of the spectrum is Japan, which has
embraced crypto-currencies. At the other
is China, which has all but banished them.
South Korea has been in the middle.
These countries have outsized roles in
the crypto universe. China’s exchanges
hosted more than nine-tenths of global bit-
coin-trading until the government closed
them last year. Japan now hasthe biggest
share of virtual-currency markets. South
Korea makes up less than 2% of global GDP
but nearly a tenth of bitcoin-trading.
North Asia hasbeen fertile ground for
crypto-currencies for several reasons.
Partly it is the high-tech pedigree. A preva-
lence of smartphones, fast internet and
computer-science graduates makes people
receptive to the newfangled. The rigidity of
conventional finance has helped. Capital
controls boost the appeal of crypto-curren-
cies in China and South Korea, and in Ja-
pan they are a beguiling alternative to low-
yielding mainstream investments. A zest
for gambling has surely lured some to a
market that is driven by speculation.
But the region’s regulators are going in
different directions. China, alarmed at theway crypto-currencies can evade govern-
ment oversight, has taken the harshest line.
Last year it banned domestic exchanges; in
recent days it has taken aim atwebsites
flouting this ban. Officials have also called
on local authorities to choke off the power
supply to bitcoin miners, computer net-
works that create new coins through mas-
sively energy-intensive calculations. Chi-
na’s miners, still dominant in the global
industry, are shifting to other countries.
The Chinese government admires the
technology that underpins virtual curren-
cies and wants to reap the benefits. It is
prodding its big financial firms to experi-
ment with blockchain, a system of distri-
buted ledgers popularised bybitcoin. But
officials believe they can do this without
having to tolerate the currencies them-
selves. As Pan Gongsheng, deputy gover-
nor of the central bank, quipped last year,
quoting a French economist: “The only
thing to do is to sit by the riverbank and
wait forbitcoin’s corpse to float past.”
Japan, by contrast, has given crypto-currencies room to run. Its regulators
know the dangers. One of the biggest scan-
dals in bitcoin’s short history wasthe col-
lapse of Mt. Gox, a Japan-based exchange,
in 2014. And officials have not minced their
words, with Haruhiko Kuroda, governor
of the Bank of Japan, warning that the bit-
coin rally in late 2017 was “abnormal”.
But rather than throttle virtual curren-
cies and the innovations they might
spawn, the government has let them de-
velop, within parameters. Last March it
passed the “virtual-currency act”, declar-
ing that they are assets and can be used for
payments. The financial-services author-
ity has granted licences to 11 exchanges, to
reduce the risk of fraud. Zennon Kapron, a
Shanghai-based analyst of digital curren-
cies, says that some of China’s leading
crypto-coders are now moving to Japan.
South Korea was initially hands-off in
its regulations. But alarm has mounted
about the speculative fervour. So intense is
the demand that South Koreans pay a
“kimchipremium” of roughly 40% for their
bitcoins (not easily arbitraged away be-
cause of capital controls). On January 11th
the justice minister said crypto-currency
exchanges would be banned. Their devo-
tees responded with a petition urging le-
niency, which swiftly collected more than
200,000 signatures.
Faced with this backlash, the govern-
ment appeared to soften its stance, saying a
ban was justone idea. Other incoming
measures are less potent: investors will
have to pay taxes on capital gains and regis-
ter trading accounts under their real
names. But just as crypto-markets had re-
covered their poise, South Korea’s finance
minister said this week that the ban was
still very much on the table, calling it a “live
option”. The collapse resumed.
Virtual currencies have bounced back
from past sell-offs, but this has been a big
one. At one point bitcoin was down about
50% from its highs in December. Believers
in virtual currencies say that one of their
selling points is freedom from government
meddling. In Asia, the cutting edge of the
crypto-world, it is governments that are
making—and breaking—their fortunes. 7Digital currenciesThe crypto sun sets in the East
SHANGHAI
The threat oftough regulation in Asia sends virtual currencies into a tailspinNot forever blowing
Historical asset bubbles, multiple of starting price* on relevant exchangeSources: “New Evidence on the First Financial Bubble”, Rik Frehen, William
Goetzmann, Geert Rouwenhorst; “Famous First Bubbles”, Peter Garber; Thomson Reuters*Three years prior or earliest available price†
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Years from (peak)321 1 23102030405060Dotcom (2000)Bitcoin (2017)Mississippi (1719)South Sea (1720)Dutch tulip bulbs† (1637)