HKU Bulletin May 2022 (Vol. 23 No. 2)

Fiat money, generally speaking, is money that is issued and backed by states who promise to uphold its value. But that has not stopped people from imagining a world where currencies are ‘denationalised’. About 50 years ago, when economist Friedrich Hayek speculated on this possibility, it was impossible to test out on a massive scale as the technology was not ready. Today, the advent of cryptocurrencies has changed all that. Companies and individuals can now create their own online ‘tokens’ or currencies that can be used to make transactions as sufficient users recognise the value. This has given rise to utopian ideals of an economy that is independent, decentralised and run by its users. Dr Yang You, Assistant Professor of the HKU Business School, has been studying different forms of cryptocurrencies, but he is not convinced they will change the world as proponents envision. “Technology can secure digital property rights, however, it cannot resolve everything. You still need to rely on a trusted party to provide information that connects the digital footnote to the real world, and you still need some centralised power or authority to enforce that,”he said. Nonetheless, there are ways in which the crypto world is starting to change our ideas of money and how it is controlled. A distinguishing feature of digital currency is that it can be programmed, which has attracted deep interest from central banks, he said. China, for instance, is interested in the traceability function which would make it possible to understand household behaviour or business practices better. Governments could also program digital money to be spent only on specified items, such as programming COVID-19 relief funds to be spent only on food and other necessities. “A key feature of conventional fiat money is that it is memory-less – you don’t know who owned it before or how they used it,”Dr You said. “Generally, there are a lot of possibilities to re-engineer fiat money now.” Online demand That would put a lot of information in government hands, but governments are not the only ones with the potential to develop digital currencies. There are signs of an emerging cyber economy where tokens that act like currencies could emerge from payment systems within platforms, such as the Steam gaming platform and YouTube. Viewers would use the tokens to enjoy activities online but have no physical product as such delivered. Big players like Facebook and Alibaba could also develop a currency for their users. Dr You sees more development in this area as young people spend substantial time with their phones and engage with their friends on social media rather than offline hangouts. “The time spent online can potentially create a real demand – I don’t see that as a fake thing,”he said – though it is more likely these currencies would be confined to use on specific platforms. His research has shown there are high issuance costs and pricing constraints to creating tokens that can be tradeable elsewhere. Bitcoin and cryptocurrencies Dr You also looks at digital currencies created beyond governments or companies. Bitcoin is the most famous example, but it is problematic because while it is created by ‘miners’ who supply the hardware and electricity to keep the network going, it is very slow and costly to use. “I think of Bitcoin kind of as a souvenir, beautiful but not very. The value comes from the limited supply, and the price only depends on consensus,” he said – unlike fiat currencies backed by governments, or even company-created tokens backed through the services they provide. He sees more potential in the cryptocurrency Ethereum, which can embed contracts and other applications into its blockchain. These ‘smart contracts’ secure transactions digitally and require each party to set up a digital wallet through which the contract payment is executed automatically on the due date. The hitch is that people are still needed to validate the conditions of the contract – in Ethereum’s case, miners are paid a ‘gas fee’ for their service, which is somewhat similar to a lawyer’s, but cheaper and less complicated. NFTs (non-fungible tokens) are another form of contracted digital currency which can track owners and, in the case of artworks, enable creators to earn a profit from their works. However, smart contracts currently can only handle very basic transactions. “There are a lot of possibilities, but I don’t want to overstate how powerful these can be because the real world is much more complicated and sophisticated than anything that can be coded in these contracts,”he said. As cryptocurrencies evolve, Dr You does not see them diverging from the real world. “They will merge, in a sense, because people spend so much time in the cyber world now and they care about their digital assets there,”he said. “The conventional money issuers, the governments, are trying to figure out what they can do to enhance their currencies, whether to recognise digital assets as real assets and how to collaborate with the cyber society.” CRYPTO MEETS THE REAL WORLD DR YANG YOU They will merge, in a sense, because people spend so much time in the cyber world now and they care about their digital assets there. Digital currencies promise contradictory things – from giving authorities the power to trace people’s spending to supporting a cyber economy that is free from government oversight. Dr Yang You’s research suggests that eluding the existing world order may be a pipe dream, but there is ample room for the cyber and the real to converge. COVER STORY 04 The University of Hong Kong Bulletin | May 2022 05