The Rise of Crypto Assets, a Dark Horse in the Government Bond Market

If Crypto Assets Become Virtual Currencies
US Dollar Could Also Be Replaced Depending on Payment Function Acquisition
Especially Potential to Act as a Dark Horse in the Government Bond Market

[Asia Economy Reporter Hwang Junho] The trading volume of cryptocurrencies such as Bitcoin has surpassed that of the KOSPI. U.S. investment bank JP Morgan has decided to launch a crypto asset fund. American electric vehicle manufacturer Tesla announced that it would accept Bitcoin as a payment method, and since then, more and more companies such as Visa, Mastercard, and WeWork have begun to accept crypto assets as a means of payment.

This shows that cryptocurrencies are gradually being absorbed into everyday life. Furthermore, there is an analysis suggesting that if cryptocurrencies coexist with fiat currencies and function as a means of payment, they could potentially compete with existing asset classes that pay interest. It is expected that they could absorb demand from asset classes such as government bonds.

Hana Financial Investment defined cryptocurrencies as crypto assets in its 'Bond Talk' report on the 2nd. This appears to be a definition based on the fact that they do not yet function as a payment currency like fiat money. The report then analyzed scenarios in which cryptocurrencies might be recognized as actual virtual currencies.

For crypto assets to become virtual currencies, issues such as high liquidity, low volatility, and exchange security vulnerabilities must be resolved. However, from a long-term perspective, if these issues are addressed, crypto assets could share the unique payment function of fiat currencies.

In such a case, the influence of each country's central bank would decline. The effects of monetary policy on adjusting market interest rates and the transmission channels between short- and long-term interest rates would become difficult to operate, weakening the impact of monetary policy on the real economy. This would also serve as a stimulus for central banks and governments to enhance the competitiveness of their national fiat currencies by improving payment convenience, security, and maintaining stable value.

Moreover, the collapse of various national currencies due to cryptocurrencies could lead to a weakening of the U.S. dollar's hegemony. The influence of specific digital currencies primarily used domestically could grow even stronger.

There is especially a high possibility of absorbing demand from the government bond market. It cannot be ruled out that some demand for government bonds in certain advanced countries with near-zero interest rates could be partially absorbed. Currently, when crypto assets are deposited, interest rates determined by supply and demand range from near 0% up to as high as 8%. This potentially creates competition with existing asset classes that pay interest.

Researcher Lee Miseon, in charge of bonds at Hana Financial Investment Research Center, said, "Government bonds could potentially compete with private cryptocurrencies and CBDCs. Private cryptocurrencies, which have competitiveness through innovation and technological development and secure value preservation advantages through decentralized structures, are even offering 'interest' like deposits or bonds."

She added, "Currently, due to the high price volatility of crypto assets, they are difficult to consider safe assets despite paying interest. However, if price volatility weakens in the long term and the value preservation advantage becomes prominent, it cannot be ruled out that they might partially absorb demand for government bonds in some advanced countries that currently offer interest rates close to 0%."

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