Cryptocurrencies: The Bitcoin

In light of Sam Gibbins, General Manager Asia moderating the “Virtual & Cryptocurrency, Future and Challenges for Financial Sector” panel discussion at the International Conference on Financial Crime and Terrorism Financing in Malaysia, we thought we’d explain the nature of cryptocurrencies on the market.

Cryptocurrencies are a virtual, unregulated currency used to consume ecommerce items. It uses cryptography to control its distribution, as opposed to a central authority i.e. a government or a bank. This makes it completely immune to government interference or manipulation.

Cryptocurrencies allow consumers to fulfil online transactions between two parties pseudonymously and with minimal processing fees. The currency exchange rate is also a reflection of supply vs. demand with no central regulatory system controlling it. It has no intrinsic value and its extrinsic value is based on whatever the person trading with it believes its worth at that particular point in time. Once purchased, cryptocurrencies can be stored on the user’s computer in digital ‘wallets’, until used or converted back to a fiat currency.

These characteristics have given cryptocurrencies the reputation of being strongly linked with the purchase of illegal substances, money laundering and tax evasion.

The first and most widely used cryptocurrency to this day came about in 2009. It is known as the Bitcoin. Some cryptocurrency experts believe that this currency was more of a phase and as it is being used less the price is declining.

However, last night the Bitcoin cryptocurrency experienced a big jumping causing a 12-month low of $US286, down from $US375 last week.

As the price of bitcoins are simply based on supply and demand and have no central repository that monitors it, the rate at which the cryptocurrency can be exchanged for another currency can fluctuate widely in a short period of time. It is believed that this low has come about from an attempt to manipulate the market with a sell wall. Around 30,000 bitcoins were offered for sale on bitcoin exchange at $US300.

Bitcoins Reserve founder, Sam Lee explains:

“A sell wall is essentially someone who places a sell order at a specific price, and because it’s a very large sell order, it cannot be filled by the average buy order so it sits there in the data feed, and everyone can see that this is someone with big money manipulating the price. Usually you don’t go against someone that has this kind of money, so you go with the flow, therefore the price of bitcoin drops.”

The Bitcoins Reserve has now moved it bitcoins to Bitstamp in attempt of purchasing bitcoins at a rate that is 4% lower than other cryptocurrency exchanges. Bitstamp is based in Slovenia and claims to voluntarily comply with anti-money laundering and terrorism legislation.

Risks of using cryptocurrencies

  1. Large banks, monetary authorities and government bodies often issue warnings to consumers trading cryptocurrencies due to price and security risks. These warnings can cause the price of cryptocurrencies to fluctuate dramatically and cause huge losses in short periods of time.
  2. Digital wallets can be hacked, their passwords forgotten, computer equipment lost or stolen, taking the cryptocurrency with them.
  3. Bitcoin does not comply with anti-money laundering and counter-terrorism financing laws across the globe. Bitcoin has had a strong link with online criminal activity such as illicit drug markets e.g. Silk Road.
  4. As a business, although you may be trading lawfully, you have no idea of who is purchasing your products and services or where they are going and risk involvement in illegal activity.
  5. Business could also face risk of fraud by suppliers taking advantage of Bitcoin’s permanent transactions. For example if an overseas supplier is attempting to avoid paying foreign currency exchange rate fees, bank fees or tax liabilities, using Bitcoin could be the solution for them.

If your organisation is going to go down the path of trading with Bitcoin be sure to consider compliance with anti-money laundering and counter-terrorism financing laws relating to your jurisdiction. Falling trap to Bitcoin’s non-transparent transactions will come with high reputation damage.

The globe has definitely seen a move towards domestic or global authorities attempting to regulate cryptocurrencies in the future.