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Ka-chinggg : virtual currency is everywhere, suddenly?

Such a move shouldn’t effect the promise that virtual currency holds. For instance, a simple example, virtual currency can help eliminate currency considerations and empower local retailers to sell to cross border buyers. Twenty percent shifts in Sterling or Dollar or Euro become irrelevant to one-currency-online shoppers. Global web, global commerce. But there will genuinely be those who seek to subvert and exploit the system. Admittedly, most financial crime we’ve seen in the last five years has been committed by men in good suits, but this isn’t really about financial crime, it’s about preventing the hiding of money acquired as a result of other crime.

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This week in the US, the Department of the Treasury issued a fascinating guidance document regarding virtual currencies, and in the US, virtual currency exchangers or administrator are subject to the same rules of record-keeping and fiscal integrity that apply to other real-world currencies:

The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies. Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA.

This is squarley aimed at addressing the concerns, shared by governments globally, regarding centralised virtual currencies. Pre-paid access or credits don’t fall in to the same category of ‘exchanges’  – so this guidance doesn’t appear to apply to Amazon’s Coins due to launch in May.  It is focussed on the exchange and movement of funds, across borders. Movements that were untraceable by authorities, and lacked  accountability. The US guidance means that if you’re an exchange, issuing and exchanging virtual currency, you have the same responsibility as a bank who are required to report transactions of a certain size or value.

The US Treasury document, as well as setting out guidelines and interpretations sows the seed of credibility for virtual currency, up to this year, it was considered by many a fringe, tech-led community for small value transactions and donations, The timing of the guidance document is interestingt; everybody’s talking – from the Wall Street Journal to BBC’s Newsnight. If you had millions of Cypriot pounds on deposit in a Cypriot bank this week, and had the opportunity to exchange it for millions of of virtual coins, would that be a prudent move? Could funds on deposit, in any country, that were illicitly earned  be moved to an untraceable, viable virtual currency with no accountability for the exchange to report it to anyone? Well, yes, they could. The logic of the US Treasury’s guidance makes sense, and we will inevitably see other central banks issuing similar instructions.

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“FinCEN’s rules define certain businesses or individuals as money services businesses (MSBs) depending on the nature of their financial activities. MSBs have registration requirements and a range of anti-money laundering, recordkeeping, and reporting responsibilities under FinCEN’s regulations. The guidance considers the use of virtual currencies from the perspective of several categories within FinCEN’s definition of MSBs.”

— FCEN – US Department of Treasury

Such a move shouldn’t effect the promise that virtual currency holds. For instance, a simple example, virtual currency can help eliminate currency considerations and empower local retailers to sell to cross border buyers. Twenty percent shifts in Sterling or Dollar or Euro become irrelevant to one-currency-online shoppers. Global web, global commerce. But there will genuinely be those who seek to subvert and exploit the system. Admittedly, most financial crime we’ve seen in the last five years has been committed by men in good suits, but this isn’t really about financial crime, it’s about preventing the hiding of money acquired as a result of other crime.

I have a conservative view regarding online privacy, and last week on Newstalk’s Down To Business we were joined by the Irish Data Protection Commissioner, Billy Hawkes – with a very firm message that Online Privacy can’t be ignored, even by small business. Privacy and regulation are important components in making the web work – really work. And FaceBook and Google for instance, are leading us towards a more authenticated web, which can only be good if achieved in its purest form. An authenticated web is a safer web and transacting online will be be more secure. For virtual currencies to succeed, they need security and regulation. But most of all like any physical, legal-tender currency, they need confidence, yours and mine, and the US Department of the Treasury may just have given us some.

External links and references

  1. Amazon Coins Press Release
  2. Department of Treasury: FinCEN guidance document
  3. RedCert/January on BitCoin & the Wallet Wars
  4. List of virtual currencies : RedCert

Bitcoin

I virtually need a new currency, quick!

The BitCoin conversation is still going on. The hacking is still going on. Disgruntled slavic businessmen are looking glum around Paphos after dark and rather than the Cypriot banking crisis being the cause, perhaps it’s people talking about the Cypriot crisis that’s got depositors looking at new, novel and accessible ways to keep their money safe

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Bitcoin & Litecoin coins

The BitCoin conversation is still going on. The hacking is still going on. Disgruntled slavic businessmen are looking glum around Paphos after dark and rather than the Cypriot banking crisis being the cause, perhaps it’s people talking about the Cypriot crisis that’s got depositors looking at new, novel and accessible ways to keep their money safe. For some, privacy and untraceability are paramount. We asked  Charles Arthur the technology editor of The Guardian about using BitCoin for currency hedging by businesses, last weekend on NewsTalk’s Down To Business with Bobby Kerr. Charles, was skeptical regarding that idea given the roller-coaster fluctuation in BitCoin over the last 18 months, and wrote about that on Wednesday. His views as usual were prescient, as this week the value of a BitCoin has plunged dramatically following hacking attacks on Instawallet and the world’s biggest BitCoin exchange, Mt Gox.

As it happens, last weekend I found myself eating the best  possible home-made lime cheesecake at a friend’s house. But there was motive in my calorie bulking; as a former Head of Treasury at a European bank I was keen to see how she felt about virtual currencies given the mainstream attention they’ve been getting. Despite knowing each other for a decade or more, she found it hard not to look embarrassed. Embarrassed on my account that is. The point she couldn’t stress enough was that the lack of regulation and centralised control, whilst giving us in the technology business a feeling of romantic and vicarious one upmanshp, leaves the entire ecosystem surrounding a virtual currency liable to manipulation and exploitation. Not exploitation by professional institutional speculators, but by semi-professional and amateurs.  The BetFair crowd I’ve decided to call them – the same mentality as the man with a debit card who thinks he’s a bookie.

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“Attackers wait until the price of Bitcoins reaches a certain value, sell, destabilize the exchange, wait for everybody to panic-sell their Bitcoins, wait for the price to drop to a certain amount, then stop the attack and start buying as much as they can. Repeat this two or three times like we saw over the past few days and they profit.”

— Mt Gox Press Release : TOKYO – JAPAN – April 04, 2013

Popularity and cultural awareness have contributed to making BitCoin ridiculously  volatile.  Currencies like BitCoin may well be limited as a commodity – the total number of coins is known – but it isn’t tied, or guaranteed by a government or central bank. It isn’t legal tender or guaranteed to be accepted. Yet, it’s getting attention. Fewer Bond-style villains hiding ill-gotten gains, and more opportunists and traders who see they can make a buck. Tonight , the weighted average value of BitCoin on theMt Gox exchange is $139 – yet I can bid on a BitCoin, a virtual coin, (not one of the lovely physical coins), in an auction at a popular online auction site, that has reached the equivalent of $181. This would be like me bidding 120 Euro or more for a current 100 Euro note. Ridiculous. speculative and to be expected? Yes, but I remain an optimist regarding the prospects for virtual currencies, howver it may well be the internet equivalent of central banks who succeed best. Amazon will launch Amazon Coins later this spring and Apple, with half a billion customers and an authenticated eco-system must be alikely player in  the Wallet Wars.

Since I  wrote on RedCert.com in January about the likely growth in the use of BitCoin, I think we’ve seen the most important development in the area of ‘e’ and virtual currencies for the last couple of years in the recent guidance from US Department of Treasury; BitCoin and other virtual currency handlers are now liable to the same legislation and procedures regarding money-laundering as ‘real-world’ financial firms.

So, BitCoin has captured the imagination for now – but are there others?  Yes, there are. Virtual and Digital Currency has been around long enough for some of them to have already disappeared. And some are not good stories, for instance e-gold which was digital gold currency operated by Gold & Silver Reserve Inc. under e-gold Ltd. that allowed the instant transfer of gold ownership between 1996 and 2009, when transfers were suspended.  In July 2008 the company and its three directors pled guilty to charges of “conspiracy to engage in money laundering” and the “operation of an unlicensed money transmitting business” in the U.S. District Court with fines of $3.5 Million imposed. Others have found it hard to gain traction – but there are a handful that are making an impression – some communities, some Peer to Peer and a couple of currencies. A good starting point is the PPCoin website which details the concepts and ideas behind much of this community, and the active players are listed below.

List of currently traded virtual & electronic currencies

Currency Founded Website
NovaCoin 2013 Forum Discussion
PPCoin 2012 Website
IXcoin 2011 Website
Litecoin 2011 Litecoin website
Ripple 2010 Ripple.com Website
Bitcoin 2009 BitCoin.org
Ven 2007 VenMoney.Net
 
 
Bitcoin image by Zach Copley.
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Bitcoin

Bitcoin, and the wallet wars.

Bitcoin was an experiment. Conceived as one of the first crypto-currencies, described first in 1998 by Wei Dai on the cypherpunks mailing list. Bitcoin, introduced in 2009, is designed around the idea of using cryptography to control the creation and transfer of money, rather than relying on central authorities. So in the Bitcoin world there is no central authority.

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Bitcoin was an experiment. Conceived as one of the first crypto-currencies, described first in 1998 by Wei Dai on the cypherpunks mailing list. Bitcoin, introduced in 2009, is designed around the idea of using cryptography to control the creation and transfer of money, rather than relying on central authorities. So in the Bitcoin world there is no central authority. The currency has a value, secured on the idea that the supply is limited, and new coins are mined over time, with coins divisible to ensure more widespread usage can be achieved. We can have 21 million Coins. The currency can be freely traded and spent. Transactions are cheap, or often free, And transactions are irreversible. Wikileaks, La Cie and The Internet Archive all accept Bitcoin as payment method.

Recently, Bitcoin Central partnered with Aqoba in France and will be able to provide what will bea form of a cash specifi accounts with an IBAN number, therby allowing Bitcoin funded transactions access to the international banking system. An exciting innovation, powered by open-source software and administered by a decentralised network.

Virtual currencies have had their nay-sayers though – citing money-laundering and contraband goods as reasons not to embrace virtual currency, It’s not just government agencies who may be dubious though as established online payment providers see a huge threat to their growth as smart device ownership soars.

Payment companies like PayPal and credit-card companies like VISA and Mastercard must be feeling threatened. Their investment in technology is significant but their spend on brand building and creating customer confidence in their brand and mechanisms is  greater still. They’ll be keen to see off the challenge of a what they well term an insecure, unbacked concept.

A decentralised network like Bitcoin with a true peer-to-peer payment mechanism could  enter widespread use, but security of funds will always be at the heart of any public scepticism. Also, the ability for your virtual currency to have ‘real-world’ value will be a challenge for any on-tangible currency. But an NFC enabled device with access to your Bitcoin account or ‘holdin’; could counter that objection. If peer-to-peer currencies can’t capture a wide market, and many vested interests will try to hinder this growth as much as they can, what alternative could succeed?

If you were a technology company with an own or co-branded device and content ecosystem you could create an alternative currency. If you had a smart phone or tablet with NFC that could be used in real-world shops your ‘currency’ could have even more adopters. If you had billions of dollars of cash reserves in the bank, consumers and retailers would trust you to settle or complete transactions. Maybe you’d decide to give your currency an exchange rate, so it doesn’t just provide consumers with a dollar, yen or euro account, but it is valued against them. You protect your consumers against inflation and they always know what purchases are going to cost on your ecosystem. maybe if they depoist $100 a month into their account and always keep their balance at a certain level, you’ll reward them with credits every quarter. Consumers will like that and give you more of their disposable income, maybe even having their companies pay their wages direct to you. More currency available inside your ecosystem – encouraging more retailers and service providers to accept your currency as a method of payment. Of course, you’d need to be very tech-savvy, consumer oriented company to make this work. With those billions of dollars in the bank. There aren’t many of them. But there’s a few.

“And what would you call this currency? I’d call it a Personal Internet Payment System. Hmm, an acronym would be nice. PIP$.”

Paymium, the company behind Bitcoin-Central has partnered with Aqoba, which is a registered PSP. This allows Aqoba to keep funds on behalf of third-parties in payment accounts (“comptes de paiement”) which are different from bank accounts (“comptes de dépôt”). The difference between these is that funds deposited on a payment account may not be used for investments or loaned out. These accounts have no overdraft capabilities but will will soon get their own IBAN number and be able to be associated with a debit card, but remain distinct from what is legally referred to as a “bank account”.

There’s a a lot of vested interest who won’t be keen on the growth of currencies like BitCoin – banks and payment companies are under direct threat – governments will be concerned about tax evasion and ease of fund transfer for illicit transactions. So don’t be surprised to hear negative views on virtual currencies – but the consumer will decide – and a small group of tech-savvy consumers have got us this far.

External links & references

  1. bitcoin.org
  2. Bitcoin and Europen banking approval @ Guardian Tech Podcast
  3. List of virtual currencies : Redcert
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