Virtual currencies may be new, but they’re here to stay.


The rapid rise of bitcoin is a case in point, attracting controversy and consternation from regulators and industry, but proving public demand for alternatives to traditional money is genuine.

The trend raises a number of questions which the International Monetary Fund has attempted to tackle in a wide-ranging report released in January 2016 on the future of virtual currencies.

“Virtual currencies offer many potential benefits, including greater speed and efficiency in making payments and transfers—particularly across borders–and ultimately promoting financial inclusion,” the report said.

“At the same time, virtual currencies pose considerable risks as potential vehicles for money laundering, terrorist financing, tax evasion and fraud.”

Daily unique bitcoin transactions crossed the 200,000 mark for the first time last December while the highly volatile bitcoin market stood at around $US6 billion in total value.

Asher Tan, the chief executive and co-founder of bitcoin startup CoinJar, says the future of virtual currencies is difficult to predict.

“The majority of money going through the bitcoin system is quite speculative in nature but there are compelling reasons to use bitcoin over other options even if you have the appropriate banking facilities already available – it does have unique advantages.”

Some of those uses include the ability to make cross-border transfers at ultra-low cost in almost real time, which traditional banking facilities can’t offer. However, that ability, combined with the anonymity of a decentralised network, can also potentially harbour illicit activity.

Balancing regulation with innovation

The decentralised nature of cryptocurrencies such as bitcoin poses a threat to state-supported fiat currencies and the dominant role played by central banks and financial institutions in society.

However, the IMF report also recognizes the upside and suggests regulators take a more balanced approach.
“National authorities will need to calibrate regulation in a manner that appropriately addresses the risks without stifling innovation,” the IMF report said.

Australian regulators such as the Reserve Bank of Australia and the Australian Securities and Investments Commission are increasingly making positive public comments about the potential for blockchain technologies such as bitcoin. However, no specific regulations have been put in place to address its decentralised nature.
“It’s been a lot about companies managing business risk,” says CoinJar’s Tan, who also sits on the government’s new fintech advisory panel. “Banks are risk averse and want to protect their consumers.”

Focus on the gatekeepers

Without a central authority to regulate, the IMF report suggests another solution: regulators target virtual currency gatekeepers, such as virtual currency exchanges. This could also include monitoring the financial soundness of virtual currency gatekeepers to protect consumers and maintain payment system stability in the event of a collapse.

Tan says it is a fair approach.

“You can’t really regulate digital protocols… some places around the world are trying to regulate gatekeepers such as ISPs but digital protocols are almost impossible to control.”

It is hoped that such regulation may help avoid another major collapse after bitcoin exchange Mt. Gox collapsed in 2014 and claimed to have lost $US500 million worth of customer bitcoins.

Since last year, the New York Department of Financial Services has required digital currency companies to hold a ‘BitLicense’ in an effort to protect consumers and enforce anti-money laundering and cybersecurity provisions.

However, Tan says the BitLicense legislation was over-reaching.

CoinJar has called for a competitive and pragmatic approach to regulations, a focus on players rather than the protocols, and unambiguous and committed legislation. To achieve this, Tan has also called for the introduction of a ‘regulatory sandbox’, in which financial technology companies can test products and services while still having oversight from relevant authorities. Tan states that this, “will increase competition and productivity in the financial sector without stifling innovation.”

Other regulators around the world have attempted to clarify how existing legislation applies to virtual currencies, issued warnings to consumers, prohibited financial institutions from dealing in virtual currencies or banned them entirely, according to the IMF report.

The IMF suggests this could ultimately help develop standards and best practices as countries gain more experience in dealing with virtual currencies. The Financial Action Task Force (FATF) has already issued guidance on how anti-money laundering and counter terrorism financing frameworks could be applied to virtual currency schemes while other international bodies such as the World Bank have released reports exploring the trend.

“The establishment of international standards that take into account the specific features of virtual currency schemes may promote harmonisation in regulation across jurisdictions, and facilitate cooperation and coordination across countries over questions such as the sharing of information and the investigation and prosecution of cross-border offenses.”

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