Virtual currencies offer countries a cost-effective, fast and accessible alternative to settling financial payments, but unclear laws and regulations are preventing their responsible development and encouraging their exploitation by criminals, says a new Commonwealth report.
Virtual currencies, which allow funds to be transferred, traded or stored electronically, have seen exponential growth in recent years, however, unlike other currencies, they are not issued by a central financial authority. Once seen as the domain of only the hard-core computer community, currencies such as Bitcoin, Litecoin and Dogecoin are cropping up in everyday use in most Commonwealth countries according to research carried out by the Commonwealth Working Group on Virtual Currencies.
Despite being unregulated or under-regulated, virtual currencies are legal in all Commonwealth countries except Bangladesh. The report explores the benefits, outlines the risks and makes recommendations to help countries respond to and regulate the technology. It represents the first step in improving legislative and regulatory frameworks in the Commonwealth to protect the legitimate use of virtual currencies and prevent cybercrime.
Katalaina Sapolu, Director of Rule of Law at the Commonwealth Secretariat, commented: “Recognising the rapid expansion of virtual currencies and the need to combat cybercrime, the Commonwealth formed a specialist working group to help its members upgrade laws to harness the benefits and counter risks. This report constitutes the group’s initial findings and aims to provide an informative and useful resource to help lawmakers, police, financial regulators and tax authorities.”
The report says virtual currencies - at the heart of which is a ‘blockchain’ acting as a digital ledger of transactions - offer individuals and organisations an alternative to the banking system. They can be a cheaper and faster way to trade goods, make payments and send and receive money, for example offering diaspora communities a means of sending funds overseas without paying high transfer fees. In some countries where virtual currencies have been more widely adopted, such as Singapore, it is not unusual to see a Bitcoin cash machine or ATM.
Sandra Sargent, Senior Operations Officer at the World Bank and a contributor to the report, said: "I have seen a decisive shift in attention towards block chain technologies among private banking institutions. The technological innovation behind it may shift the way we conduct financial transactions in the future.”
"It is very encouraging to see a cohesive and coordinated approach put forth in the virtual currencies report by Commonwealth countries. I believe its value will go beyond reaching the audience just in Commonwealth states. I already myself recommended it to a number of World Bank clients as a solid policy guiding document.”
Lorien Gamaroff, the founder of Bankymoon, an organisation highlighted in the report, has combined smart metre technology and Bitcoin so that anyone in the world can pay electricity costs for schools in South Africa. “There is a large segment of the global population that do not have access to banking services - 80% of Africans exist solely in a cash economy,” he commented.
“This means that payments are often inconvenient and insecure, expensive and in some cases, impossible. By making digital payments available new products and services will become accessible to this large market.”
The report notes, however, that because users can make transactions anonymously from anywhere in the world, virtual currencies are vulnerable to criminal exploitation – trade in drugs and weapons, money laundering and financing terrorism. Governments are struggling to develop legislative responses to keep up with the changing technology.
For consumers, Bitcoin and other virtual currencies carry individual risks. There is a lack of clarity around consumer protection and no facility to refund a fraudulent or disputed transaction. Losing login credentials or getting hacked means access to the user’s ‘wallet’ or account can be lost irretrievably or stolen, the report notes.
The report urges member countries to foster an awareness of virtual currencies within their jurisdictions and of the potential risks involved. It recommends financial regulators and central banks take actions to confirm the applicability of existing legislation, and calls for more funding and training to be provided for law enforcement. It also suggests tax authorities clarify tax regimes applicable to virtual currencies and adapt or extend them as necessary.
The Commonwealth Working Group on Virtual Currencies is chaired by Colin Nicholls QC and is made up of the following members: Australia, Barbados, Kenya, Nigeria, Singapore, Tonga, the Commonwealth Telecommunications Organisation, World Bank, INTERPOL and the United Nations Office on Drugs and Crime. The International Monetary Fund also commented on the report. The US Government was an observer of the Working Group, represented by the Federal Bureau of Investigation and US Department of Justice.
— The Commonwealth (@commonwealthsec) February 3, 2016
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