Regulating cryptocurrencies in M’sia

CRYPTOCURRENCY is a digital currency that is secured by cryptography, i.e. scrambling or encrypting information for delivery in such a way that only the intended recipient of the information is able to receive and understand. One of the most popular cryptocurrencies in the world is Bitcoin.

Bitcoin is not denominated in any national currency. Its value is not expressed in any sovereign currency, i.e. it is expressed as one Bitcoin, and not RM1. It is created by a network of computer users called “miners” using mathematical computations. Being a digital currency, physical or tangible coins do not exist. A person’s ownership of Bitcoins is recorded in a digital ledger.

Many cryptocurrencies rely on distributed ledger technology. They employ ledgers containing details of all currency, eg. Bitcoin, in existence and all transactions ever entered using that currency. An identical form of this ledger is maintained on many independently-operated computers around the world. An attempt to perform a single currency transaction (and thereby to update the ledger of currency) will require all the independently-operated ledgers to vote or validate the update. Once a certain number of ledgers validate the update, the currency transaction is considered updated and all the ledgers in the network are updated. If by any chance a small number of ledgers have been tampered with or been removed from the network (eg. by fraud or regulatory action in one country), that should not affect the other ledgers or the transaction.

In many countries, users are not required to identify themselves when they create a Bitcoin address or a Bitcoin wallet, which entitles them to own and transact Bitcoin.

As Bitcoin is not issued by any government, and the ledger recording Bitcoin transactions do not reside in a single location; but rather, distributed across the globe within the Bitcoin community, no single government is able to control Bitcoin.

Sending a large sum in any sovereign currency across borders usually requires notification to or the permission of the central bank regulating the sender and/or the recipient and/or the currency, and the assistance of a commercial bank (to execute the transfer). Fees are usually involved at various stages of the transfer, at the sending and receiving ends. The process of sending money across countries typically takes several days.

With Bitcoin, the sender merely needs to access his/her Bitcoin wallet and send the Bitcoin to the recipient. No party other than the sender and recipient are involved in or aware of the transaction, very much like a cash transaction. The transaction can be completed in a matter of minutes.

Apart from anonymity, the use of the latest cryptography technology promises to reduce fraud in transactions since the ownership of every Bitcoin in existence and every Bitcoin transaction undertaken is recorded in many different ledgers – such that a Bitcoin that has been transferred by one user to another cannot be re-used by the transferor. And unlike cash, with Bitcoin, there is no physical item that can be stolen.

Whilst Bitcoin values have been volatile over its short life, it can be seen how a widely used global cryptocurrency can serve the purpose of a hedge against volatility in the value of a single currency.

Apart from savings in transaction cost and time, cryptocurrencies allow their users to keep money and transactions away from the scrutiny of regulators. These characteristics have made it the payment of choice for criminal activities and a tool for money laundering. A few countries, such as Bolivia has banned cryptocurrencies. However, as no single government can effectively stop the use of cryptocurrencies by banning it in one country, countries such as the UK and the US are looking to regulate cryptocurrencies. Even Russia that had previously banned cryptocurrencies has now changed its mind to regulate them. Japan is the first country to recognise cryptocurrencies as a legal payment method. Cryptocurrency exchanges are now required to be registered with the Japanese Financial Services Agency, and be subjected to annual audits and “Know Your Customer” (KYC) anti-money laundering regulations. Australia now plans to follow in Japan’s footsteps to regulate cryptocurrencies.

The time and cost savings, the ability to reduce fraud and the privacy enabled by cryptocurrencies makes it a very compelling utility for our times. The first step to bringing this utility to the wider public is to bring it out of the shadows of the underworld. Many cryptocurrency exchanges have recognised this, and although not regulated in their jurisdictions, have self-imposed KYC requirements on individuals desiring to set up an account.

In Malaysia, Bank Negara Malaysia (BNM) previously expressed that Bitcoin is not a legal tender but is now looking to issue guidelines on cryptocurrency use. BNM is already regulating electronic payments, specifically “issuers of electronic money” to ensure compliance with Malaysia’s antimoney laundering regulations. Key obligations such as KYC and audit in BNM’s electronic payment guidelines are not far off from Japan’s current cryptocurrency regulations.

So, if BNM decides to regulate, it may possibly approach cryptocurrencies in a similar way to what it has done for electronic payments.

Contributed by Audrey Ser of Christopher & Lee Ong (www.christopherleeong.com).