Bit­coin – the way to the fu­ture or the path to fi­nan­cial ruin?

The Malta Independent on Sunday - - BUSINESS & FINANCE -

Bit­coin, hailed in some quar­ters as the fu­ture of cur­rency, is hav­ing a rough week, with a flurry of ru­mours that China is to shut down its ex­changes and the head of a ma­jor US bank call­ing bit­coin ‘a fraud’.

Plum­met­ing prices have again raised ques­tions about the wis­dom of own­ing it, if not its le­git­i­macy. The dig­i­tal, or crypto, cur­rency tum­bled 15 per cent on Thurs­day to about $3,300 against the dol­lar. Bit­coin, which has had bouts of volatil­ity in the past, has shed about a third of its value since 1 Septem­ber but it is still up about $600 com­pared with this time last year.

Bit­coin is a dig­i­tal cur­rency cre­ated and ex­changed with­out the in­volve­ment of banks or gov­ern­ments. Trans­ac­tions al­low anonymity, which has made it pop­u­lar with peo­ple who want to keep their fi­nan­cial ac­tiv­i­ties, and their iden­ti­ties, pri­vate. The dig­i­tal coins are cre­ated by so-called ‘min­ers’, who op­er­ate com­puter farms that ver­ify other users’ trans­ac­tions by solv­ing com­plex math­e­mat­i­cal puzzles. These min­ers re­ceive bit­coin in ex­change. Bit­coin can be con­verted to cash when de­posited into ac­counts at prices set in on­line trad­ing.

A look at Bit­coin’s re­cent data sug­gests that this is not nec­es­sar­ily the dig­i­tal cur­rency’s swan­song. In mid-July the value of bit­coin was around $1,900 per dol­lar, drop­ping from nearly $2,500 at the end of June. Users forced a change in the com­puter code, which was de­signed to im­prove ca­pac­ity on the in­creas­ingly clogged net­work. The ma­noeu­vre worked, help­ing to avoid a split in bit­coin and driv­ing the value up to roughly $2,800 by the end of July.

Bit­coin’s value has fluc­tu­ated since then. At the be­gin­ning of Au­gust, it stood at about $2,710 and shot up to more than $4,700 by the month’s end. But there has been a steady de­cline this month, with the value slip­ping to ap­prox­i­mately $3,300 on Thurs­day, ac­cord­ing to Blockchain.info.

This week, one of China’s big­gest bit­coin ex­changes an­nounced that it will cease trad­ing fol­low­ing re­ports that Bei­jing is to or­der all Chi­nese ex­changes to close. And on Tues­day, JPMor­gan Chase CEO Jamie Di­mon called bit­coin a fraud, say­ing that if any of his traders were deal­ing in the cur­rency, he would fire them. Bit­coin tum­bled six per cent be­tween Tues­day and Wed­nes­day.

How are sov­er­eign na­tions deal­ing with bit­coin? In the US, the IRS has is­sued guide­lines on the cur­rency, call­ing it an ‘in­tan­gi­ble as­set’ sub­ject to tax­a­tion. But in the end, cash talks.

Ac­cord­ing to IRS guid­ance: “Vir­tual cur­rency that has an equiv­a­lent value in real cur­rency, or that acts as a sub­sti­tute for real cur­rency, is re­ferred to as 'con­vert­ible' vir­tual cur­rency. Bit­coin is one ex­am­ple of a con­vert­ible vir­tual cur­rency: it can be dig­i­tally traded be­tween users and can be pur­chased for, or ex­changed into, US dol­lars, Eu­ros, and other real or vir­tual cur­ren­cies."

And it is an as­set be­ing hotly pur­sued by US in­tel­li­gence agen­cies which – in some in­stat­nces – see bit­coin as a fund­ing ve­hi­cle for groups or in­di­vid­u­als that in­tend to do harm.

China’s Cen­tral Bank has yet to re­spond to ques­tions about bit­coin’s fu­ture. How­ever, in the past it has warned that the dig­i­tal cur­rency is be­ing traded with­out reg­u­la­tory over­sight and might be linked to fraud and last week, the bank banned ini­tial of­fer­ings of new dig­i­tal cur­ren­cies.

Fol­low­ing the fail­ure of a bit­coin ex­change in Ja­pan called Mt Gox, that coun­try has en­acted new laws to reg­u­late bit­coins and other cryp­tocur­ren­cies. Mt Gox shut down in Fe­bru­ary 2014, say­ing it had lost about 850,000 bit­coins, pos­si­bly to hack­ers.

The Ja­panese govern­ment has also spelled out reg­u­la­tions to help pre­vent the mis­use of bit­coins and other vir­tual cur­ren­cies for ter­ror­ism or other il­le­gal ac­tiv­i­ties, and is now re­quir­ing banks and other busi­nesses to ver­ify iden­ti­ties, keep records and re­port sus­pi­cious trans­ac­tions. The reg­u­la­tions im­ple­mented in April re­quire vir­tual cur­rency traders to keep cus­tomers’ as­sets sep­a­rate from their own, partly be­cause of the losses suf­fered in the Mt Gox bank­ruptcy.

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