Central Bank cautions on digital currencies for first time

Amid the growing interest towards virtual currencies globally and locally, Sri Lanka’s Central Bank on Monday said it has not given the licence or authorization to any entity or company to operate schemes involving virtual currencies, including cryptocurrencies and has not authorized any Initial Coin Offerings (ICOS).

The term ‘virtual currencies’ is commonly used to refer to digitally created representations of value that are issued by private developers and denominated in their own unit of account.

Common examples of virtual currencies are cryptocurrencies such as Bitcoin, Litecoin and Ethereum. Virtual currencies are not Central Bank-issued currency.

Virtual currencies such as cryptocurrencies use decentralised peer-to-peer digital networks to authorize transactions.

Due to the absence of a centralized authority, such as a central bank, to guarantee the value of the currency and regulate transactions, there is no recourse in the event of any user or transaction-related issues or disputes.

The value of virtual currencies is dependent on speculation and is not backed by an underlying asset or a regulatory framework.

Due to this, virtual currencies may demonstrate major volatility. Similarly, there appears to be a high probability of virtual currencies being used in illegal activities.

Further, though unintentional, their usage could amount to breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws.

Therefore, cryptocurrencies, in the present form, may pose significant risks in terms of financial, operational, legal, customer protection and security-related risks to their users as well as to the economy.