A roundtable discussion at the World Bank on Friday brought together a small group of officials for a closed-to-the-public, “frank discussion” about virtual currencies.
“Virtual Currencies: The Legal and Regulatory Challenges,” was organized by the Global Forum on Law, Justice and Development and was held at the World Bank’s headquarters in Washington, DC.
“A stocktaking roundtable will discuss legal and regulatory challenges associated to this new phenomenon. Virtual currencies are among the myriads of options for receiving payments and paying online. For example, Bit-Coin (sic) – one of the better known virtual currencies – has been in news recently because of the wild fluctuations in its ‘value’ and also significant venture capital investment in entities associated with it. How are policy makers, regulators and overseers approaching this? What are the threats and opportunities associated with this new payment”
Although no transcripts or recordings of the proceedings were made available, downloadable PDFs of the participants’ presentations were featured on the forum’s website.
Iddo de Jong, senior expert in the market integration division of the European Central Bank (ECB), led off the roundtable with an overview of virtual currencies. In his presentation, he noted that the ECB — Europe’s equivalent of the US Federal Reserve — began paying attention to “virtual currency schemes” in 2011 after “increased press coverage and following outside requests (public, press, public authorities).”
De Jong described how virtual currencies could be classified into three categories: closed virtual currency schemes with “almost no link to the real economy” (for example, World of Warcraft gold); virtual currency schemes with unidirectional flow — that is, currencies such as Amazon Coins or frequent-flyer points that can be “purchased using ‘real’ currency at specific exchange rate, but cannot be exchanged back”; and virtual currency schemes with bidirectional flow, which includes Second Life Linden Dollars and bitcoins.
De Jong’s presentation went on to describe three different functions of money — as a medium of exchange, a unit of account and a store of value — and added, “Bitcoin does not meet any of these functions.”
The ECB’s view on virtual currencies so far, de Jong pointed out, is that they “do not pose a risk to price stability nor can they jeopardise financial stability.” As an unregulated means of transacting, he added, they pose a risk for users and do fall within the realm of central banks’ authority “as a result of characteristics shared with payment systems.”
Authorities watching virtual currencies can monitor market developments, set payments security requirements, keep legal frameworks updated and “facilitate a social dialogue” among stakeholders to develop priorities, set business requirements and identify needs for harmonization and standardization, de Jong stated.
David Mills, assistant director in the division of reserve bank operations and payments at the Federal Reserve Board in Washington, DC, discussed new developments in virtual currencies. His summary of Bitcoin pointed out the cryptocurrency’s numerous advantages over other alternatives, including fast transaction processing and reduced transaction costs. Mills also noted that the Bitcoin protocol prevents over-issue and results in a currency with several desirable properties: recognizability, portability and divisiblity (to eight decimal places).
Mills then addressed the usual-suspects list of Bitcoin risks:
- Is Bitcoin a more efficient currency for illegal activities than physical currency? How anonymous is it?
- How vulnerable is Bitcoin to theft and counterfeiting? Like cash, there is no recourse for a victim of theft Is it easier to steal virtual currency or physical currency?
- How vulnerable are Bitcoin exchanges to cyber attacks? Introduces volatility in the value of the currency
Mills concluded by identifying several areas that authorities should monitor: Will other virtual currencies emerge to challenge Bitcoin? Will Bitcoin or another virtual currency become “widespread enough to have implications for central bank currency and monetary policy”? and “Will bank-like institutions emerge to take deposits and make loans of virtual currencies?”
Jason Thomas, head of Thomson Reuters Special Services’ innovation initiatives, focused his attention on modern money laundering and its connections to digital currencies, virtual goods and anonymous payment systems. After looking at World of Warcraft gold and Second Life Linden Dollars, Thomas went on in his presentation to examine Bitcoin.
He noted that bitcoin today has more than 100,000 users and is the “first decentralized electronic currency not controlled by a single organization or government.”
“Think of a single Bitcoin as a large sheet of paper watermarked with a serial number,” Thomas stated. “To send a Bitcoin to someone, you write their name on the paper, sign it like a check, and then post a copy in a public location. They can then resend it to someone else, and so on.”
He added that, “Although every transaction is publicly visible, in most cases it is impossible to trace a Bitcoin address back to an individual.”
Thomas concluded by summarizing a number of issues today that have implications for the future of money, especially in the developing world. Among them are the facts that 2.5 billion people in the world remain unbanked, while there are six billion mobile subscriptions — 4.5 billion of them in the developing world.
“Financial institutions are few and far between in the developing world,” Thomas stated. “Peer-to-Peer Banking and Microfinancing are the coming concerns.”
Emery S. Kobor, deputy director for strategic policy in the Office of Terrorist Financing and Financial Crimes at the US Department of the Treasury, focused his presentation on the regulation of virtual currency.
He began by describing the qualities of “real” currency — anonymous, untraceable, reusable, universally accepted, requiring no intermediary and enabling instant settlement — and added, “The more virtual currency functions like real currency, the greater the illicit finance threat.”
Kobor referred to the guidance issued earlier this year by the US Financial Crimes Enforcement Network (FinCEN) that found that a “money transmitter” includes anyone that 1) “accepts and transmits a convertible virtual currency” or 2) “buys or sells convertible virtual currency for any reason.” He then went on to discuss a number of cases — including the recent Liberty Reserve crackdown — in which the US prosecuted virtual currency organizations for unlicensed money transmission.
“Financial inclusion and AML (anti-money-laundering) can coexist: risk-based approach helps countries navigate flexible concepts,” Kobor concluded. “Virtual currencies are not necessarily riskier than any other electronic payment system.”
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