Perhaps, as a risk manager, you feel digital currencies are somewhat peripheral? They remain on the fringes of financial markets and connection with criminality causes many to treat them with caution.
Except that Bitcoin – which remains the most popular digital currency – is starting to edge into everyday parlance. And, increasing use should certainly mean risk managers need to prick up their ears.
Right now, there appear to be more ‘cons’ than ‘pros’ which can broadly be summarized as:
- Lower transaction costs
- Ownership – i.e. the individual holds their own ‘key’ unlike other electronic cash systems
- Huge potential to grow – i.e. over two billion people have internet access
- Has some positive safety attributes – i.e. physical money can be counterfeited
- Weak or no regulation in most countries
- Security problems – wide-ranging from issues such as password theft, technical failure, fraud and exchanges may cease trading without reimbursing traders
- Few retailers/businesses accept it
- Anonymity – almost impossible to trace who is using it
- Limited consumer knowledge prevents legitimate growth
- Still not viewed as legal tender
Yet, despite the concerns, there is also growing acceptance. For example, did you know that employees of asset manager Fidelity can now pay for their canteen lunches in Bitcoin? It is also possible to purchase Amazon gift cards with Bitcoins and so fund purchases. Even the city of Liverpool launched its own digital currency at the start of the year.
That said, digital currencies remain outside the remit of most small investors. Bitcoin has shown it can be extremely volatile, even though it recently soared to giddying heights and was described as the best-performing asset on the world’s financial markets.
Meanwhile in contrast, Bitcoin was also the chosen payment method for the recent global ransomware attacks, which affected the NHS among many others.
No one knows if digital currencies will really take off, but the message from numerous central banks is this is a sector they want to be a part of. These include the Bank of England who is well advanced with its version, known as the RSCoin.
Other examples include the Bank of Canada which is seeking more regulation and developing its own digital currency and Australia who is promoting self-regulation of the sector and has recently launched a code of conduct.
Japan is among the most advanced when it comes to digital currency regulation and has passed a bill, which acts as an amendment to its Banking Act – this will potentially be known as the Virtual Currency Act. It refers to digital currencies including Bitcoin for the first time and recognizes them as a method of payment, although without the legal status of money.
Certainly, better regulation is vital to ensuring there is more trust in the sustainability of digital currencies. There are polarized views with some believing the sector presents massive opportunities, while others believe the criminal connections are too entrenched. In Europe, the emphasis is on boosting controls. Money laundering and terrorist financing is high on Europol’s agenda and there are proposed additional rules to be included in a forthcoming directive that will regulate digital currency businesses and prevent anonymity.
The US has many supporters and detractors when it comes to digital currency, but regulators in the Financial Stability Oversight Council said that digital currencies pose potential financial stability risks and that there must be much closer scrutiny. There is also support for more regulation from businesses such as Apple and PayPal which are well aware of the potential, but also need more rules and stability.
So with so much going on and growing interest in digital currencies, it makes sense for risk managers to keep up to speed. There are still many unanswered questions, not least on how these financial instruments should be defined and what regulatory approach should be taken.
But the internet had its detractors when it first came on the scene and look where we are now. Bitcoin and the many other digital currencies are gaining ground, as is blockchain technology. This is behind the electronic ledger used to underpin digital currencies. Those who fail to keep up to date with such disruptors face being left behind – a position no risk manager can afford to be in.