All the risk of using Bitcoin and other digital currencies rests on the user, according to a panel of international regulators and experts. And the risk is great: cybercrime is a growing problem worldwide.
While there is some recourse for consumers who are victims of cybercrime related to bank cards and accounts, when it comes to digital currencies, they are on their own, it was agreed at a meeting of international regulators and experts at the University of Cape Town’s African Institute for Financial Markets and Risk Management (AIFMRM). They met on the sidelines of FinCoNet’s Financial Consumer Protection International Seminar in October. FinCoNet is the International Financial Consumer Protection Organisation.
Caroline da Silva, the deputy executive officer for financial and intermediary services at the Financial Services Board (FSB), stressed that the regulator does not have jurisdiction over digital currencies, because they are not regulated.
We were living in a historical time, Paolo Tasca, a Bitcoin expert and regulator from the Deutsche Bundesbank, said. “The digital currency is both the payment and money concept at the same time. This has significant regulatory implications … [In addition] we have the ‘prosumer’ – the producer of the good is also the consumer of the good.”
As the name suggests, digital currencies are digitally or electronically created and stored. People in the virtual or online community agree to accept these units as a representation of value in the same way that currency is accepted.
Bitcoin is software based and uses peer-to-peer technology to operate, with no involvement of central or commercial banks. It is decentralised, and the managing of transactions and the issuing of Bitcoins are done collectively by the network, through what is called the blockchain. Bitcoins are stored in a digital wallet.
It is also open source, meaning that its design is public; nobody owns or controls it and anyone can use it. You can perform instant peer-to-peer transactions and make worldwide payments using Bitcoins.
They can be exchanged or bought with real currency, and be converted back to real currency whenever you want if you sell them to another buyer.
It throws up several issues for regulators: there is no central authority, users produce the service that they use and it is a test lab to see whether different monetary policies can exist in one system.
“But the onus is on the customer to check there is no fraud or risk, or that they are not doing business with a criminal,” said Co-Pierre Georg, of AIFMRM, a postgraduate institute in UCT’s Faculty of Commerce.
“The risk of financial crimes and terrorism is very high,” Tasca said. “There is a high risk networks can be used for money laundering, hiding money, financial crime anywhere in the world. There is also the possibility of illegal, but not criminal, activity on the network, such as tax evasion.”
There are benefits of digital currency: it is fast and free, and payments are global. This is important for Africa, because the African diaspora sends large sums of money home – often at a high remittance cost.
But the risk to the consumer is extensive, as Alastair Christian, a developer at dataDigest pointed out.
“Mobile payment systems are doing different things on an increasing number of devices, which is increasing the complexity for the developer. You need more code, which leads to more bugs and more potential losses for consumers.”
In addition, the conference heard, because new currencies are virtual, they are not bound by jurisdiction, and producers can work in any geographical location, meaning they can move when regulations get too hot.
Speaking about security when it came to trading with Bitcoins, Da Silva said there were no accounts or assets to be frozen if you suffer a loss or fraud.
There is also a movement towards making use of “green addresses” for payments, which have been declared. These may eventually become a “green book”. If you use green addresses, it means you can trust each other when conducting transactions. But the identity of the user can still be anonymous.
In an alert issued in 2014, National Treasury said there were no laws or regulations governing the use of digital currencies, which means users of digital currencies have no legal protection or recourse.
The South African Reserve Bank, the FSB, the South African Revenue Service and the Financial Intelligence Centre have warned consumers to be aware of the risks of using digital currencies. they are not regulated, because they operate outside the authority of central banks.
And because they are unregulated, they cannot be classified as legal tender and any merchant may refuse them as a payment instrument. This means you are not protected and are at the risk of losing money. Transactions are also irreversible; there are also risks of cyber-attacks, hardware damage and bugs. Financial risks are, therefore, limitless and claims cannot be made for such losses, Treasury said.
This was backed up by the Reserve Bank in a position paper issued in December 2014. Any and all activities related to the acquisition, trading or use of digital currencies “are performed at the end-user’s sole and independent risk and have no recourse to the bank”, it said.