Can cryptocurrencies like Bitcoin survive scrutiny from central banks?

William Potter/Shutterstock

Nafis Alam, University of Reading

The future of money looks very different in the world of cryptocurrencies. There is a growing consensus among businesses, investors and countries (Venezuela in particular) that these alternative forms of online money are going to dominate payments in the next decade. There may be agreement on the potential, but quite how regulators and central banks will respond is still up in the air.

The combined market value of all cryptocurrencies in circulation reached US$170 billion by the end of August 2017, 850% higher than at the beginning of the year, according to CoinMarketCap, a leading cryptocoin prices and market capitalisation tracker website. It is no surprise that this kind of growth sparked much hand-wringing among regulators and central banks, who are still undecided whether cryptocurrencies should be classified as a commodity, an asset or a form of currency.

That might seem like an odd discussion to be having. But one of the basic functions of currency is to facilitate transactions in a timely manner. And to protect the security of the blockchain (the technology behind cryptocurrencies such as Bitcoin), the processing of Bitcoin transactions is sometimes very slow.

Due to restrictions on the limit of Bitcoin transactions which can be completed in a day, it may take a few days to complete a single transaction, rendering the cryptocurrency unable to fulfil the basic function of money at times. Private blockchains can speed up transactions but they are not popular and availability is limited.

In the chain gang?
NicoElNino/Shutterstock

Money worries

The call to better regulate cryptocurrency gained momentum after the International Monetary Fund (IMF) issued a staff discussion note stating that banks should consider investing in cryptocurrencies:

Rapid advances in digital technology are transforming the financial services landscape, creating opportunities and challenges for consumers, service providers and regulators alike.

Any wholesale adoption by the banking sector would clearly establish a huge market for cryptocurrencies, but the traffic isn’t moving entirely one way. Chinese regulators dealt a huge blow to the crypto market at the beginning of September when the People’s Bank of China made it illegal to raise funds through Initial Coin Offerings (ICOs).

An ICO is a fundraising tool that trades future cryptocoins in exchange for cryptocurrencies of immediate, liquid value. They have become an easy platform for digital currency geeks to raise funds quickly. In simpler terms, ICOs are a crowdfunding platform for future cryptocoins. They have already raised US$2.32 billion, according to industry website Cryptocompare.

China is getting stricter in general. It was even reported that it may ban the trading of virtual currencies on domestic exchanges entirely. If this goes ahead, it will certainly dampen the enthusiasm around the sector. But there always seems to be some better news round the corner, and more oversight may well generate the confidence that can overcome concerns.

The Russian finance ministry is pushing to regulate the use of cryptocurrencies in the country by the end of 2017, while the central bank has been working on regulation for digital currencies since the beginning of the year. Perhaps the biggest boost for cryptocurrencies came from Finland’s central bank economists, who called the infrastructure behind crypctocurrencies such as Bitcoin “revolutionary” and praised its ability to prevent manipulation.

There has also been recognition for cryptocurrencies in countries such as Australia
and Japan, which are both implementing polices to legalise cryptocurrencies exchanges. Japan has made it mandatory for Bitcoin exchanges to register with regulators and undergo annual auditing by certified accountants.

Singapore’s central bank noted that the function of digital tokens went beyond simply being a virtual currency while asserting some oversight. It said that ICOs would have to be approved or recognised by the bank or recognised under Singapore’s Securities and Futures Act.

In the US, the Securities and Exchange Commission echoed that sentiment, announcing that ICOs will be regulated as securities and any unregistered offerings could be subject to criminal punishment.

Two options

This kind of growing acceptance – China aside – is an acknowledgement of the growing popularity of cryptocurrencies as a financial instrument. Looking further ahead, regulators have two options.

First, they could implement stricter regimes to ensure cryptocurrency transactions are not related to dark net activities, terrorism financing or money laundering activities. Alternatively, central banks could start issuing their own digital currency known as Central Bank issued Digital Currency (CBDC) based on the distributed ledger technology (DLT), the same blockchain technology behind the cryptocurrencies. This raises the possibility of CBDCs destroying the value proposition of existing cryptocurrencies.

Taking the lead. The BoE in London.
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The Bank of England has taken a lead in the initial discussion while its peers in Canada, Sweden and at the European Central Bank all analyse the feasibility of launching digital currencies.

The wider discussion on CBDCs is a testimony to the fact that central banks are serious about cryptocurrencies, and in a way competing with their growing popularity. In the worst case scenario for this still fledgling market, central banks could decide to make trading or possessing cryptocurrencies illegal. That would be tough to enforce as there is no single organisation or person that controls cryptocurrencies and transactions don’t go through a central clearing house. There is precedent, however. Back in 1933, the US president, Franklin Roosevelt, made holding gold bullion a crime and required all Americans to hand over their cache of gold to the Federal Reserve.

If that happens here, then the cryptocurrency market would die a natural death. It all rests now with the central bankers. China has offered a glimpse of a difficult future; crypto evangelists will hope others continue down the more accommodating path.The Conversation

Nafis Alam, Associate Professor, University of Reading

This article is republished from The Conversation under a Creative Commons license. Read the original article.

China’s crackdown on cryptocurrency trading – a sign of things to come

An illustration photo of Bitcoin (virtual currency) coins
Reuters

Andrew Godwin, The University of Melbourne

The Chinese government’s decision to order several Bitcoin and other cryptocurrencies exchanges to close shows how much of a threat they are perceived to be to financial stability and social order in China.

The decision to also ban initial coin offerings altogether (the unregulated means by which funds are raised for a new cryptocurrency venture) has taken traders and analysts by surprise. China is the world’s largest cryptocurrency market with around 80% of Bitcoin transactions taking place in yuan.

The blockchain (a digital ledger in which digital currency transactions are publicly recorded) is poised to have a massive impact on the future of finance. This recent crackdown suggests the Chinese government is determined to cement its place as a leading rule maker and power-broker in the quickly emerging area of cryptocurrency transactions and exchange.

Chinese relationship with bitcoin

The Chinese government released a list of 60 initial coin offering trading platforms and instructed local agencies to make sure all platforms were listed and closed down. The delayed crackdown is in line with previous practice in China.

The Chinese government often adopts a wait-and-see approach to activities that are largely unregulated until the magnitude of the activity becomes clear. The extent of speculative investment and the risk of losses to investors if the bubble bursts motivated the government to intervene in cryptocurrency trading.




Read more:
Can cryptocurrencies like Bitcoin survive scrutiny from central banks?


In China, the popularity of cryptocurrencies has been boosted by the tightening of controls on money moving out of the country over the past two years. This has lowered the value of the China’s currency, the renminbi, as investors seek assets in different denominations and chase higher yields. Cryptocurrencies are also popular because they can be used to transfer funds offshore and circumvent foreign exchange controls.

The government is particularly concerned with the use of cryptocurrencies and initial coin offerings to perpetrate and disguise fraudulent activity, including money laundering and ponzi type investment schemes.

Chinese authorities are anxious to avoid any social unrest in the lead-up to the 19th Party Congress. The effects of the 2015 stock market collapse, where the A-share market lost one-third of its value over a period of one month, are still being felt.

In some respects, the regulatory intervention in China is mirrored in other countries that have been dragging their heels in coming to terms with cryptocurrencies. It was only in July this year that the US Securities Commission issued a report determining that DAO tokens were “securities” and must be regulated accordingly.

China’s own cryptocurrency

In January last year, the People’s Bank of China issued a notice announcing it would be issuing its own digital version of the renminbi. The notice highlighted the benefits of a government backed digital currency in terms of cost, coverage, convenience and security.




Read more:
The big business revolution: why the future is blockchain


In the initial phase, it’s likely that trading in this digital currency will be limited to regulated entities such as banks along similar lines to trading on the conventional foreign exchange markets.

By launching its own digital currency, the Chinese government avoids the risks associated with privately-issued cryptocurrencies and ensuring they are not used as a means of circumventing China’s strict capital and currency controls.

When China introduces its own digital currency (no formal date has yet been announced), the impact on the global economy will be significant. Not only will it challenge the existing global payment systems and establish China as a leading rule maker in this area, it will also enhance the importance of the renminbi as a global reserve currency.The Conversation

Andrew Godwin, DIRECTOR OF STUDIES, BANKING AND FINANCE LAW, The University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Bitcoin investors should be taxed like any other investor

Jason Potts, RMIT University; Chris Berg, RMIT University, and Sinclair Davidson, RMIT University

Despite its name, cryptocurrency isn’t just money. It could also be debt or equity and so it should be regulated and taxed in the same way as other finance.

The tokens investors get when they buy a cryptocurrency, like Bitcoin, can be used to buy into blockchain startups (businesses that use the same online ledger as cryptocurrencies). When blockchain startups issue shares in their businesses using cryptocurrency, it’s called an initial coin offering. For investors, this is like any other equity investment.

Cryptocurrency can also be used to finance specific assets, like debt. So what we have is a single financial instrument that has the advantages of both debt and equity.

So startups issuing their own tokens for investment purposes should have to comply with the same rules and regulations that startups issuing more traditional instruments must comply with. Cryptocurrency investors should be taxed on the same basis as traditional investors.

Why cryptocurrency is a mix of money, debt and equity

Money is very often defined by its functions: a medium of exchange, a unit of account (used to represent the real value or cost of any economic item), and a store of value (that can be saved, retrieved and exchanged at a later time). The early consensus about Bitcoin among economists is that it’s not money.

At best cryptocurrencies are a medium of exchange. But many economists doubted that Bitcoin, given its volatility, could ever serve as a unit of account, let alone as a store of value.

So if cryptocurrency isn’t money, is has to be something else. It could be an asset of some sort.

Usually if investors acquire or sell an asset, it would be liable to tax, such as the GST. This means people using Bitcoin would be taxed twice when using it.

It would be taxed when the person buys the Bitcoin and taxed again when they used it to buy something. Luckily the federal government realised this was a bad idea and moved to repeal the double taxation of Bitcoin.

Clearly the federal government’s view is that cryptocurrency is not legal tender – so don’t try pay your income tax in Bitcoin anytime soon. And there are important differences between money, specifically legal tender, and cryptocurrency.

Cryptocurrencies tend to strictly rules bound. How they’re created, when they can be earned, how they’re distributed and how many there ever can be, is all determined by rules. In fact, users like strict rules.

By contrast government controlled money is not rules bound. Government employs substantial discretion in exercising control over money. So while the US dollar has the words “In God we trust” printed on it, this system actually requires substantial trust in government.

This trust has been repaid by a substantial reduction of value over the past century. It seems that government-backed money may also be a poor unit of account and store of value.

Debt and equity are financial instruments used to raise money to finance economic activity. It is something of a puzzle to financial economists why firms use debt in some instances to raise finance while using equity in other situations.

An important 1988 paper by the 2009 economics Laureate Oliver Williamson provides a possible answer to that question. Williamson argues that debt, being a strict rules bound financial instrument, is best used to finance general assets, while equity is best used for so-called specific assets. Specific assets are those assets that cannot be cheaply or easily redeployed from their current use to alternate uses without a substantial loss of value.

As it turns out Williamson had speculated about the existence of such an instrument (that he labelled “dequity”) and then rejected that instrument as being unworkable. The reason dequity was unworkable was due to opportunism – investors simply could not trust dequity issuers.

The ledger that cryptocurrencies use – the blockchain – is a actually “trustless” technology because it’s decentralised. It allow users to see each other’s ledgers and transactions, negating the need for a trusted third party to manage risk. Instead it relies on cryptographic verification.

With the absence of the ability for investors to game the system, cryptocurrencies are the dequity Williamson first imagined and it could become an efficient financing mechanism.

How dequity should be regulated

The idea of regulating or taxing cryptocurrency finance may not be to the liking of many crypto-enthusiasts who are likely to argue that traditional rules and regulations are very onerous. They are correct, of course. Yet the solution to over-regulation is not a carve-out for special interests but rather regulatory reform that reduces the burden for all business.

The good news for crypto-enthusiasts is that some governments appear willing to engage in genuine regulatory reform and tax competition to attract investment in this space. For example, the Singaporean government is relaxing existing regulation to accommodate cryptocurrency. Its proposed framework would require applicable companies to obtain a license from the Monetary Authority of Singapore, and divides payment activities into several categories.

But regulators should really regulate cryptocurrencies in much the same way as they do existing financial instruments. It shouldn’t be given special treatment.

Despite all the complexity of cryptocurrency it really is simple: it’s a financial instrument that combines all the advantages of money with debt and equity. It’s none of those well known concepts in isolation, but a viable and workable hybrid of all three.The Conversation

Jason Potts, Professor of Economics, RMIT University; Chris Berg, Postdoctoral fellow, RMIT University, and Sinclair Davidson, Professor of Institutional Economics, RMIT University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Australian regulators have finally made a move on initial coin offerings

Initial coin offerings have taken off this year.
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Philippa Ryan, University of Technology Sydney

The Australian Securities and Investment Commission (ASIC) has finally issued guidance to explain how “initial coin offerings” (ICOs) will be regulated.

ICOs are a form of crowdfunding, with companies raising funds by selling tokens or cryptocurrencies to investors with promises of a social good or financial benefit. ICOs have exploded this year, with one estimate that more than US$2.2 billion has been raised so far.

But ICOs are also risky. They are mostly created by anonymous entities, are currently unregulated, and may not always refund money upon request or allow the resale of tokens. Investors are often left in the dark with respect to their entitlements, rights, and benefits. ICOs typically confer no ownership rights in the company and, unlike bonds, investors in ICOs do not receive interest payments.

Until recently regulators around the world have been scrambling to figure out how to deal with this new phenomenon.

ICOs are popular because the promoter or operator does not have to apply for registration or a licence, and there is no delay in waiting for regulatory approval. The cost of setting up and releasing an ICO is very low. For investors, the popularity is driven by the expectation that the price of the cryptotoken will increase in value. However, this is risky because when a currency is the subject of intense speculation, its price will be volatile.

Adding to the risk for investors, the cryptocurrencies that promise the highest returns in the shortest time are the ones with the lowest market capitalisation, and they are also the most volatile. For example, Dent’s market cap is just over US$5 million (compared with Bitcoin’s US$67 billion) and the fluctuations in Dent’s price in the past week alone reads like a seismogram during a major earthquake.

Regulators are catching up

Australia’s new approach is markedly different than the path of regulators in other countries. The Chinese government recently decided to outlaw all ICOs, with seven regulators in China issuing a joint decree. ICOs were declared an unauthorised public financing activity, involving illegal fundraising, financial fraud, and pyramid schemes.

In response to the Chinese ban, many blockchain projects refunded all of the money they had raised. The ban sent the value of bitcoin (in which many ICOs are denominated) into freefall. Meanwhile, the market capitalisation of Ethereum declined by a staggering US$6 billion within 24 hours of the announcement.

But China is not the only country to take steps to reign in ICOs.

In July the US Securities and Exchange Commission (SEC) issued a warning that US securities laws apply to ICOs. It stipulated that no matter what terminology or technology was being used, the sale of digital coins may be regulated as “securities”. The effect of this ruling is that ICO operators must comply with reporting and consumer protection legislation, including keeping a register of “investors” and filing annual returns.

The Australian approach

ASIC’s information sheet sets out clear guidelines for how to operate within Australia’s regulatory framework, while encouraging innovation and the development of new financial business models. Australia’s approach is an amalgam of a suite of regulations that might apply to public and private companies when they launch an initial public offering (IPO), raise funds from existing shareholders, or offer financial services.

The many ways that ICOs stage the release of tokens remains organic. Some pre-empt the process by raising venture capital and most publish a white paper to anticipate the launch. Recently, some ICOs have started imposing a lock-up period of 3-12 months, during which time the investors cannot sell their tokens. Making sense of the projects and the rules imposed on the token sales can make it harder for investors to make an informed decision.

Importantly, if an ICO is operating as a Managed Investment Scheme (MIS) with people brought together to contribute money in a collective investment to get an interest in the scheme (like a cash management trust or a property trust), the operator will need to comply with a range of disclosure, registration, and licensing obligations under the Corporations Act. An MIS arises when the contributor obtains an interest in the scheme, where the contributors’ assets are pooled together, and where that pool of assets is controlled by the operator of the scheme.

According to ASIC, an ICO could also be an offer of shares. In this case
the company must keep a register of all the shares they have issued. This is similar to the way that public companies (that is, companies with more than 50 non-employee shareholders) issue securities. The register must have information about the company’s members (or shareholders) and the number of shares in the company. The register must also contain key identification information about each member, as well as the number and types of shares held by each member. Importantly, this sort of offering must be accompanied by a disclosure document.

The disclosure document must be lodged with ASIC before the launch. Only when a company is issuing shares to fewer than 20 people and raising less than A$2 million in the first 12 months will it be exempt from providing that disclosure.

If the ICO is an offer of a derivative (for example, an option or a future), then the company will need to be licensed. In Australia, companies will need a financial services licence if, as part of their business, they provide financial product advice to clients, deal in a financial product, make a market for a financial product, operate a registered scheme, provide a custodial or depository service, or provide traditional trustee company services.

As well as this detailed guidance for ICO operators, ASIC is directing potential investors to its MoneySmart website. This provides guidance about the risks of investing in an ICO. It warns that the value of crypto-tokens is volatile, that the tokens may be stolen, and that many ICOs are scams.

Buyer beware

Even with this new guidance, the challenge for the investors remains to separate the schemes from the scams. ASIC’s media release and information sheet should not be regarded as a general stamp of approval. The regulator is by no means suggesting that they are fit for general consumption.

ASIC recommends that anyone intending to contribute to an ICO check first whether the issuer is a company registered in Australia and whether it has a licence to operate an ICO. If the company is not registered and does not have a licence in Australia, investors will have little protection if things go wrong.

While China is regulating the use of ICOs by banning them (for now), Australia is taking a more supportive approach by encouraging operators to play by the rules. Meanwhile, for consumers the message is clear: when it comes to ICOs, investor beware.The Conversation

Philippa Ryan, Lecturer in Commercial Equity and Disruptive Technologies and the Law, University of Technology Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Explainer: what are initial coin offerings (ICOs) and why are investors flocking to them?

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Paul Dylan-Ennis, University College Dublin and Donncha Kavanagh, University College Dublin

Initial coin offerings – or ICOs – have become enormously popular with investors. They have raised more than US$1.8 billion so far in 2017 and one recent ICO raised US$35m in under 30 seconds.

But they are proving unpopular with governments around the world. The Chinese and South Korean governments have shut them down, while US regulators have issued a warning that ICOs may be subject to securities laws.

This is all part and parcel of the rise in cryptocurrencies in recent years. Bitcoin is the most famous, as the original and still dominant iteration. It was created as a form of digital cash, with a unique property: it is not backed by any bank or government. And it was specifically designed not to be centralised. For this reason it has always had a certain lawless aspect to it and has become the currency of online digital crime. But it is also having a real moment – one bitcoin is currently worth more than US$5,000.

Within the cryptocurrency space ICOs have become the favoured way to raise funds in a manner akin to venture capital funding – but without any of the oversight normally found in that process.

Avoiding the middle men

ICOs are typically built on the technology of another cryptocurrency called Ethereum. Created by a programming prodigy, 23-year-old Vitalik Buterin, Ethereum was designed as a “world computer” rather than simply a form of money.

Like Bitcoin, Ethereum is a decentralised payment network with its own cryptocurrency (technically called Ether) that allows anonymous transactions to be sent across the internet without the need for a bank or other middleman. Instead, transactions are stored on the blockchain, a decentralised ledger.

Where it differs from Bitcoin is that, as well as allowing currency to run on its network, Ethereum can run all sorts of things including “smart contracts”, which are a form of digital contract that executes automatically once a certain set of conditions is met. ICOs are built on these contracts. An ICO involves creating a sellable token (or coin) that can be purchased with existing cryptocurrencies (such as Bitcoin or Ether).

The investor effectively purchases digital tokens that can be used within a specified ecosystem. Take this made-up example: an ICO for a new online betting venture, “Conversation Casinos”, might issue coins, “Conversation Coins”, which investors could buy and then use to make bets in Conversation Casinos (which would only accept and pay out Conversation Coins). Investors could also decide to hold onto their coins, speculating that the business will be successful, which will increase the demand for the coins and their market value.

In many ways, these tokens are not unlike the virtual currencies found in computer games like World of Warcraft and Second Life. They have a utility value, in that they are the digital venture’s medium of exchange (the money). But, often what attracts investors is the speculative value of tokens on cryptocurrency exchanges, rather than the originally intended use.

Dangers inherent

The ICO model has attracted scammers who lure gullible investors into ICOs that are unlikely to ever generate a return. And, since ICOs are completely unregulated, investors have no recourse should the project not deliver or simply disappear.

Some ICOs do not allow citizens from certain countries, specifically the United States, to participate, in order to avoid coming under the radar of law enforcement agencies. They are also subject to the volatility that blights cryptocurrencies in general. All cryptocurrencies and tokens are tethered to the price of Bitcoin, the coin that acts as the crypto-economy’s reserve currency.

While the Chinese regulators did not explain why they banned ICOs, they were probably most concerned about the danger to investors, given the prevalence of ICO scams. And they probably should be banned if they are merely schemes to avoid securities laws that exist for good reason.

Nevertheless, it is clear that ICOs are an interesting innovation. They allow people without access to traditional investment opportunities a chance to invest in companies that appeal to them, without the requirement of a broker (and broker fees). In turn, this allows companies to bypass the traditional venture capital scene and to get their projects in motion quicker.The Conversation

Paul Dylan-Ennis, Assistant Professor, University College Dublin and Donncha Kavanagh, Professor of Information & Organisation, University College Dublin

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Bitcoin’s surge intensifies need for global regulation of cryptocurrencies

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Iwa Salami, University of East London

The news that bitcoin had broken the $10,000 barrier
reflects the way that mainstream investors have been flocking to cryptocurrencies over the past year. But amid the excitement, regulators are fretting about criminals who are increasingly using cryptocurrencies to escape detection from law enforcement.

Why is digital currency so appealing to miscreants? Cryptocurrencies are a recent phenomenon and – as with all new technology – it takes time for regulators to catch up. Bitcoin was the first to gain an international reputation as a digital currency that could be used to settle transactions after it was anonymously created in early 2009.

Cryptocurrencies are decentralised, meaning that they are issued without a central administering authority. They are cryptography-based, distributed open source and function on a peer-to-peer basis.

Significantly, the underlying protocols on which most cryptocurrencies are based do not require or provide user identification and verification. Also the historical transaction records generated on the blockchain (the technology behind bitcoin, which serves as a public ledger of all cryptocurrency transactions) are not necessarily associated with an individual’s identity.

[youtube https://www.youtube.com/watch?v=f7iXTyHGYX4?wmode=transparent&start=0]

Cryptocurrencies are also – by definition – convertible virtual currencies, as they can be exchanged for fiat money such as pounds, dollars and euros and this facilitates their use for settling commercial transactions.

Bitcoin is now an acceptable form of payment in exchange for goods and services by household names such as Microsoft, Expedia and Subway. At the same time, blockchain technology is being adopted by more businesses.

Private transactions enabled by the use of bitcoin are key to understanding the growth of cryptocurrencies among consumers. However, this advantage is keeping regulators and law enforcers awake at night.

Flipped coin

The infamous Silk Road case drives this point home. Bitcoin was used to purchase drugs through the dark web – transactions that weren’t spotted by the authorities.

But hard-to-track criminal activity isn’t the only threat from the use of cryptocurrencies – there’s also the possibility of their use to finance terrorism, given that the formal banking sector is now adept at spotting suspicious movement and mobilisation of monies through the banking system

The fact that they can be converted into pounds, dollars and euros does make regulation of cryptocurrency more feasible. It can be done at the point of their conversion through virtual currency exchanges – which, as financial institutions, can be regulated.

International financial regulation and a growing number of national measures across the globe, such as “Know Your Customer” (KYC) and anti-money laundering (AML) directed at financial institutions, have been strengthened. And, when implemented effectively, it’s now easier to track down individuals engaging in illegal transactions.

But the global nature of this payment mechanism is the biggest challenge.

Whack-a-mole

Payments can be easily affected cross-border because conversion of the likes of bitcoin through currency exchanges can be transacted in different parts of the world – including in jurisdictions with lax financial regulatory regimes and weak KYC/AML measures. This means that, while jurisdictions with stronger regulatory powers may clamp down on criminal activities, such efforts can be easily wiped out because perpetrators are likely to migrate to countries with lax regimes.

Nonetheless, positive steps are being taken to regulate financial technology (fintech) products such as cryptocurrencies. Emerging challenges within this sector has led to the arrival of regtech – which, among other things, is regulatory technology adopted to address fintech risk issues.

Regtech covers artificial intelligence, big data and machine learning – technology that enables detailed data analysis on platforms such as blockchain. Again, regtech is only likely to be adopted effectively in jurisdictions with advanced regulatory regimes, so the extent of its effectiveness in policing the global cryptocurrency phenomenon appears limited.

Load up on drugs

Another challenge is the investigation and prosecution of illegal activities perpetrated with payments using cryptocurrencies, with semi-anonymity of the blockchain making it difficult to monitor transactions and identify suspicious behaviour, such as drug sales. Law enforcement agencies find it incredibly difficult to trace illicit proceeds that are laundered using cryptocurrencies and – once again – are scuppered by different legal systems around the world.

The global nature of cryptocurrencies makes them incredibly difficult to police.
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Different jurisdictions have their own approaches to regulating cyber-related transactions, which makes international cooperation deeply challenging. In some countries, such as North Korea and China, regulation of web-based transactions is significant for national security policy. Legal mechanisms are in place to allow extensive government intrusion into the sender and recipient details of every single transmission.

Other countries, such as the US and the UK, cautiously approach online regulation to balance security concerns against constitutionally protected freedoms and to preserve privacy and data protection laws.

It means that a worldwide effort is needed to regulate this global payment mechanism. Governments, financial regulators, financial intelligence units and law enforcement agencies must all agree to a unified approach in tackling cryptocurrencies. Without this, effective regulation of bitcoin and similar currencies is unattainable.

A starting point could be instituting minimum regulation, such as currently exists in some international financial standards including the Basle Committee’s Core Principles for Effective Banking Supervision and the IOSCO principles of securities regulation.

Countries across the world are encouraged to implement these provisions, which indicates that they embrace investor-friendly policies. A similar standard applied to cryptocurrencies would be a sensible way forward, given the patchwork approach to regulating cyber-related transactions around the globe.The Conversation

Iwa Salami, Senior Lecturer in Financial Law and Regulation, University of East London

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The Bitcoin bubble – how we know it will burst

Ready to pop?
Adam Dachis/flickr, CC BY

Larisa Yarovaya, Anglia Ruskin University and Brian Lucey, Trinity College Dublin

In the last year, the price of Bitcoin has increased from less than US$800 to more than US$12,000. This huge spike in value has many asking if it is a bubble or if the high price today is here to stay.

Finance defines a bubble as a situation where the price of an asset diverges systematically from its fundamentals. Investment mogul Jack Bogle says there is nothing to support Bitcoin, and the head of JP MorganChase, Jamie Dimon has called it a fraud “worse than tulip bulbs”.

Like any asset, Bitcoin has some fundamental value, even if only a hope value, or a value arising from scarcity. So there are reasons to hold it. But our research does show that it is experiencing a bubble right now.

Together with Shaen Corbet at Dublin City University, we took as the fundamentals of Bitcoin elements of the technology that underpins it (and other cryptocurrencies). We looked at measures, which represent the key theoretical and computational components of how cyrptocurrencies are priced.

New Bitcoin is created by a process of mining units called blocks. Bitcoin is built on blockchain technology – a digital ledger of transactions – which enables the currency to be traded independently from any central banking system, without risk of fake or duplicate Bitcoins being used. Instead of having a bank verify pending transactions (a “block”), miners check them and, if approved, the block is cryptographically added to the ever-expanding ledger.

So the first measure we examined relates to mining difficulty. It calculates how difficult it is to find a new block relative to the past. As per the Bitcoin Protocol, the number of Bitcoin is capped at 21m (there are currently 16.7m in circulation). This means that as more people mine for Bitcoin and more blocks are created, each block is, all things being equal, worth less than the previous block.

Bitcoin mining affects the cryptocurrency’s values.
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The second measure we looked at relates to the “hash rate”. This is the speed at which a computer operates when mining. To successfully mine Bitcoin, you must come up with a 64-digit hexadecimal number (called a “hash”), which is less than or equal to the target hash. The faster you can do this, the better chance you have of finding the next block and receiving payment.

The third measurement was “block size”. This relates to how large the chain is at any given time, with larger chains taking longer to mine than shorter ones.

And lastly we looked at the volume of transactions conducted. Any asset, in particular any currency, which is more widely used will be more valuable than one which is used less frequently.

In our study, we examined data from Bitcoin’s early days – from July 2010 to November 2017. The price of one Bitcoin did not rise above US$1 until April 16, 2011, then to US$10 on June 3, 2011 and US$100 on April 2, 2013. Since then the price rise has clearly been exceptional.

We then applied an accepted method that is used to detect and date stamp bubbles after they burst. In essence, this involves identifying the existence of an explosive component in a series. As the series, here the price of bitcoin, “explodes”, it runs the risk, like any explosion, of flying apart.

A possibly counter-intuitive result of this approach is that if a fundamental driver and the price of an asset both show an explosive component, we might not conclude a bubble is present. A bubble is when something deviates from its fundamental value. If the fundamental value is itself growing explosively then the price would also.

Think of dividends on a stock. If, somehow, these were to grow at an explosive rate we might expect to see the price do the same. While unsustainable, this is not technically a bubble. To overcome this, we then date stamp a bubble as being present when the price shows an explosive component and the underlying fundamentals do not.

Here are the results of the analysis:

The Bitcoin Bubbles.
Authors own calculations

The orange lines denote when the price is showing explosive behaviour. We also see a period where the hash rate was growing explosively – the blue columns in late 2013 and early 2014. This is also an indication of a price bubble, which went on to burst.

So there are clear points where bubbles are visible – including now. The price of Bitcoin at present shows explosive behaviour in the absence of anything similar in its fundamentals. We see the price moving upwards in a manner that is not related to the technical underpinnings. It is a clear bubble.

A weakness of these tests and indeed all bubble identification tests is that they take place after the bubble has burst. Even this test, which can be redone as swiftly as new data arrives, is such. Bubbles by their nature grow in a compound manner – so even a day or two delay in addressing the situation can make a bubble significantly worse.

What is not yet available is an accurate advanced warning bubble indicator. In its absence, this approach may be the best. Unfortunately, we cannot use this approach to determine the extent of the bubble. There is no well-accepted model that suggests a “fair” value for Bitcoin. But whatever that level is, it is almost certain that, at present, it is well below where we are now.The Conversation

Larisa Yarovaya, Lecturer in Accounting and Finance, Anglia Ruskin University and Brian Lucey, Professor of International Finance and Commodities, Trinity College Dublin

This article is republished from The Conversation under a Creative Commons license. Read the original article.

So findet ihr die günstigsten Last Minute Flugangebote

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In den letzten Monaten haben sich Last Minute Angebote wirklich bewährt: Wenige Tage oder Wochen im Voraus könnt ihr Reisen mit großer Sicherheit planen, natürlich immer mit Blick auf die aktuelle Situation bei der Einreise ins jeweilige Land und die Rückreise nach Deutschland. In diesem Artikel findet ihr jederzeit tagesaktuelle Last Minute Flugangebote und Insider-Tipps für eure nächste Flugbuchung.

Hinweis: Dieser Artikel wurde zuletzt am 23. August 2021 aktualisiert. Beachtet, dass sich Einreisebestimmungen jederzeit ändern können. Informiert euch daher bitte vor jeder Buchung und vor jedem Reiseantritt über die aktuellen Reisewarnungen des Auswärtigen Amtes und die Hinweise des Robert Koch Instituts (RKI). Wir empfehlen auch unsere Artikel zum Thema Corona-Einschränkungen, flexibles Reisen und Flugstornierungen.

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Insider-Tipps: So findet ihr weitere Top Flugangebote

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Die "Alle Orte"-Funktion von Skyscanner

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Quelle: https://www.skyscanner.de/nachrichten/aktuelle-airline-angebote-rabatte-und-deals-im-ueberblick geladen am 06.09.2021

Bitcoin is a highly speculative investment. Why caution is required

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Co-Pierre Georg, University of Cape Town and Qobolwakhe Dube, University of Cape Town

With the price of a bitcoin reaching record highs of more than $10,000, more and more ordinary people consider investing in the cryptocurrency. The recent price surge, however, comes with tremendous risks. Investors should be prepared for the possibility that they could lose their entire investment.

Bitcoin was launched in 2008 by an anonymous author under the name of Satoshi Nakamoto as a means of transacting among participants without the need for intermediaries. Since the beginning of this year, the price of bitcoin has increased by 1300% as more and more consumers flock to it hoping to profit off its increasing popularity and the associated increase in value.

Cryptocurrencies are not currencies at all. As the Financial Times explains, bitcoin is a string of computer codes which means that new bitcons can be created – up to an agreed limit – by computers that gain the right to do so by solving complex puzzles. Transactions are recorded in a database called a blockchain.

Bitcoin, like other assets like gold, doesn’t yield income. You have to sell it to realise any value. And, like gold and other currencies, it can be transferred peer-to-peer.

Part of the nervousness about bitcoin is that, along with other cyptocurrencies, it challenges the traditional role of banks and central banks. In the classical world, banks act as intermediaries by providing loans out of the deposits they took and from funding from the central bank. The central bank uses the rate at which it provides this funding as a lever to ensure price stability. The introduction of cryptocurrencies threatens this model because banks are no longer necessary to intermediate funds and there is no central bank to ensure that prices are stable.

The more immediate fears about bitcoin centre on the recent dramatic rise in its value. There’s nervousness in the market that a flash crash might be imminent after the cryptocurrency tumble by more than $1,300 in minutes on the bitcoin exchange Bitfinex. It did recover to levels above $10,800.

The flash crash echoes long standing warnings that the bitcoin party is set to end in tears. Most recently Jamie Dimon, CEO of JPMorgan, one of the world’s largest investment banks declared that he would fire any employee trading bitcoin for being stupid.

In a highly unusual alliance, his words were echoed by economics Nobel Laureate Joseph Stiglitz, who has gone even further arguing that bitcoin:

ought to be outlawed.

All of these are clear warning signs that the professionals do not trust the lofty promises of crypto enthusiasts.

The blockchain factor

There is no doubt that Bitcoin – and in particular blockchain, the technology behind it – has the potential to revolutionise the financial services industry.

A blockchain functions as a transparent and incorruptible digital ledger of economic transactions, recorded in chronological order, that operates on a peer-to-peer network.

Fundamentally, the technology allows exchange of value to occur in an environment of peers with conflicting interests without the need for trusted intermediaries. That, in effect, wipes out the need for banks or financial services companies which fulfil this role.

The use of the technology is not limited to financial transactions. Virtually anything of value can be traded on a blockchain.

But no matter how useful the underlying blockchain technology is, or how widely it can be applied, there are real and substantial risks involved in bitcoin.

Volatility versus returns

The first, and most significant risk is that compared to any currency, share, or gold, bitcoin is extremely volatile. The volatility of bitcoin to US dollar is almost six times the volatility of the Rand to US dollar. While this is great in good times, it is potentially devastating for investors in bad times.

When professional investors decide on which assets to hold, they look at both the return and the volatility of the asset. Only investors with a healthy appetite for risk are willing to invest in risky, volatile assets. Usually these are finance professionals, for example in large investment banks or hedge funds.

Investors with a lower risk appetite, such as asset managers or pension funds, prefer assets with a somewhat lower return, but which are less volatile.

The rule of thumb is that the sophistication of an investor increases with the volatility of the asset she invests in. But with bitcoin this rule of thumb doesn’t hold true. More and more private investors have been flocking to bitcoin ‘exchanges’ that have sprung up all over the internet and that are aggressively advertised on social media.

Overvalued

There is a huge risk that bitcoin is already overvalued.

The practical use cases for bitcoin are limited. It doesn’t enable enough transactions to take place per second to be used as a replacement for a modern payment system. And it doesn’t offer any functionality other than pseudonymous transactions – transactions where the true identity of the counterparties is hidden.

Bitcoin is favoured by pyramid schemes, including the infamous MMM pyramid scheme in Nigeria. In a recent article, the Financial Times called bitcoin itself a pyramid scheme, much to the dismay of crypto enthusiasts. (A pyramid scheme is usually an illegal operation in which participants pay to join and profit mainly from payments made by subsequent participants. If no new people come in, it collapses.)

Regulatory risk

The third, and possibly biggest risk is regulatory. In September 2017, the Chinese government outlawed bitcoin exchanges in mainland China, sending the price of bitcoin tumbling.

Despite the claim that bitcoin is a “global currency”, the reality is that 58% of all bitcoin mining happens in China. If at any point the Chinese government should decide to make Bitcoin mining illegal the price is likely to plunge into oblivion.

Other countries have also voiced concern. The Russian Central Bank recently issued a warning to investors on the risks of investing in cryptocurrencies, citing concerns about a bubble. This suggests that there might be a concerted crackdown.

Cryptocurrencies are banned in India as their use is a violation of foreign exchange rules. The Australian Reserve Bank has taken a different approach. It monitors the cryptocurrency market in a bid understand the underlying technology.

The South African Reserve Bank has expressed its openness to blockchain technologies. But it has also highlighted potential risks to consumers.

A classic bubble

There are real risks that many consumers investing in cryptocurrency don’t fully understand. Advertisements promise that bitcoin can make you rich fast. And social media is alive with stories about friends of neighbours or distant cousins who have made a lot of money through bitcoin.

Without a doubt, these cases are real, and those who invested early can reap large benefits. But this is true in every bubble – from the dotcom bubble to the tulip mania. It’s also true in every pyramid scheme.

As always, investors should be extremely wary with any scheme that promises quick returns.The Conversation

Co-Pierre Georg, Senior Lecturer, African Institute for Financial Markets and Risk Management and Director, UCT Financial Innovation Lab, University of Cape Town and Qobolwakhe Dube, PhD candidate, University of Cape Town

This article is republished from The Conversation under a Creative Commons license. Read the original article.

What happened to the price of Bitcoin? The truth behind big bubbles and crashes

Callum Halliday, The Conversation; Eleanor Harrison-Dengate, The Conversation; Jenni Henderson, The Conversation, and Josh Nicholas, The Conversation

When Katherine Hunt’s dad asked her whether or not he should invest in Bitcoin, alarm bells rang, first she thought “he’s a musician”.

Hunt is a lecturer in accounting at the Griffith Business School, and as someone who knows the five stages of a bubble and crash, she was worried when it seemed everyone was thinking they needed to “get in on” Bitcoin.

“The stock market is a manifestation of the psychology of everyone who is investing, so of course there is going to be these crazy stages,” Hunt says.

There is a boom, as momentum behind a new stock or asset speeds up and the media starts to cover it, fuelling its price rise.

Then the euphoria sets in, the value of the asset skyrockets and people start to make a profit. But looming around the corner is the panic.

Investors feel the last phase of a crash far more than they do the elation of the price rising, Hunt says. Panic breeds more panic and the price falls.

Hunt is seeing this pattern play out with the stocks of the more well known gig economy businesses like Airbnb and Uber. These businesses now enjoy the privilege of being the only, or one of a few of their kind, in the marketplace. But Hunt says this can’t last.

“In an open market that’s not the case at all, there’s always going to be competition and these companies will fall. It’s just probably that they’ll fall in 30 or 40 years, not necessarily tomorrow,” she says.

Of course this is all easier to see in hindsight.

Remembering the global financial crisis

John Crosby, now a senior lecturer in finance at the University of Technology Sydney, was once working as an investment banker at Lloyds of London in 2007 when he noticed a news story on losses financial services company HSBC was reporting from its subprime mortgages.

“I thought, that could be quite bad,” Crosby recalls.

At the time volatility was low and it seemed like everything was going along fine. But Crosby overheard a coworker who looked after the banks’ various branches asking people to move any sums to deposit to London.

“That wasn’t normal right? It was perfectly normal that you did business with anybody you wanted to, unless there was a real credit risk issue with the bank,” he says.

Crosby realises now that his coworker knew other banks were carrying toxic debt that would eventually kick off the global financial crisis.

When it came to 2008 the real problems became clear and it was more of a question of which bank would fall next, he says.

“People were way too complacent before the crisis and then during the crisis it’s one of blind panic, thinking everyday things are going to get worse. Whereas in reality there was light at the end of the tunnel,” Crosby says.

By then Crosby was working at financial services company UBS and thousands of people were being laid off. In 2009 the company decided to hire half of those employees back.

Past theories about what causes crashes

The benefit of hindsight also shows what sort of speculation leads to market crashes. Before crashes were well understood, economists had to grapple with what they thought might be causing a crash.

In the 19th century, economist William Stanley Jevons believed that sunspots (hyperactive radiation on the sun) could be the key to understanding crashes.

“He was interested to find out that the cycle of sunspots was very similar…as the trade cycle back on earth,” says Simon Ville, a professor of economic and business history at the University of Wollongong.

Of course this theory was later discredited, but there have been bubbles over some very ordinary assets in the past.

Ville explains that tulips were at the centre of the first market bubble and crash in recorded history. Tulips became high fashion in the Netherlands, in the early 17th century, but because it took a while for these plants to grow it was very much like the future markets we see today in modern finance.

“That inevitably creates a sense of uncertainty and a sense of speculation, ‘what are you actually buying? Will you get the full value of what you’re paying for?’,” Ville says.

Of course people started paying more and more for tulips, until it took someone’s life savings to buy one bulb. Ultimately there was a point where euphoria turned to panic and the climate changed from optimism to pessimism. This is when the price crashed, and the bubble burst.The Conversation

Callum Halliday, Editorial Intern, The Conversation; Eleanor Harrison-Dengate, Editorial intern, The Conversation; Jenni Henderson, Section Editor: Business + Economy, The Conversation, and Josh Nicholas, Deputy Editor: Business + Economy, The Conversation

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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