SINGAPORE: As the price of Bitcoin soared then fell, exhibiting a nearly ten-fold increase in price over a one-year period, we saw increased interest in Bitcoin and other cryptocurrencies. Bitcoin is currently the world’s most valuable or expensive cryptocurrency, having climbed by 276 percent in the last year alone, much outpacing rival cryptocurrencies such as Ether, which runs on the Ethereum network.
It reached a high point in April this year before plummeting to nearly half its previous worth in June. Traditional institutions such as banks are creating blockchain funds to allow its high-net-worth investors the option to invest in cryptocurrencies, indicating that Singapore investors are keeping a close eye on Bitcoin and cryptocurrencies. Traditional businesses, such as Kopitiam in Funan, have also announced that they will accept cryptocurrencies such as Bitcoin and Ethereum. According to Statista, there were eight Bitcoin ATMs in Singapore as of January, and roughly 51 companies identified as taking cryptocurrency as payment. BITCOIN AS A TRANSACTIONAL CURRENCYBitcoin, on the other hand, has a number of properties that prevent it from being used as a transactional money.
Because of the volatility of Bitcoin, both consumers and merchants are exposed to exchange-rate risk as a result of the requirement to convert fiat currency to Bitcoin.
For example, in 2010, the first commercial transaction involving Bitcoin occurred when a pair of pizzas were purchased for 10,000 Bitcoins, which equated to around US$40 at the time and would cost almost US$400 million today.
People use a smartphone app to pay bills, buy groceries, or have their hair cut using bitcoin, which is sent directly to the seller over the internet. AFP/Stanley ESTRADA
The inefficiency of blockchain, which takes hours, if not days, to confirm transactions, and the usage of proof of work in Bitcoin mining both result in excessive electricity use, posing a sustainability problem.
As a result, it is doubtful that Bitcoin will gain widespread adoption as a transactional currency in the United States, however alternative types of virtual currencies or stable coins with values tethered to certain fiat currencies may do so.
Furthermore, unlike e-money held on an EZ-Link card or in a bank account, customers of cryptocurrencies have limited regulatory protections, which means that if the company goes bankrupt, customers of cryptocurrencies may lose the entire amount.
READ: Bitcoin has become legal tender in one country. Regrets could be on the way shortly. READ MORE: Don’t believe the hype — Bitcoin is never a good investment The Monetary Authority of Singapore (MAS) has mandated that cryptocurrency companies make clear and relevant disclosures to its consumers, including merchants, so that everyone is aware of the dangers.
Cryptocurrencies are neither legal tender nor investments. Instead, they are treated as goods, similar to collectible cards that can be purchased from vending machines or stores. They can also be used as a means of trade because they are a good. AS AN INVESTMENT INSTRUMENT, BITCOIN However, with high-net-worth investors increasingly interested in incorporating cryptocurrencies into their investment portfolios and mainstream banks such as DBS offering investment opportunities to clients with cryptocurrencies in their portfolios, we are likely to see increased interest in cryptocurrencies among local investors as a result of increased bank availability. The scale of the cryptocurrency market in Singapore, according to the MAS, remains extremely modest. The MAS has published many consumer advisories over the years to caution the public about the dangers of trading or investing in cryptocurrencies.
On February 7, 2018, a Bitcoin automated machine (ATM) is visible in Hong Lim Complex in Singapore. The photo was taken on February 7, 2018. DEWEY SIM/REUTERS
Cryptocurrency values can be extremely volatile and are frequently speculative. This is unsurprising, given that cryptocurrencies are nothing more than bytes of data stored on computers connected by networks. They are not linked to any country’s economy or economic foundations, and their worth cannot be quantified or determined objectively. Their values are essentially what people believe they are worth, similar to collecting cards, and can even fluctuate based on billionaires’ tweets like Elon Musk. READ ALSO: Elon Musk Recognizes Bitcoin’s Environmental Impact READ: Elon Musk should probably quit tweeting about Tesla. The enormous and rapid increases in value appeal to those seeking quick profits — investors are constantly trying to buy at the bottom and sell at the top, especially since the rise and fall cycles occur frequently and rapidly. RULES TO PREVENT MISUSE The MAS has imposed rules to combat the misuse of cryptocurrencies to finance terrorism and weapons proliferation, as well as money laundering, such as laundering proceeds from drug trafficking and the use of cryptocurrencies to receive ransom or other illicit payments, in addition to warning consumers about the speculative nature of many of these virtual assets. Because of their capacity to be moved or used rapidly and discreetly, as well as the cross-border nature of such transactions, cryptocurrencies are excellent vehicles for money laundering. Furthermore, cryptocurrency assets stolen from cryptocurrency firms with poor governance or cybersecurity measures can be laundered undetected through other firms with similarly poor governance or cybersecurity measures, or through DeFi – decentralised finance systems – which do not require any intermediaries for transactions. DISTRIBUTORS ARE REQUIRED TO COMPLY WITH REGULATIONS Entities that trade cryptocurrencies in Singapore are regulated as digital payment token service providers and must be licensed under the Payment Services Act. Entities that deal in cryptocurrencies, facilitate their transmission, or provide custodian wallet services, for example, must be licensed and meet all of the standards.
At The Arcade in Raffles Place, Singapore, there is a cryptocurrency ATM. (Photo courtesy of Jeremy Long)
Although the regulatory purpose is to address money laundering and terrorism funding issues, the standards placed on corporations are quite onerous, which may dissuade businesses from providing the services generally.
For example, extensive client due diligence is required prior to any transaction, as well as regular and continuous monitoring.
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In addition, the MAS now has the authority to impose additional measures on cryptocurrency enterprises as needed and in a timely manner. All of this will be a deterrent to bitcoin suppliers and investors. Overall, we anticipate Bitcoin’s adoption as a transactional money will be limited. Cryptocurrencies that have the potential to become a transactional currency must be stable and efficient, two characteristics that Bitcoin lacks. Because Bitcoin is not tied to any underlying asset, its value is greatly dependent on investors’ expectations – which is why a tweet from Elon Musk is all it takes to create huge variations in its value – it may attract greater attention from investors. Hannah Yee-Fen Lim is an Associate Professor of Business Law at Nanyang Technological University (NTU) and one of 15 international legal experts selected by the International Institute for the Unification of Private Law to draft new international model laws on cryptocurrencies and other digital assets. NTU’s Nanyang Business School’s Boh Wai Fong is the Deputy Dean and Professor of Information Systems. In this edition of the Money Mind podcast, experts examine the risks and benefits of decentralized finance:/n
