The Isle of Man Government has thrown its arms wide open, even suggesting that residents may soon be able to pay their taxes in Bitcoin. The Isle of Man Financial Supervision Commission (FSC) has been quick to respond to interest in the area, announcing plans to apply anti-money laundering (AML) rules to the industry. The Isle of Man Government appears keen not to suffocate this evolving area with onerous regulation.
Significant is the very public, and very quick, way in which this has all been done. Yet rolling out the red carpet could be a risky strategy: Bitcoin has received plenty of bad press and there’s still some mysticism surrounding digital currency and what it is and why we need it, and a tendency to focus on risks rather than opportunities. Indeed, some operations found out that their treasury services were being withdrawn because of pressures from banks, just as the inaugural Crypto Valley Summit, aiming to showcase the Island as a front-runner in the sector, was opening. It is hoped that registration with the FSC will provide the integrity these start-ups so desperately need and, in turn, bring potentially lucrative business to the Manx economy.
What is Bitcoin?
“Bitcoin” is one type of crypto-currency (albeit the original and best known) in a sea of emerging digital currencies, alternatives include Litecoin, Dogecoin and Darkcoin.
Digital currencies do not have legal tender but are representations of value that can be traded, functioning as a medium of exchange. Crucially, and perhaps scarily for some, they are not endorsed by a government and not backed by a physical commodity such as gold. These crypto-currencies are instead based on maths, with computers in private homes across the globe running software to “mine” the currency by solving complex algorithms with each “coin” essentially being a string of code which answers the mathematical problem at the heart of the currency. This will eventually produce a finite number of “coins” as there are a limited number of answers to the mathematical problem at the heart of each crypto-currency.
Coins accumulated from mining, received as payment, or purchased on an exchange, are kept in a digital “ewallet”.
This allows the coins to be accessed from anywhere in the world by logging on to a computer or using a mobile phone app.
One appeal of digital currency is the removal of a bank in payment processing and the associated costs otherwise incurred by retailers. Some also argue that digital currencies (such as Bitcoin) are superior to physical cash from an AML perspective, as the transactions a digital coin is used for are recorded on a “blockchain” ledger which attaches to the coin and transfers along with its value when it is used as payment, making tracing easier than following the flows of cash.
Are crypto-currencies bad?
Crypto-currencies have encountered opposition and been the subject of much bad press: there have been high profile stories about hacking (not just of individuals but also e-wallet operators and currency exchanges), resulting in users losing their Bitcoins; in February the then largest Bitcoin exchange, based in Japan, “lost” around six per-cent of all Bitcoins in circulation; a Texan Bitcoin-based virtual hedge fund turned out to be a
Ponzi scheme; and some of the first merchants to accept payment in Bitcoin sold illicit substances. Another big criticism of Bitcoin has been the volitility in its price, with a mixture of speculation and uncertainty not helped by each new negative press story. The European Banking Authority (EBA) also recently published an opinion on the topic of virtual currencies, identifying a long list of risks associated with the sector.
To combat bad publicity and perceived risks, proponents of digital currencies are crying out for higher standards in the industry, arguing that hacks are not the fault of Bitcoin but of the businesses employing insufficient security controls, much like a bank robbery is not the fault of the stolen gold but of the bank for failing to make its vaults impenetrable.