Treasury warns of virtual currency risk

2014-09-18 19:48 - Fin24
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Balloons bearing the bitcoin logo float above the floor at the Inside Bitcoins conference and trade show in New York. (Mark Lennihan, AP, file)

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Johannesburg - South African consumers should be aware of the risks associated with the use of virtual currencies for either transactions or investments.

This warning was issued on Thursday by the National Treasury, the SA Reserve Bank (Sarb), the Financial Services Board (FSB), the South African Revenue Service (Sars) and the Financial Intelligence Centre.

"While there are benefits associated with this new technology, it is difficult to assess those benefits against the risks of something so novel, innovative and technologically sophisticated," Treasury said in a statement.

"Users of virtual currencies can therefore become susceptible to fraudulent or any other criminal behaviour as they may be less circumspect than usual when faced with the promise of high return investment opportunities."

Accordingly, Treasury strongly advise the South African public to consider the risks when evaluating undertakings involving virtual currencies.

"The relevant authorities will continue to monitor and assess the use of virtual currencies and consult with private sector stakeholders in this regard," Treasury said.

"Further guidance or regulations may be issued, should the need arise."

What are virtual currencies and how do they work?

A virtual currency is a unit of account that is digitally or electronically created and stored.

Members of the virtual community agree to accept these units as a representation of value in the same way that currency is accepted.

In contrast to traditional currencies, virtual currencies operate without the authority of central banks, and are therefore not regulated.

Examples include Bitcoin, Darkcoin, Peercoin and Feathercoin. A virtual currency such as Bitcoin allows users to purchase goods and services without using a government backed currency so long as participants are willing to accept Bitcoins as a form of payment.

Unregulated in South Africa

Currently in South Africa there are no specific laws or regulations that address the use of virtual currencies.

Consequently, no legal protection or recourse is afforded to users of virtual currencies.

Due to their unregulated status, virtual currencies cannot be classified as legal tender as any merchant may refuse them as a payment instrument without being in breach of the law.

In addition, virtual currencies cannot be regarded as a means of payment as they are not issued on receipt of funds.

The use of virtual currencies therefore depends on the other participant’s willingness to accept them.

While virtual currencies can be bought and sold on various platforms, they are not defined as securities in terms of the Financial Markets Act. The regulatory standards that apply to the trading of securities therefore do not apply to virtual currencies.

Risks and challenges users should be aware of:

- There is no investor protection and no recourse;

- Transactions are also irreversible;

- The price of virtual currencies is based on investor sentiment and can rise rapidly and tend to be very volatile and can drop as quickly as they rise;

- Financial risks are, therefore, limitless and claims cannot be made for such losses;

- Virtual platforms are prone to operational risks;

- Digital wallets can be hacked, and the virtual currencies stolen;

 - There is no cancellation or reversal of the transaction once the virtual
currency has been transferred;

- Virtual currencies are particularly susceptible to misuse as transactions are difficult
to trace and provide users with a high degree of anonymity, contributing to their
attractiveness to criminals, fraudsters and money launderers.

Recommendations

In order to be fully aware of and understand the risks associated with virtual currencies, Treasury recommended that users conduct thorough research about investment offers or means of payments involving any virtual currency before committing to any such transactions.

"Users should weigh up the concomitant benefits and risks associated with virtual curren
cies," said Treasury.

- Fin24

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