Mar 24, 2014

    Bitcoin faces real-world problems

    AS WE think about bitcoin, a chance to quote The Good Wife presents itself: "Reality isn't idealistic. And when the two of them run into each other, only one of them gets hurt."

    Now, as bitcoin runs up against the confines of the real world, the question of which side will yield more is worth considering. It is a complex one.

    Bitcoin operators worldwide run the gamut from the suit-clad to the Bermuda-wearing - a metaphor for how the players also range from the respectable to the dodgy.

    In Singapore, bitcoin outfits have veered towards the legitimate. The people behind them include former bankers and entrepreneurs with track records.

    Since bitcoin took off in earnest here last year, many operators have inundated the authorities with earnest questions, like how to account for the goods and services tax and whether to verify customer identities.

    So, the community appears willing to play ball. The larger question is whether bitcoin firms will be allowed to at all.

    The Monetary Authority of Singapore's (MAS') plan to regulate bitcoin operators in the money laundering and terrorist financing areas is celebrated by some.

    This is the first step towards legitimacy for bitcoin operations, goes the reasoning by the glass-half-full type of people. Others who tend to notice the missing half of a glass' contents wonder if these rules portend further regulation that might be more onerous.

    It is not an unfounded fear. In December, China's largest bitcoin exchange, BTC China, saw its fortunes rocket up and down with the Chinese government's stance on bitcoins.

    What such events underscore is just how closely the bitcoin ecosystem is tied to that of the financial establishment. Sometimes, that tenuous connection snaps.

    Last year, several Canadian bitcoin outfits found their bank accounts either frozen or shut down, and no reason was given.

    It probably did not help that bitcoin is touted as an alternative currency that can circumvent unwieldy banks without interference from a party-pooping central authority. Money can be transferred across the world in seconds, for a micro-fraction of the transaction fees that banks and payment processors charge.

    What on earth would compel a bank to provide a service to an industry that threatens its revenue from telegraphic transfers and foreign exchange spreads?

    But, as the community reaches for legitimacy, it is in the untenable position of seeking cooperation from these unwieldy banks and party-pooping central authorities. This is the equivalent of a solar energy firm relying on the goodwill of an oil company.

    For some, the argument is that these are merely teething problems, and bitcoin will eventually become another US dollar or euro, as newcomers and established players adjust their business models to new and better ideas.

    That is a reasonable expectation, except that it is not a unanimous one. Some adopters of bitcoin elsewhere are drawn to it for its anarchist overtones, its almost-anonymous qualities and its law-bending potential.

    Of course, fiat currencies remain the mainstay of money laundering, and Al-Qaeda is unlikely to transact in bitcoin for now.

    But it is bitcoin that carries the headline-making miasma of the unsavoury. The drug wonderland that was Silk Road and the high-profile arrest of a bitcoin entrepreneur in New York on money laundering charges do little for its reputation.

    Given all these factors, the probability that MAS is thrilled about Singapore being portrayed as bitcoin-friendly, with welcoming tax laws and lax regulation, is somewhere between zero and nil.

    So far, it has been careful to define the boundaries of its involvement - it will not meddle in consumer and investor decisions for bitcoin.

    Only the most naive will believe that this stance is set in stone. In fact, one suspects that the primary reason for the absence of wider intervention is bitcoin's own lack of wider adoption.

    The collision between bitcoin and the real world of regulation and Big Business is a given. Before it happens, the cryptocurrency community had better decide between wearing suits and Bermudas, and put on a helmet for good measure.