BITCOINS AND CRYPTO-CURRENCIES; IS IT MATURE ENOUGH TO WARRANT REGULATION IN GHANA?

Bitcoin is a virtual currency that came to light after the financial crisis. It allows people to bypass banks and traditional payment processes to pay for goods and services. Banks and other financial institutions have been concerned about bitcoin’s early associations with money laundering and online crime, and it has not been adopted by any government.

The challenge with Bitcoin and cryptocurrencies is that, it is such a new and rapidly changing field that it is almost impossible to have access to good books or adequate materials on the subject. It is gaining grounds in the world currently and Ghana is not an exception, yet understanding it, in the first place to administer regulation is a huge challenge.
The Central bank currently have not given it much thought, not because they are being negligent, but the technicalities in dealing with them have not yet catch up with us. Let us take some time to go through this article and get to understand what faces us and ways to deal with this topic so as to catch up with time and avoid being caught unawares, when we are faced with difficulties in the near future. Bitcoins and cryptocurrencies, as may be argued is still in its infancy stage. The industry is currently in its pilots, and trials stages and therefore it can be argued that regulations is too early to be proposed since the industry is not strong enough to warrant the involvement of the central bank or the Security and Exchange commission, jumping in for the purpose of regulation. Yet it is still of relevance to understand what these are, and also educate the general public to understand what is happening currently in our world so as whip all of us in line with the ever-changing technological advancement and new ways of doing things.

Many central banks around the world are monitoring bitcoins and cryptocurrencies and have emphasized the need for the industry to be given more time to mature before developing comprehensive regulation. It is still crucial for our central bank and possibly the Securities and Exchange Commission to observe and try to measure the impact of bitcoin and cryptocurrencies in Ghana. Someone argued that it may take about another five years before we can really see whether there is a true impact on the currencies in general and the future operating model of Bitcoins and cryptocurrencies. The relevant bodies in the United States, China, Japan and Singapore are finding regulatory measures to deal with the ever-growing digital currencies. China have come out boldly by making it illegal for companies to raise funds by issuing virtual tokens. Experts are extremely worried that stringent regulation could be a demotivator to innovation and this will automatically have a negative effect on the original tenet of cryptocurrencies privacy, but other experts have also asserted that there are benefits of having some effective regulatory oversight in order to avoid the fire spreading uncontrollably to sensitive places beyond fighting, when challenges arise. In other words, you don’t wait for problems before you exercise regulatory authority.

Bitcoin has not just been a trendsetter, ushering in a wave of cryptocurrencies built on decentralized peer-to-peer network, but it has become the de facto standard for cryptocurrencies​. The Bitcoin inspired currencies are collectively called altcoins and they have presented themselves as some improved versions of Bitcoin. While some of these currencies are much more less complex to mine than the Bitcoin, there are also the issue of tradeoffs, including greater risk assumed as a result of reduced liquidity, acceptance and value retention.

CRYPTO-CURRENCY; WHAT IT IS?

Cryptocurrency is a coded, decentralized digital curreny used to check transactions on a distributed system with open source software between peers. The transfer of funds works simply on the internet, independently of any regulator and governments. Transactions are added to a public ledger – also known as the blockchain through nodes on the network with agreement achieved through a proof-of-work system referred to as mining. Cryptocurrencies are a part of alternative currencies or more specifically, digital currencies.

The History of Cryptocurrencies

Bitcoin became the first decentralized cryptocurrency with the release of the Bitcoin: A Peer-to-Peer Electronic Cash System on January 3rd, 2009.

Since, hundreds of cryptocurrencies have been created. As of this writing, there are 746 different cryptocurrencies, including 123 digital ‘assets’, across 4088 different marketplaces with a total market capitalization of $102,210,572,345 billion dollars.

These are commonly referred to as alternative coins or alt-coins. The most popular alt-coin is called Ethereum, a decentralized platform that runs smart contracts and applications.

Bitcoin was the first successful decentralized crypto-based currency to scale on a meaningful level, but it wasn’t the first attempt.

The cryptocurrency market cap is now more than $100 billion. It has spawned an entire industry of exchanges, wallets, news/media, security, and much more.

Bitcoin, what it is?

Bitcoin basically is a peer to peer electronic cash system or a cryptocurrency that does not rely mainly on trusting one central monetary authority or body and allows for anonymous, inability to track, and untaxable transactions. The idea was first shared by members of the cypher-punk mailing list and then a workable system was put in place, which used a distributed database spread across the nodes of a peer to peer network (a little like the one that underpins Bit torrent) that could systematically monitor transactions secured by cryptography and this was outlined by a programmer called Satoshi Nakamoto in a paper in 2008 and built in 2009.

Is Bitcoin a Commodity or Currency?

It is suggested as though Bitcoin is an awkward combination of the two. The commodity price of bitcoins is linked to their currency value, but the more they become more like a commodity, the less useful they are as a currency.

Mining

Mining is the process or the procedures through which transactions are checked and verified before being added to the public ledger, known as the blockchain. It is also the process through which new bitcoins are released. Any internet user with a suitable hardware can participate in mining.

The process of mining deals with the compilation of a very current transactions into blocks and also solving a computationally difficult puzzle. The computer (or cloud of computers) that solves the puzzle gets to place the next block on the blockchain and claim the reward for solving this math problem and providing this critical function to the system.

The reward (new bitcoin) provides an incentive to mining; both the transaction fees associated with the transactions complied in the blocks as well as newly released bitcoin. The value of new bitcoin released with each mined block is referred to as, the block reward.

The block reward divides into two every 210,000 blocks or estimated every 4 years. The challenge of mining adjusts itself with the aim of keeping the rate of block discovery constant. Therefore, if more calculation power is involved in mining, then the problem will adjust upwards thereby making mining harder over time.

The process mining bitcoins

Basically, anybody will be able to install Bitcoin’s mining software, which basically uses the computer’s processing power (that is the CPU or GPU) to carry out some intensive calculations, and you can think of it as trying to look for prime numbers. A great number of people might be working on the same unit of work, which poses a computational difficult problem. The purpose is to look for a certain sequence of data, called a block, that comes out with a pattern when the Bitcoin hash algorithm is applied to the data. Whatever computer manages to do this automatically win the bitcoins.

Because of the challenges associated with mining, it could take more than 3 years to generate any coins, running up huge energy and equipment costs. There are a lot of opportunistic IT suppliers keen to sell to people expensive equipment that is mainly dedicated to mining. People are better off joining a mining pool, or a Bitcoin syndicate, where you can split any wins between the group based on the amount of work on your computer

How bitcoins are bought

It is possible to exchange regular currencies for bitcoins using an exchange. Normally it is suggested the best possible way is to stick to the biggest, Mt.Gox which handles around 80 percent of Bitcoin trade, as around 45 percent of exchanges fail, whilst taking their users’ money with them. Of the 40 exchanges which have worked with Bitcoin, 18 have closed. This is almost about 50%. Five of these sites were hacked and they lost funds, including Bit floor, which had more than £160,000 stolen and 13 closed down completely without any explanation. Even though Mt. Gox is the biggest, it is not immune to attack and unforeseen problems, as they also suffered a number of outages over the last few months following denial of service attacks (hammering the exchange with traffic until it fails).

Attacks on Exchanges

Mt. Gox are of the view that some opportunists are attacking exchanges so as to destabilize the market. The point worth noting is that if bitcoin owners find or foresee that they cannot access the exchange or there are far less exchanges to convert their money back into currency, then they might panic and possibly convert all of their money at the next available opportunity, thereby increasing bitcoin supply and reducing the price of bitcoin. This will definitely allow the perpetrator to buy bitcoins at a cheaper price and then wait until the market stabilizes again before selling it, thereby pocketing the difference.

Where can I spend bitcoins?

Bitcoin is very useful if you want to buy drugs and other illegal items without easily being identified. You can spend them on online black markets such as Silk Road. A 2012 study found that around 20 percent of all bitcoins exchanged on Mt.Gox (Bitcoin’s largest exchange) each day were spent on Silk Road. However, the site has been under heavy DDoS attack which has led some to report that it is collapsing, while others have said that an individual had been trying to blackmail the organization.

Security of bitcoins

Bitcoin maintains that because all of transactions are well within track and accessibility then definitely, they are much more secure, but there have been minimal scenarios where hackers have completely ransacked electronic wallets used to store secret keys that gives the right to spend bitcoins, notably when one exchange had 25,000 stolen. It is worth noting that there are some extremely smart hackers in Bitcoin. So far, none of the stolen bitcoins have been spent, because those coins can be easily tracked, but the challenge is that you have deprived of your ability to spend them.

Harder mining also means that less and less people will bother to dedicate their processing power to mining, which could mean that the overall number of nodes decreases to the point where it could be vulnerable to a 51 percent attack. Such situation is dangerous.

51 percent attack, what it means

Bitcoin records every single transaction on its network in a public record called the blockchain. A new one is generated roughly every ten minutes and shared throughout the network. The determining factor in whether the blockchain is the real one or should be discarded as a fake is based on those accepted by the most number of mining nodes. If someone can take over enough nodes that they could dictate their own, fake, version of the blockchain, they could then counterfeit bitcoins or spend them multiple times. Currently the biggest Bitcoin miner only has 15 percent of the total hashing power, but if this rose to 51 percent it could be disastrous for the cryptocurrency. Those concerned about this risk might want to move to an alternative currency.

Volatility of Bitcoin

The prices of Bitcoin over the years have fluctuated wildly, rising to a level as high as $1,100 and falling back down completely to around $76 within a very short space of time before rebounding again. The lack of liquidity in the market and the absence of central authority to influence supply and demand, has made the currency vulnerable to speculation and manipulation.

A number or sequences of DDoS attacks against Mt. Gox was enough to send the Bitcoin value into freefall.

Bitcoin, Are Ghanaians Interested? Read more on subject

How Digital Currency Will Change the World

Brian is the founder of Coin base and wrote an article to explain how cryptocurrencies like Bitcoin could have a big positive impact on global prosperity. The short version simply put is, as economic freedom increases, prosperity also increases, and crypto-currency has the potential to provide greater global economic freedom whether governments buys into it or not.

“Economic freedom is one of the great meta-problems of our time (right up there with A.I., quantum computing, and cheap renewable energy). If we can create more economic freedom in the world, it will serve as a giant economic stimulus package for the world, accelerate innovation, reduce wars, make the poorest 10% better off, overthrow corrupt governments, and raise happiness.”

When bitcoin came into the in 2009 after the financial crisis, there was mainly to be a universal currency, an electronic cash that could be sent around the globe in minutes and that would work as well in other countries as it did in say the United States or Ghana. Its scarcity is however predetermined by the code, and that New bitcoins are introduced into the system at regular intervals through mining. Successfully solving the problems triggers the creation of more digital currency.

Bitcoin pseudonymous creator, Satoshi Nakamoto, built a solid decentralized system that no one could own but anyone could participate in. A constantly updated copy of the ledger recording all Bitcoin transactions, that is the blockchain, would be stored on the computer of anyone running the software. Although the ledger was open to all, Bitcoin transactions were meant to be anonymous.

While some of the currencies noted are much easier to mine than Bitcoin, there are some tradeoffs, including risk assumed as a result of lower liquidity, acceptance and value retention. Since Bitcoin prices are moving into far higher realms, it is crucial that we look at least six cryptocurrencies, picked from over seven hundred (in no order at all) that could be worth your while.

1) Lite coin (LTC)

Lite coin, which was first launched in the year 2011, was among the initial cryptocurrencies that came after bitcoin and was often referred to as ‘silver to Bitcoin’s gold.’ It was created by Charlie Lee, a graduate MIT University and a former engineer of Google. Lite coin is based on an open source global payment network that is not regulated by any central authority and uses “scrypt” as a proof of work, which can be decoded with the help of CPUs of consumer grade. Although Lite coin is like Bitcoin in many ways, it has a faster block generation rate and therefore offers a faster transaction confirmation. Other than developers, there are a growing number of merchants who accept Lite coin.

2) Ethereum (ETH)

Ethereum was Launched in 2015, and it is a decentralized software platform that enables Smart Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an overwhelming response. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform and is sought by mostly developers looking to develop and run applications inside Ethereum. According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” Following the attack on the DAO in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum (ETH) has a market capitalization of $4.46 billion, second after Bitcoin among all cryptocurrencies. (Related reading: The First-Ever Ethereum IRA is a Game-Changer)

3) Zcash (ZEC)

Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https,” is how Zcash defines itself. Zcash offers privacy and selective transparency of transactions. Thus, like https, Zcash claims to provide extra security or privacy where all transactions are recorded and published on a blockchain, but details such as the sender, recipient, and amount remain private. Zcash offers its users the choice of ‘shielded’ transactions, which allow for content to be encrypted using advanced cryptographic technique or zero-knowledge proof construction called a zk-SNARK developed by its team. (Related reading, see: What Is Zcash?)

4) Dash

Dash (originally known as Dark coin) is a more secretive version of Bitcoin. Dash offers more anonymity as it works on a decentralized master code network that makes transactions almost untraceably. Launched in January 2014, Dash experienced an increasing fan following in a short span of time. This cryptocurrency was created and developed by Evan Duffield and can be mined using a CPU or GPU. In March 2015, ‘Dark coin’ was rebranded to Dash, which stands for Digital Cash and operates under the ticker – DASH. The rebranding didn’t change any of its technological features such as Dark send, Instant X.

5) Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Ripple “enables banks to settle cross-border payments in real time, with end-to-end transparency, and at lower costs.” Released in 2012, Ripple currency has a market capitalization of $1.26 billion. Ripple’s consensus ledger — its method of conformation — doesn’t need mining, a feature that deviates from bitcoin and altcoins. Since Ripple’s structure doesn’t require mining, it reduces the usage of computing power, and minimizes network latency. Ripple believes that ‘distributing value is a powerful way to incentivize certain behaviors’ and thus currently plans to distribute XRP primarily “through business development deals, incentives to liquidity providers who offer tighter spreads for payments and selling XRP to institutional buyers interested in investing in XRP.”

6) Monero (XMR)

Monero is a secure, private and untraceable currency. This open source cryptocurrency was launched in April 2014 and soon spiked great interest among the cryptography community and enthusiasts. The development of this cryptocurrency is completely donation-based and community-driven. Monero has been launched with a strong focus on decentralization and scalability and enables complete privacy by using a special technique called ‘ring signatures.’ With this technique, there appears a group of cryptographic signatures including at least one real participant – but since they all appear valid, the real one cannot be isolated.

The Bottom Line

Bitcoin continues to lead the pack of cryptocurrencies, in terms of market capitalization, user base and popularity. Nevertheless, virtual currencies such as Ethereum and Ripple which are being used more for enterprise solutions are becoming popular, while some altcoins are being endorsed for superior or advanced features vis-à-vis Bitcoins. Going by the current trend, cryptocurrencies are here to stay but how many of them will emerge leaders amid the growing competition within the space will only be revealed with time.

It is hard to ignore the frenzied, jargon-filled recent headlines around digital currency: China has banned trading it! JPMorgan Chase has warned against buying it! Startups are embracing it every day! So are tech investors. Bitcoin-related startups raised $343 million from venture capitalists in the first half of 2017, according to CB Insights, and more than $2.2 billion from all sorts of investors so far this year through so-called ICOs, or “initial coin offerings,” according to Coin Schedule.

CONCLUSION;

There are renewed interest from regulators in countries like Singapore, the United States, Japan and China to have oversight in the cryptocurrency space and curb the potential of widespread money laundering and fraud. But some worry that too many rules could also potentially deter firms from innovating on the blockchain.

The Japanese media has reported that the country is set to introduce regulatory oversight on cryptocurrency exchanges in October this year. The challenges that authorities need to figure out include settling on accounting rules for virtual currencies and deciding how to handle initial coin offerings (ICOs), according to the Nikkei business daily.

Earlier this month, Chinese authorities said ICOs, which have become a primary means of fundraising for projects that are built on blockchain technology, are now illegal in the country. Chinese regulators called ICOs unauthorized illegal fundraising activity and recent reports indicated they have clamped down on local bitcoin exchanges. Bitcoin is the most commonly used cryptocurrency.

“The only way you can really stop bitcoin in China completely is if you shut down the internet. So, the regulators are really focused on the points where bitcoin hits fiat currency,” Zennon Kapron, founder and director at consultancy firm Kapron Asia, told CNBC’s “Squawk Box“. According to Kapron in China, the current regulation that is being talked about is banning bitcoin exchanges, which would cut out a lot of the trade flows and the exchanges around bitcoin. So, the focus will be around those activities where there is an entity or person or some kind of connection to the traditional financial system that they can control.

Our regulators need to observe the development globally and look at different possibilities and scenarios. This is very crucial. We cannot turn a blind eye to something growing so fast and quick that any unforeseen blip can cause a scare in the country. People are gradually buying into this new phenomenon in Ghana. Companies and individuals are getting to invest in these currencies but where will there be the cutoff point to curb challenges. Do our regulators know much about this new digital currency? More education is needed in this area to prevent loss of funds and avoid unwarranted pressure on our regulators. Regulators need to observe and monitor what is happening and try to measure the risks associated with it so as to have adequate insight and enough preparation (in case there is a national crisis) into something that is being traded and accepted globally.

Many have expressed the belief that bitcoin is destined to “implode” in the future. Prince Alwaleed told CNBC that bitcoin “just doesn’t make sense. This thing is not regulated, it’s not under control and it’s not under the supervision of a central bank”. Prince Alwaleed also described bitcoin as “Enron in the making.” It is important to note that, these statements do not in itself make the digital currencies a bad thing, however its ever growing tendencies require adequate awareness and understanding and where possible proper regulation in order to avoid national crisis if there ever will be any future problems, since people gradually are buying into it, even in Ghana. It all comes to the million-dollar question with regards to cryptocurrencies, how would regulation deal with its existence. As cryptocurrencies poses great disruptions in the financial space, it’s greatest setback is regulation. 2017 has brought much acceptance to cryptocurrencies and the general robustness of blockchain technology. But, I am hugely concern how its valuation is being peddled on just speculative basis not successes.

Speaking at a conference in New York, the boss of America’s biggest bank said he would fire “in a second” anyone at the investment bank found to be trading in bitcoin. “For two reasons: it’s against our rules, and they are stupid. And both are dangerous.” He added: “The currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think that people who are buying it are really smart.

“If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than US dollars,” he said. “So, there may be a market for that, but it would be a limited market.” The very reason why, our regulators need to watch the space.

Important issue worth noting is that heavy-handed regulation of digital currencies could stifle innovation in blockchain as companies may need to set aside a larger portion of their budget for regulatory compliance. It would also reduce or remove layers of privacy which is one of the central tenets of cryptocurrencies.

“(Many see that) fiat currency is corrupted by the heavy-handed intervention of central governments and banks. Cryptocurrencies are anonymous (to a certain extent) and decentralized, meaning decisions affecting the currency are not centrally dictated,” Justin Hall, principal at early-stage venture capital firm Golden Gate Ventures, previously told CNBC.

Though the use of Bitcoins has many advantages, some countries are now considering regulating it. If a company wants to operate with the use of Bitcoins, some states may now have to ask them to submit a formal application. This move is done after the collapse of a recent Bitcoin bank that has been hacked and the users lost a considerable number of Bitcoins and in this case money. As of now, the governments are paralyzed because the Bitcoin software are not under their jurisdiction. In as much as the government wants to intercede, it does not have the capacity to protect the Bitcoin users.

The Central Bank should be keen on regulating the Bitcoin software in order to thwart any suspicious financial transactions. It specifically targets the vending machines or the automated teller machines that dispense Bitcoins, this is mainly in countries that have gone far with it. The consumers are attracted to the Bitcoin software because the government is not part of the picture, hence, their money will not be taxed.

However, by not involving the government, the Bitcoin users become vulnerable to the sudden fluctuations of the Bitcoin exchange rates. Plus, just like in the case of the Flex Coin Bank and the Mt. Gox where the Bitcoin users had no one to turn to but just accept the fact that they have lost their investments in Bitcoins. The government cannot help them bring back their lost investment, since those Bitcoins have no insurance.

In Singapore, Bitcoin exchange might also be regulated by the government. This move by the government is to prevent the potential use of Bitcoins in money laundering and terrorist activities. It is very easy to transfer funds from one to the other with the use of Bitcoins. Add to that the fact that there is no limit when it comes to sending and receiving Bitcoins. In Singapore, the identities of the users will have to be verified before finishing a transaction and if there are any suspicious transactions, the police will be notified immediately.

There are more and more countries that are calling for the regulation of Bitcoin exchange because it is becoming a medium for illegal trades and activities. Countries such as China, United States of America, and Russia are countries that are being scrutinized. There are suggestions like limiting or totally banning Bitcoin exchange.

In Tokyo, the government issued a statement that the use of Bitcoins should be taxed based on income, corporate and consumption laws. This news was announced after Mt. Gox, the world’s largest Bitcoin exchange, filed for bankruptcy. Theft from hacking is the cause of the downfall and Mt. Gox announced that they lost 750,000 Bitcoins or 2.8 billion yen.

The users will not be able to get back their Bitcoins and the government of Japan cannot intercede for them because it is not yet regulated. Thus, the Japanese government is serious about the regulation of Bitcoins in order to prevent unscrupulous activities and to protect the investors.

By regulating the Bitcoin, the illegal activities like drug money transfer and terrorist funding may be aborted. This is crucial, and Ghana must look into this, because we live in a global village and we cannot exempt ourselves.

New legislation introduced in Ukraine would bring the local cryptocurrency ecosystem under the oversight of the country’s central bank. The bill, first filed on October 6 according to public records, outlines the rules for exchange services, including taxation and data redemption requirements. Notably, the bill calls for cryptocurrencies to be taxed as a kind of property, mirroring the approach taken by the U.S. Internal Revenue Service, which released a similar determination in 2014.

It also includes a section on cryptocurrency mining – the energy-intensive process by which transactions are added to a blockchain, creating new coins as a reward – stating that the proceeds are also subject to taxes.

The legislation’s introduction is notable development, given that in August, the central bank hinted that it may move to regulate cryptocurrency activities in Ukraine. It remains to be seen what Ghana can also do in order to take advantage of the new digital currency issue. This means our regulators need to be proactive in dealing with this new phenomenon in Ghana which is gradually gaining grounds.

If the bill is passed and signed into law, the National Bank of Ukraine would have two months from that date to create guidelines for exchanges. Further, it mandates that the Ukrainian government “ensure that the ministries and other central executive bodies bring their normative legal acts into compliance with this law,” according to a translation. Whilst these countries are making a lot preparation towards dealing with cryptocurrency in terms of regulation, the onus is on our regulators, the Central Bank and the Security and Exchange commission to also make the necessary preparations towards having detail understanding of these current developments and making enough the appropriate regulations to deal with them. If we want to wait before we act, the harm it will cause might be too damaging to repair. That is not to say it is harmful but these things along the way are bubbles that will eventually burst, and we need to be pro-active and stay ahead.

Dr. Kwasi Kyere is the CEO of Star Alliance Microfinance and an expert in Financial Services Inclusion