Virtual Currencies

What are virtual currencies and their purposes?

Virtual currencies (“VCs”) are non-physical stores of value that can be exchanged for goods and services at places that accept them. For instance, one may be able to use VCs as payment at online stores and even some physical food and beverage outlets. VCs can typically be transferred electronically from one user to another. VCs are usually not denominated in fiat currency, such as the Singapore dollar or US dollar.

Does MAS regulate virtual currencies and their intermediaries? 

VCs in Singapore, like most other countries, are not regulated by a financial services regulator like the Monetary Authority of Singapore, as these are not considered as securities or legal tender. Investors in VCs will also not have the safeguards that investors in securities enjoy under the Securities and Futures Act and the Financial Advisers Act.

As for virtual currency intermediaries (“VCIs”), MAS has announced on 13 March 2014 that regulations will be applied to mitigate the money laundering and terrorist financing risks posed by VC transactions which VCIs facilitate. However, consumers should continue to be cautious when dealing with VCs, as the regulations to be introduced will not extend to the safety and soundness of VCIs or the proper functioning of virtual currency transactions.

For more information on MAS’ proposed regulation of virtual currency intermediaries, please refer to the 13 March 2014 press release titled “MAS to Regulate Virtual Currency Intermediaries for Money Laundering and Terrorist Financing Risks” 

What are the different types of virtual currency schemes?

There are currently two broad types of VC schemes - Centralised and Decentralised. A centralised VC scheme is issued by an organisation (or “VC Operator”), that is in charge of recording transactions made with the VCs. These VCs may be bought with fiat currency at a fixed price specified by the VC operator. Examples of such centralised VC schemes are Liberty Reserve, WebMoney and Perfect Money.

In contrast, a decentralised VC scheme does not have a VC Operator and is typically maintained by a community of VC users. The price of a decentralised VC is typically not fixed and fluctuates according to market forces. Bitcoin, Litecoin and Namecoin are some examples of decentralised VC schemes.

What are the risks involved in using virtual currencies?

Regardless of the type of VC scheme, consumers need to be aware of the risks of participating in such schemes. For instance, customers of Liberty Reserve suffered monetary losses when the scheme was shut down by US authorities due to its involvement in money laundering activities.

Consumers may not be able to obtain a refund of their monies should a VC scheme cease to operate. Consumers should also take note that the value of decentralised VC schemes could fluctuate unpredictably within a short period of time. For example, the value of Bitcoin reportedly fell more than 50% in a matter of hours in early April 2013.

Box Story 1: Liberty Reserve - a centralised VC

Liberty Reserve was a VC service issued by a Costa Rican company named Liberty Rica S.A. The Liberty Reserve VC was available in two different varieties, namely the Liberty Reserve Dollars and Liberty Reserve Euros, which were fixed to a price of 1 USD or 1 Euro respectively.

Liberty Reserve users were required to register with only a name, e-mail address, and birth date, which were not verified. The ease of access allowed it to be an easy conduit for money laundering activities. After a multi-year investigation by officials in 17 countries, United States federal prosecutors finally shut down Liberty Reserve in May 2013 for money laundering offences involving more than US$6bn in criminal proceeds. It is still not clear whether users of Liberty Reserve will be able to get their money back.

Box Story 2: Bitcoin – a decentralised VC

Bitcoin is a VC service created by an anonymous developer. No specific organisation has been identified as the VC Operator. Instead, Bitcoin transactions are recorded and confirmed by adding them to a ledger which is maintained simultaneously by servers provided by volunteers, who are known as Bitcoin miners. As a consequence of this, Bitcoin does not have a fixed price. It is typically bought and sold on exchanges or between users at a price agreed upon by the buyer and seller. 

What consumers should know…

Consumers should be cautious when dealing with VCs given the risks highlighted above. MAS’ targeted regulatory approach is to specifically address the money laundering and terrorist financing risks posed by VCs. Consumers and businesses should take note of the broader risks that dealing in VCs entails and should exercise the necessary caution.

MAS will continue to monitor closely the development and implications of VCs as well as evolving regulatory approaches taken towards VCs by major jurisdictions. If necessary, MAS will consider additional measures to address the risks posed by VCs and their intermediaries.