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.
Are virtual currencies recognised by MAS?
VCs, including those from Liberty Reserve and Bitcoin, are not legal tender in Singapore.
Under the Currency Act, the Monetary Authority of Singapore (MAS) has sole right to issue currency notes and coins in Singapore. Only notes and coins issued by MAS are legal tender in Singapore.
Further, VCs are not considered as securities under the Securities and Futures Act (SFA). As such, platforms that enable the trading of VCs are not regulated by MAS under the SFA.
What are the 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 decentralised VCs 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 would 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 also does not have a fixed price. It is typically bought and sold on exchanges or between its 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. Moreover, if a consumer chooses to participate in schemes that are not regulated by MAS, he will not have the protection afforded under the regulatory framework administered by MAS. If he has a complaint against an unregulated entity, he will also not be able to approach the Financial Industry Disputes Resolution Centre (FIDReC) for assistance. If the VC operator is based overseas, it could be even harder for the consumer to seek recourse.
Consumers can look up the Financial Institutions Directory to check if the firm they intend to deal with is regulated by MAS, and the specific regulated activities it is authorised to conduct in Singapore.