Tag: cryptocurrency

More clarity needed to crack the crypto code

Banking & Finance

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The Reserve Bank of India’s recent notification on ‘Customer Due Diligence for Transactions in Virtual Currencies (VC)’ has sent a wave of cheer across cryptocurrency investors in the country, as it has kindled hopes that it will ensure smoother banking transactionsand further growth and innovation in the industry.

Though this notification has cleared the air regarding transactions in this new asset class to some extent, there continues to be confusion in terms of regulations.

Banks will be complying with the aforementioned RBI directive to not send advisories citing the 2018 circular. But how each of them proceeds in terms of enabling cryptocurrency transactions is still unclear.

Also read: Cybercriminals go after cryptocurrency: Report

The RBI had, on May 31, asked regulated entities to not cite its April 2018 circular on ‘Prohibition on Dealing in Virtual Currencies’ as it is no longer valid following the Supreme Court setting it aside.

Due diligence

The central bank also asked them to continue to carry out customer due diligence processes in line with the governing standards for Know Your Customer, Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under the Prevention of Money Laundering Act, 2002.

Significantly, at the June 4 post monetary policy press conference, the RBI Governor Shaktikanta Das said there is no change in the central bank’s position.

“The RBI’s position is that we have major concerns around cryptocurrency, which we have conveyed to the government,” he said, adding that the central bank’s latest directive sets the record straight that the 2018 circular has been set aside and that it is not correct to refer to it.

Regulation

Apart from the Supreme Court ruling of March 2020, there is no clear guidance on the sector. While the larger debate on the legality of cryptocurrencies continues, key issues that also need to be resolved include those related to licensing and investor grievances, taxation and banking.

The only word that has come till now is from the Ministry of Corporate Affairs, when it asked companies to disclose in their annual financial statements the amount of cryptocurrencies held as on the reporting date.

However, many countries are now making their stance clear. The US, Japan and South Korea have come out with regulations for cryptocurrencies. Others like China have warned citizens not to deal in cryptocurrencies.

Pointing out that there have been instances of banks using RBI’s 2018 circular to raise objections to cryptocurrency transactions, Ramalingam Subramanian, Head of Brand and Communication, CoinDCX, said the new RBI notification gives clarity and clears the air.

However, he noted: “Regulations are needed not just for clarity, but also on issues such as investor protection, who can create a token and licensing of exchanges.”

Code of conduct

Meanwhile, the Blockchain and Crypto Assets Council, which is part of the Internet and Mobile Association of India (IAMAI), has decided to set up a board to oversee the implementation of a self-regulatory code of conduct by its member crypto exchanges to comply with AML/CFT and other laws.

Veena Sivaramakrishnan, Partner, Shardul Amarchand Mangaldas & Co, also pointed out that quite a few countries have legalised cryptocurrencies, but in Indiathe government has been negative about it.

“With the RBI notification, it seems that there is some change in stance…But there is still no legality to cryptocurrencies and there is a regulatory vacuum. So, there is need for regulation. The expectation is that the new cryptocurrency Bill will help the sector as it will not completely ban private cryptocurrencies but regulate them,” she said.

But despite the strong adoption of cryptocurrencies and robust investor interest, experts point out that its speculative nature and volatility in prices cannot be wished away.

Another key concern that has become a topic of debate is the energy consumption involved in mining cryptocurrencies and the carbon footprint of the entire ecosystem, pointed out a recent report by Cyril Amarchand Mangaldas. “As per an analysis undertaken by the Cambridge Centre for Alternate Finance, Bitcoin’s electricity consumption is at approximately 110 Terawatt hours per year, or 0.55 per cent of the global electricity production,” it said.

Digital currency

Many central banks, including the RBI, are now looking at the option of a Central Bank Digital Currency.

“The prospect of competition from cryptocurrencies has prodded central banks to design their own digital currencies, which will be backed/controlled by the central banks,” noted a recent Treasury report by HDFC Bank.

Citing global experience, the report pointed out that the Bahamas rolled out a CBDC in October 2020, while Sweden has completed a technical pilot and China is conducting real-world trials for its digital yuan in cities including Shenzhen and Suzhou.

“European officials want to launch a digital euro by 2025 while the UK government has launched a ‘Britcoin’ task force, and the US is carrying out research to test the credibility of CBDCs programme,” it noted.

In its report on Currency and Finance, 2020-21, the RBI had said that a “CBDC can be designed to monitor transactions, promote financial inclusion by direct fiscal transfer, pumping central bank ‘helicopter money’, even direct public consumption to a select basket of goods and services to increase aggregate demand and social welfare.”

“We think it is just a matter of time before Indian investors have legal access to crypto plays,” the HDFC Bank report noted.

With the booming crypto trade in the country and subsequent investments, as well as the potential of blockchain technology, there is widespread expectation that the Finance Ministry will do a re-think on the proposed cryptocurrency Bill that was to be tabled in Parliament. Instead of a full-fledged ban, experts are hopeful that the proposed legislation would call for regulation.

But until such a development takes place, the woes of crypto investors may not go away completely.

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Cryptos show inflows after record outflows in previous 2 weeks, BFSI News, ET BFSI

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NEW YORK: Cryptocurrencies posted inflows last week after hitting record outflows the previous two, as investors took advantage of price declines in the market, data from digital currency manager CoinShares showed late Tuesday.

Inflows into crypto investment products and funds totaled $74 million last week. That followed record outflows of $151 million the previous two weeks, representing 0.3% of assets under management.

Bitcoin products continued to see outflows last week of about $4 million, CoinShares data showed. This brings the total outflow over the last three weeks to $246 million. For the year, however, bitcoin still showed inflows of $4.4 billion.

The world’s most popular currency rose 3% last week and was last up 3.8% at $38,104.

Ether, the second largest cryptocurrency in terms of market capitalization and the token used for the Ethereum blockchain, showed inflows of $47 million, with total inflows totaling $973 million.

Its price was up 13% last week, but dropped 41% the week before.

Investment product flows also showed that altcoins, or the non-bitcoin, non-ether tokens, remained popular, with inflows into Cardano and Polkadot and Ripple.

Grayscale remains the largest digital currency manager at $33.6 billion, but their assets under management were down from $47.3 billion two weeks ago.

CoinShares, the second-biggest and largest European digital asset manager, oversaw about $3.9 billion in assets as of last week, down from about $6 billion two weeks ago.



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Investors cheer after RBI clarifies crypto trading isn’t banned

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The Reserve Bank of India’s clarification that cryptocurrency trading isn’t banned in the country is a welcome relief for a community facing push-back from traditional lenders needed to help settle these deals.

The regulator late on Monday told banks not to cite a 2018 central bank circular as a reason to hinder crypto trades, given the Supreme Court has since squashed the order. “Banks must continue with other routine due diligence measures on the deals,” the RBI said.

Also read: A glimmer of hope for cryptos in India

The RBI order follows local media reports that financial firms, including SBI Cards & Payment Services Ltd., one of India’s biggest credit card issuers, and the nation’s largest private-sector bank HDFC Bank Ltd. had cautioned customers against dealing in virtual currencies. Indian authorities have repeatedly expressed concern that crypto assets could be used for criminal activity such as money laundering and funding terrorism.

“Investing in crypto has always been 100 per cent legal in India and the new RBI circular clearly confirms the right to do business with crypto firms,” said Avinash Shekhar, co-Chief Executive Officer at ZebPay, India’s oldest crypto exchange. He added that the clarification will attract more investors to the virtual currencies.

Also read: What’s next in the world of cryptos and blockchain?

“The RBI’s broader concerns and banks’ worries around money laundering should help to spur regulations and make the industry safer and stronger,” said Sumit Gupta, CEO and co-founder of crypto exchange CoinDCX.

Bitcoin, the largest cryptocurrency, was little changed as of 12:15 pm in Hong Kong on Tuesday, after having gained in the two previous sessions.

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Banks discourage crypto customers with account suspension warnings, BFSI News, ET BFSI

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After putting curbs on crypto exchanges banks have trained guns on their customers crypto transactions.

Banks including HDFC Bank and State Bank of India have sent official notices to many customers warning them of curbs, including permanent closure of accounts.

Lenders are asking customers to clarify the nature of transactions and warning credit card users that transactions of virtual currency will lead to suspension/cancellation of card.

Though there is no order by the RBI, lenders are opting to tread on the side of caution.

While trading in cryptocurrency is not illegal as per existing Indian laws, individual institutions can enforce their terms based on their risk assessment.

Exchanges evaluating options

Crypto exchanges are currently evaluating their options and are hoping to resolve the matter with a dialogue instead of raising the matter in court again.

Last week, the Blockchain and Crypto Assets Council also sent representation to various government stakeholders to put forward the industry’s case for banking access, according to a person privy to the matter.

Indian crypto exchanges, which have seen record-breaking transaction volume and customer sign-ups in recent months, are evaluating their options, including ways to seek clarification from the court and asking for additional supplemental material based on the verdict.

In May 2020, the co-founder of crypto exchange Unocoin had filed an RTI query questioning whether the RBI had prohibited banks from providing accounts to crypto exchange companies or crypto traders.

There is no prohibition on banks providing accounts to traders dealing with virtual currencies, the Reserve Bank of India told cryptocurrency exchange Unocoin then.

The crackdown

Since early May, leading banks, notably private sector lenders ICICI Bank and IndusInd Bank, have asked payment gateway partners to stop processing such transactions.

Axis Bank, Kotak Mahindra Bank, Citibank, and others are limiting their exposure to the cryptocurrency market.

Banks, the industry sources said, have stopped issuing merchant IDs to payment gateways, and have asked these intermediaries to tighten scrutiny while dealing with cryptocurrency exchanges in India.

The issue started in late February and according to experts, the recent surge in the market, dogecoin frenzy and advertisements by crypto exchanges during IPL led to a fresh clampdown on the cryptocurrency.

Regulator against it

According to reports, the Reserve Bank of India is informally urging lenders to cut ties with cryptocurrency exchanges and traders as the highly speculative market booms, despite a Supreme Court ruling that banks can work with the industry.

The guidance comes as the Indian government is drafting a law to ban cryptocurrencies and penalise anyone dealing in them, which would be among the most sweeping crackdowns on the new investing fad in the world. But with the Covid crisis engulfing the country, no one is sure when such a bill may be passed, adding to investors` confusion.

The Reserve Bank of India (RBI) in 2018 had forbidden banks from dealing in all transactions related to bitcoin and other such assets. That diktat was challenged by the crypto exchanges and in March 2020, India`s top court overturned the RBI ban and allowed lenders to extend banking facilities to them.



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Ray Dalio bats for crypto’s relevance, admits to having “some” Bitcoin, BFSI News, ET BFSI

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MUMBAI: Renowned billionaire hedge fund manager Ray Dalio today admitted to owning “some” Bitcoin as he stressed the argument that the cryptocurrency can act as the best store of value in an inflationary environment.

The sharp change in Dalio’s position will come as music to the ears of cryptocurrency investors who have been battered by an intense meltdown in the asset class over the past week. The value of Bitcoin alone has crashed over 50 per cent from its record high although the cryptocurrency staged some comeback on Monday as it rose as much as 15 per cent.

At 08:27 pm, Bitcoin was trading 10.7 per cent higher at $37,711 on cryptocurrency exchange WazirX.

“I have some Bitcoin,” Dalio said in an interview at CoinBase’s Consensus 2021 event.

Dalio said that in an inflationary scenario, he would rather have “Bitcoins than bonds” as he echoed the argument some institutional investors have made recently in the cryptocurrency’s favour, i.e., Bitcoin could replace gold as a better hedge against runaway inflation that may happen in the West in the coming years.

The owner of the largest hedge fund in the world Bridgewater Associates, which manages assets worth over $100 billion, has recently warmed up to Bitcoin after being against it as soon as November.

“It seems to me that Bitcoin has succeeded in crossing the line from being a highly speculative idea that could well not be around in the short order to probably being around and probably having some value in the future,” the hedge fund manager had said in January.

However, Dalio reiterated that the cryptocurrencies will face existential threat from regulators and central banks.



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US regulators signal stronger risk, tax oversight for cryptocurrencies, BFSI News, ET BFSI

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WASHINGTON: US Federal Reserve chief Jerome Powell turned up the heat on cryptocurrencies on Thursday, saying they pose risks to financial stability, and indicating that greater regulation of the increasingly popular electronic currency may be warranted.

The Treasury Department, meanwhile, flagged its concerns that wealthy individuals could use the largely unregulated sector to avoid tax and said it wanted big crypto asset transfers reported to authorities.

The back-to-back announcements came in a week when Bitcoin, the most popular cryptocurrency, took a wild ride, falling as much as 30% on Wednesday after China announced new curbs on the sector, underscoring the volatility of the sector.

Powell underlined cryptocurrency risks in an unusual video message that also laid out a clearer timetable as the Fed explores the possibility of adopting a digital currency of its own.

While highlighting the potential benefits of advances in financial technology, Powell said cryptocurrencies, stablecoins and other innovations “may also carry potential risks to those users and to the broader financial system.”

As the technology advanced, “so must our attention to the appropriate regulatory and oversight framework. This includes paying attention to private-sector payments innovators who are currently not within the traditional regulatory arrangements applied to banks, investment firms, and other financial intermediaries.”

Powell’s comments signaled how seriously the Fed has been forced to reckon with the surge in popularity and market values of non-traditional currency options such as Bitcoin, especially as it looks at developing a digital version of the U.S. dollar, the world’s reserve currency.

Speculative Assets
The Fed and Treasury consider cryptocurrencies, which now have a market capitalization of about $2 trillion, to be more like art, gold or other highly speculative assets.

A central bank digital currency, though, offers whoever holds it – a person, a business, even another government – a direct claim on that central bank, which is exactly what holding a paper dollar bill does now.

Powell said the Fed would release a discussion paper this summer on digital payments, with a focus on the benefits and risks of establishing a central bank digital currency, and will also seek public comment.

He noted that “to date, cryptocurrencies have not served as a convenient way to make payments, given, among other factors, their swings in value.”

The Treasury also flagged cryptocurrency risks, including opportunities for wealthy individuals to move taxable assets into the largely unregulated crypto sector.

“Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion,” the Treasury said.

Its proposal, disclosed as part of a policy report https://home.treasury.gov/system/files/136/The-American-Families-Plan-Tax-Compliance-Agenda.pdf detailing the Biden administration’s $80 billion IRS enforcement proposal to boost revenue collection, would provide additional resources for the IRS to address crypto assets,

In addition to the reports of $10,000-plus cryptocurrency transfers that would parallel bank reports of similarly sized cash transfers, the Treasury also proposed that crypto asset exchanges and custodians also report transactions to the IRS related to bank interest, dividend and brokerage transactions.

The reporting requirements, depending on how they are structured, could also allow the government to gain insight about US companies that are extorted to pay hackers ransoms, almost invariably in cryptocurrency, to regain control of their IT systems.

Law enforcement and private sector cybersecurity experts alike have complained that a lack of transparency around these ransomware incidents contributes to their continued occurrence.

The Treasury disclosure took the wind out of a rally in the dollar value of Bitcoin on Thursday that followed steep plunges for Bitcoin and etherium on Wednesday. Bitcoin was up 8.7% in afternoon trade after an earlier gain of 10%.

While the Fed and some other developed economies are still conducting research on what a central bank digital currency would look like, China is moving ahead at a fast clip and is currently piloting a digital version of the yuan, with plans to ramp up usage before the 2022 Winter Olympics in Beijing.

Powell said last month that the Fed would not rush its efforts in response to China’s more aggressive pace, noting that the approach taken there would not work in the United States.

“It is far more important to get it right than it is to do it fast,” Powell said after the April policy setting meeting.

The Boston Fed is currently working with the Massachusetts Institute of Technology to research the technology that could be used for a central bank digital currency and will be releasing those findings in the third quarter.

Congressional action would be required before a digital currency could be developed.

Also on Thursday, U.S. Securities and Exchange Commission Chair Gary Gensler said he would like to see more regulation around cryptocurrency exchanges, including those that solely trade bitcoin and do not currently have to register with his agency.

“This is a quite volatile, one might say highly volatile, asset class, and the investing public would benefit from more investor protection on the crypto exchanges,” he said at the Financial Industry Regulatory Authority’s annual conference.



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What’s the endgame of all the speculation & hoarding in Bitcoin, BFSI News, ET BFSI

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LONDON: Bitcoin‘s wild ride this week is far from unusual for the largest crypto token – but the rollercoaster is also its inherent contradiction.

Speculators betting for years on bitcoin becoming a stateless digital currency that’s widely used for online retail and payments are largely responsible for its parabolic price rises. But they also seed the sort of blinding volatility that makes that ambition almost untenable.

Bitcoin’s 30 per cent plunge on Tuesday after another Chinese government crackdown is not unique. Daily moves of more than 20 per cent have been frequent during the past 6 years. At almost 4.5 per cent, median daily price swings over that time period are more than 6 times that of the main Transatlantic euro/dollar exchange rate.

And while some online retailers might accept bitcoin as payment for goods priced in dollars, few could manage the potential accounting chaos of sticker pricing in bitcoin if its value can routinely shift by a fifth in just hours.

The flipside is true for buyers. If you think bitcoin’s price keeps on rising over time – much like the latest quadrupling over the past 12 months – then why would you surrender those gains by paying for anything with bitcoin today?

And so if that role as a transaction currency or stable store of value remains elusive, it’s essentially just a game of hoarding a finite number of tokens by small groups of people that routinely involves wild, illiquid swings whenever regulators pounce, backers tweet support or big players cash in.

As ever, arguments about pros and cons of crypto tokens divide among believers and non-believers – blind faith versus instant dismissal, cheer-leading versus scorn.

Deutsche Bank this week likened bitcoin belief structures to the so-called “Tinkerbell effect” – a theory drawing from childrens’ book character Peter Pan‘s claim that the fairy only exists because the kids believe she does.

“In other words, the value of Bitcoin is entirely based on wishful thinking,” wrote Deutsche analyst Marion Laboure.

Laboure estimates that less than 30 per cent of transactions in bitcoin are currently related to payments – the rest is trading, speculation, investment or related activities.

And she reckons its liquidity as an investment asset is low. With about 28 million bitcoins changing hands last year, that’s 150 per cent of all those in circulation – almost half the equivalent metric for Apple shares.

TINKERBELL, ARK AND MUSK
With a market capitalisation still about $1 trillion, governments can’t ignore bitcoin, even if central banks continue to dismiss its wider systemic importance. They may even welcome the fact its emergence over the past decade has spurred so-called “fintech” innovation as they gradually develop their own central bank digital currencies over the coming years.

But Deutsche’s Laboure reckons more crackdowns will come – and most likely the whenever bitcoin even looks like rivalling their currencies for payment.

“It is no surprise that governments are not inclined to give up their monetary monopolies. Throughout history, governments first regulate and then take ownership.”

If so, what’s the endgame of all the speculation and hoarding – which just further limits bitcoin supply and drives the price higher? Is it just “pass the parcel” while the music keeps playing? Or are people with money to burn punting for quick gains and trading strategically by timing entry and exits?

Some argue there is genuine demand for crypto transfers within the half trillion dollars per year of global remittances, as migrant workers often need to funnel money back to poorer countries with strict formal exchange controls.

Others claim crypto privacy features draw in demand from criminals, as per this month’s ransomeware hack at Colonial pipeline. But that will just hasten more regulation. Investment arguments beyond simply punting it ever higher range from a lack of “correlation” with other assets to a potential role as an inflation hedge – an odd assertion given its latest reversal comes amid all the post-pandemic inflation scares.

Powerful backers have a outsize say too, but are increasingly erratic.

Tesla billionaire Elon Musk drove the price skywards earlier this year by saying Tesla would accept bitcoins as payment for its dollar-priced electric vehicle and add bitcoin to the company balance sheet – only to backtrack last week by warning about excessive energy usage in bitcoin mining.

With no obvious rationale, star tech stock investor Cathie Wood of Ark Invest claimed this week that bitcoin would rise another tenfold again after it registered a 50 per cent loss in a month.

At the $500,000 level she posits, the market cap of bitcoin would then be $10 trillion – or a third of the entire M1 money supply of G20 economies.

London School of Economics‘ Jon Danielsson reckons that as a result of the concentration of bitcoin ownership, that sort of move would create new multi billionaires – or even the first trillionaire. And that would wildly exaggerate existing wealth skews as the gap between bitcoin haves and have-nots soars to intolerable levels, making a mockery of claims of crypto “democratisation”.

As a result, he thinks co-existence of bitcoin and so-called fiat currencies is impossible. It’s all or nothing.

If it replaces all G20 currencies in circulation, that would then see each bitcoin priced at $1.5 million.

Reality or fiction?

“Bitcoin is a bubble,” Danielsson concludes. “It makes sense to ride the bubble as long as possible – just get out in time.”

(By Mike Dolan, Twitter: @reutersMikeD)



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Industry watchers, BFSI News, ET BFSI

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By Samuel Shen & Andrew Galbraith

Shanghai: China‘s latest salvo against cryptocurrencies has driven a brutal selloff in bitcoin markets but retail traders, miners and even crypto finance firms reckon Beijing’s bark is louder than its bite.

China extending its crypto ban to include banks and payments companies offering crypto-related services furthered a selloff that briefly wiped $1 trillion off crypto market capitalisation.

But fears that the rules would cripple cryptocurrency markets and mining on the Chinese mainland appear baseless. Cryptocurrencies could still be bought from China on Thursday and investment schemes promising juicy returns for mining them remained operational.

Bobby Lee, founder and chief executive officer of Ballet, a cryptocurrency wallet app, said he thought the announcement was merely an attempt by regulators to protect retail investors from volatile markets, but that it would be a challenge for banks to identify crypto-related dealings.

“If you look at the banking activity in China, millions or maybe billions of transactions happen on a daily basis. From all that…how many are actually really crypto services versus dining or e-commerce? It’s almost unknowable,” said Lee, formerly CEO of BTC China, China’s first bitcoin exchange.

It’s not the first time China has banned crypto-related financial and payment services. Beijing issued similar bans in 2013, and in 2017, though the latest one has expanded the range of prohibited services. The repeated bans highlight the challenge of closing the loopholes.

On Thursday, Reuters found it was still possible for Chinese individuals to buy bitcoin and other cryptocurrencies and trade them on overseas crypto exchanges such as Binance. Yuan payments for these purchases could be made via banks or commonly-used online payment platforms in over-the-counter (OTC) markets.

“If you have bitcoin or ethereum, and I want to buy some, I can just send money to you through banks. Just don’t write down anything like bitcoin or ethereum,” said Mr Li, who sells cryptocurrencies on behalf of miners.

“Of course, banks have internal risk-management. If the transaction volume is too big, you might be caught,” said Li, who was unwilling to give his full name because of the sensitivities of the issue.

Miners Undaunted

Players in China’s crypto mining industry were also broadly unfazed by the latest crackdown, again citing the difficulties regulators would have in identifying transactions.

China-based miners have the opposite problem to investors, as they already have bitcoin which they need to change for yuan to pay their electricity costs.

Mining is big business in China, which accounts for as much as 70% of the world’s crypto supply, according to some estimates, although others say that proportion has come down in recent years.

“The Chinese government does crack down from time to time, but currently it is not overly challenging to convert mined coins to RMB for Chinese miners,” said Thomas Heller, chief business officer of Compass Mining, using another word for China’s currency.

Although the new China crypto ban curtails cryptocurrency-related investment products, such schemes are still sold online. One platform offering retail investors a chance to quadruple their money over three years by buying computing power for miners of a smaller cryptocurrency, Filecoin, which has surged in popularity in China, still seemed to be accepting money on Thursday.

Flex Yang, chief executive officer of Babel Finance, a cryptocurrency financing firm, remained bullish. “Bitcoin prices dropped more than 50% last year in March but eventually rebounded back to a new record high,” Yang said. “In the long run, bitcoin still makes for an excellent asset class for portfolio managers seeking growth.”

Reuters’ Kevin Yao in Beijing contributed to this story.



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Why has the price of Bitcoin been falling?, BFSI News, ET BFSI

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Even by Bitcoin‘s standards, Wednesday was pretty wild.

The price of the famously volatile digital currency fell nearly 30% at one point after the China Banking Association warned member banks of the risks associated with digital currencies. The decline narrowed to below 10% in the afternoon, but Bitcoin had still lost about $70 billion in market value in 24 hours.

Bitcoin has lost about 38% of its value since April 13 when it hit a high of more than $64,600. The China warning was just the latest headwind: Before Wednesday, Tesla’s decision to not accept the digital currency as payment for cars – after it said it would – and murmurings in Washington about tighter regulation of digital currencies had put pressure on Bitcoin. The price is still up about 31% in 2021 and nearly 300% from a year ago.

Here’s a look at Bitcoin and digital currencies in general:

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HOW BITCOIN WORKS

Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive Bitcoins in exchange. The coins also can be bought and sold on exchanges with U.S. dollars and other currencies. Some businesses take Bitcoin as payment, and a number of financial institutions allow it in their clients’ portfolios, but overall mainstream acceptance is still limited.

Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with libertarians as well as tech enthusiasts, speculators – and criminals.

Bitcoins have to be stored in a digital wallet, either online through an exchange like Coinbase, or offline on a hard drive using specialized software. According to Coinbase, there are about 18.7 million Bitcoins in circulation and only 21 million will ever exist. The reason for that is unclear, and where all the Bitcoins are is anyone’s guess.

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WHAT HAPPENED TO THE PRICE?

On Wednesday, a statement posted on the Chinese Banking Association’s website said financial institutions should “resolutely refrain” from providing services using digital currencies because of their volatility.

Virtually every cryptocurrency fell after the industry group’s statement.

As of 4:15 p.m. eastern time Wednesday, Bitcoin was down more than 7% at around $40,310 per coin. Most cryptocurrencies lost between 7% and 22% of their value and shares of Coinbase dropped 5.4%.

It’s not unusual for the value of Bitcoin to change by thousands of dollars in a short time period, though swings totaling around $20,000 in one day are extreme. On the last trading day of 2020, Bitcoin closed just under $30,000. In mid-April, it flirted with $65,000.

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DOESN’T ELON MUSK HAVE A ROLE HERE?

Yes, and a fairly big one. Musk announced in February that his electric car company Tesla had invested $1.5 billion in Bitcoin. In March, Tesla began accepting Bitcoin as payment. Those actions contributed to the run-up in Bitcoin’s price, and Musk also promoted the digital currency Dogecoin, which also spiked in value.

However, Musk reversed course in just a short time, saying last week that Tesla would stop accepting Bitcoin because of the potential environmental damage that can result from Bitcoin mining. The announcement sent Bitcoin falling below $50,000 and set the tone for the big pullback recently in most cryptocurrencies.

A number of Bitcoin fans pushed back on Musk’s reasoning. Fellow billionaire Mark Cuban said that gold mining is much more damaging to the environment than the mining of Bitcoin.

A 2019 study by the Technical University of Munich and the Massachusetts Institute of Technology found that the Bitcoin network generates an amount of CO2 similar to a large Western city or an entire developing country like Sri Lanka. But a University of Cambridge study last year estimated that on average, 39% of “proof-of-work” crypto mining was powered by renewable energy, primarily hydroelectric energy.

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BUT SOME COMPANIES ARE USING BITCOIN?

The digital payment company Square and its CEO Jack Dorsey – also the CEO of Twitter – have been big proponents of Bitcoin. Overstock.com also accepts Bitcoin, and in February, BNY Mellon, the oldest bank in the U.S., said it would include digital currencies in the services it provides to clients. And Mastercard said it would start supporting “select crypto currencies” on its network.

Bitcoin has become popular enough that more than 300,000 transactions typically occur in an average day, according to Bitcoin wallet site blockchain.info. Still, its popularity is low compared with cash and credit cards.

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THERE IS SKEPTICISM AROUND BITCOIN?

Yes, plenty of it. Tracking Bitcoin’s price is obviously easier than trying to figure out its value, which is why so many institutions, experts and traders are skeptical about it and cryptocurrency in general. Digital currencies were seen as replacements for paper money, but that hasn’t happened so far. Federal Reserve Chair Jerome Powell has said the central bank prefers to call crypto coins “crypto assets,” because their volatility undermines their ability to store value, a basic function of a currency.

While some banks and financial services companies are getting in on it, others are staying away.

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COULD A DIGITAL CURRENCY SELL-OFF CAUSE WIDESPREAD DAMAGE?

Regulators aren’t very worried about a possible crash in digital currencies dragging down the rest of the financial system or economy.

Even with the recent sell-off, digital currencies have a market value of about $1.72 trillion, according to the website coinmarketcap.com. But that pales compared with the $46.9 trillion stock market, $41.3 trillion residential real estate market and nearly $21 trillion Treasury market at the start of the year.

The European Central Bank said Wednesday that the risk of cryptocurrencies affecting the financial system’s stability looks “limited at present.” In large part, that’s because they’re still not widely used for payments and institutions under its purview still have little exposure to crypto-linked instruments.

Earlier this month, the Federal Reserve said a survey of market contacts found roughly one in five cited cryptocurrencies as a potential shock to the system over the next 12 to 18 months. That’s a turnaround from the fall, when a similar survey found none mentioning cryptocurrencies.

HOW MUCH OVERSIGHT IS THERE?

Washington officials have been talking about regulating digital currencies more, and worries about a heavier hand have played a role in the recent swoon in prices.

Gary Gensler, who took over as chairman of the Securities and Exchange Commission last month, has said that cryptocurrency markets would benefit from more oversight to protect investors.

In a hearing before the House‘s financial services committee earlier this month, Gensler said neither the SEC nor the Commodity Futures Trading Commission, which he used to head, has a “regulatory framework” for trading on cryptocurrency exchanges yet. He said he thought Congress would ultimately have to address it because “there’s really not protection against fraud or manipulation.”

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HOW BITCOIN CAME TO BE

It’s a mystery. Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto. Bitcoin was then adopted by a small clutch of enthusiasts. Nakamoto dropped off the map as bitcoin began to attract widespread attention. But proponents say that doesn’t matter: The currency obeys its own internal logic.

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China extends its cryptocurrency ban to banks, payments companies, BFSI News, ET BFSI

Personal Finance

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Beijing: China has banned financial institutions and payments companies from providing services related to cryptocurrency transactions, and warned investors against speculative crypto trading.

It was China’s latest attempt to clamp down on what was a burgeoning digital trading market.

Under the ban, such institutions, including banks and online payments channels, must not offer clients any service involving cryptocurrency, such as registration, trading, clearing and settlement, three industry bodies said in a joint statement on Tuesday. “Recently, cryptocurrency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order,” they said in the statement.

China has banned crypto exchanges and initial coin offerings (ICOs) but has not barred individuals from holding cryptocurrencies.

The institutions must not provide saving, trust or pledging services of cryptocurrency, nor issue financial product related to cryptocurrency, the statement also said.

The moves were not Beijing’s first moves against digital currency. In 2017, China shut down its local cryptocurrency exchanges, smothering a speculative market that had accounted for 90% of global bitcoin trading.

In June 2019, the People’s Bank of China issued a statement saying it would block access to all domestic and foreign cryptocurrency exchanges and Initial Coin Offering websites, aiming to clamp down on all cryptocurrency trading with a ban on foreign exchanges.

The statement also highlighted the risks of cryptocurrency trading, saying virtual currencies “are not supported by real value”, their prices are easily manipulated, and trading contracts are not protected by Chinese law.

The three industry bodies are: the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China.



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