Having taken the financial realm by storm, Bitcoin, the first ever virtual currency, has forced governments and regulators to explore the best way to approach it, due to its popularity.
What is Bitcoin?
Reportedly referred to as the ‘paperless no-bank currency’, Bitcoin is a digital currency payment network that is operated solely by its users.
“It is powered entirely by its users, with no central authority. Unlike traditional currencies, Bitcoin is never printed,” said Lara-Jade Sher, a candidate attorney at Webber Wentzel, and David de Villiers, a partner at Webber Wentzel.
Created by an unknown person under the pseudonym of Satoshi Nakamoto in 2009, this uncontrolled currency relies purely on mathematics.
According to Sher and de Villiers, Nakamoto wrote a paper on the concept when the money supply and reliance in the capability of governments and banks to properly manage the economy, was at a record low.
“Bitcoin offers a solution that is decentralised, not governed by any central authority and does not need faith in politicians or bankers,” said the Webber Wentzel pair.
How does Bitcoin work?
Unlike traditional operational bank currencies, Bitcoin makes use of no go-between.
“It is powered entirely by its users, with no central authority. Unlike traditional currencies, Bitcoin is never printed. Rather, it is produced through a process called ‘mining’ during which networks of computers run complex algorithms to record and verify user transactions. For every successful transaction recorded, ‘miners’ are awarded new Bitcoins,” explained Sher and de Villiers.
Storing and using Bitcoins requires wallet software, or you can make use of an online service. Once you have this setup, you can buy, sell and spend your Bitcoin. You can either download the software onto your machine or use an online service that stores your Bitcoin wallet for you, explained Sher.
Bitcoin further enables you to either do a direct trade with another person or sell it on an exchange.
“You need to register with an online exchange and from there you can specify how much you want to sell and it will try match you to a buyers order of the same amount and then the transaction goes through,” said Sher.
Where to get Bitcoins?
You can 'earn' Bitcoins by either buying the currency, receiving Bitcoins from others or through a process called mining.
According to CNBC, “mining is lingo for the discovery of new bitcoins just like finding gold. In reality, it's simply the verification of bitcoin transactions.”
Pros of using Bitcoin
Due to the currency making use of no designated ‘middleman’, there are no transaction fees and users are reportedly allowed to use fake names to protect their real identities, and play into the anonymity and hard to trace aspect of the currency.
Due to the popularity, traders are more so starting to accept Bitcoin as a legitimate form of payment.
Early adopters of Bitcoin, however, have taken to identifying the many benefits of the cryptocurrency.
“Early adopters, such as the Winklevoss twins, the brothers known for their legal battle with Facebook founder Mark Zuckerberg, believe the controversial cryptocurrency is the payment network of the future,” revealed Sher and de Villiers.
Here are some of the benefits:
-It largely eliminates the margin for fraud as it is a digital asset that cannot be replicated or reversed.
-Transactions are fast, easy and cheap to make, sometimes free.
-It offers privacy and anonymity to its users.
-The number of Bitcoins in circulation have been kept to 21 million at most, to prevent inflation.
Cons of using Bitcoin
“As one would expect, the increasing popularity of Bitcoin has regulators and authorities from around the world trying to make sense of this cryptocurrency, a digital currency that uses encryption and operates without a central bank,” stated Sher and de Villiers.
The following are the downsides to using Bitcoin:
-The currency provides the ideal platform for money laundering as transactions remain fairly untraceable, and further compromises its status in the parameters of foreign exchange trading.
-Incidents where companies have lost huge sums of money in Bitcoins and declared bankruptcy have brought the currency under regulatory scrutiny.
-Because of its anonymity it has unfortunately become the desired place for illegal trading, and is the preferred method of payment on the ‘dark web’.
What can I use Bitcoin for?
“Some people buy Bitcoin purely as an investment i.e. to make a profit off the constantly changing exchange rate. Others purchase Bitcoin to use as a currency. Some online e-commerce websites and physical retail stores now accept Bitcoin as payment,” said Sher.
Bitcoin in South Africa
“In South Africa, Bitcoin falls under the Financial Intelligence Centre Act 38 of 2001 (FICA). By simply following FICA rules and regulations, local companies such as BitX – South Africa’s only Bitcoin trading platform – can operate legally and freely, allowing innovation and rapid development,” stated Sher and de Villiers.
This being said, there are no rules or laws as yet surrounding virtual currencies and thus no legal protection is available to its consumers. This gives traders or providers the choice to accept it as a payment method or not, without being in opposition to the law.
Following the news that Standard Bank* had reportedly been running a Bitcoin trial, and later stated that it would not be taking that avenue, the South African Reserve Bank (SARB) has come out and cautioned consumers against using the currency as it is void of legal support.
“SARB has warned about these risks, noting that Bitcoin has no legal status or regulatory framework. Those who choose to use it therefore do not have the guarantee of security, convertibility or value. The Reserve Bank is monitoring developments around virtual currencies for future regulatory approaches that may be needed in the South African legal system,” remarked Sher and de Villiers.
Regardless of SARB’s stance, a number of local companies are accepting Bitcoin as a method of payment.
“Predominantly in the Western Cape, it is possible for consumers to buy taxi services, takeaways or even a manicure, using Bitcoin,’’ said Sher and de Villiers.
The currency, though new to the financial scene goes to show that the idea of virtual currencies will further take route in the minds of innovative consumers and entrepreneurs.
*Standard Bank had failed to provide comment at the time of publication.