Singapore should adopt a light touch approach in regulating virtual currencies such as Bitcion, and instead allow technology to do most of the "governing" to safeguard against illegal activities.
According to David Moskowitz, director of Singapore-based Bitcoin broker, Coin Republic, regulation alone will not necessarily achieve its goal of addressing concerns such as money laundering or the failure of a Bitcoin exchange.
Monetary Authority of Singapore (MAS) last month said it would introduce legislations related to virtual currency transactions including Bitcoin, in a bid to safeguard against associated risks, specifically, terrorist funding and money laundering. It said it would require virtual currency intermediaries that buy, sell, or facilitate the exchange of such currencies for real currencies to verify the identities of their customers. They are also to report "suspicious transactions" to an intelligence unit within the country's Commercial Affairs Department, which is already required of money changers and remittance businesses handling cash transactions.
It has yet to formally release the regulations, though Moskowitz is expecting MAS to do so anytime soon. And he is hoping the regulator takes into consideration feedback from the industry before announcing its policy.
"Based on MAS' previous statement, I think the legislation will be similar to those related to the remittance and currency exchange business, which isn't conducive for Coin Republic, specifically," he said, pointing to the 51 percent local ownership requirement and S$100,000 bond. Moskowitz is not Singaporean and, as the sole owner of Coin Republic, would not meet the requirement related to local ownership. The bond amount would also be an issue.
"These regulations would raise the cost of running the company and I may have to rethink the business, maybe considering moving the business to another country," he noted. Coin Republic also operates a Bitcoin ATM in Singapore, where there are seven other Bitcoin ATMs located across the island.
Moskowitz suggested that technology can solve most of the problems governments have associated with Bitcoin. For instance, a lot of effort in Europe is currently focused on developing technology to enable Bitcoin exchanges to operate the virtual currency in a similar framework to how central banks manage their country's money supply. In addition, there are ongoing discussions about the feasibility of setting up a common reserve managed by several Bitcoin trading exchanges.
He added that there are also security features including palm- and photo-scanning, for instance, which can be activated at Bitcoin ATMs to establish and authenticate the identity of Bitcoin owners. These currently are not turned on yet at Coin Republic's ATM, but can be activated should the Singapore government require Bitcoin operators to do so, he noted.
"I don't have any issue with light touch regulation like Know Your Customer [banking] policies, which are reasonable for anything above a certain transaction value such as $5,000 or $10,000," he added. The company's ATM is currently the only one that dispenses cash in exchange for Bitcoins.
Moskowitz declined to reveal the number of transactions the machine has processed to date, but said a fair amount comes from tourists who sell their Bitcoins to get Singapore currency. He reiterated the low risk of abetting illegal activities such as money laundering, since the ATM would not contain the volume typically associated with such activities. The machine has a S$1,000 limit for anyone buying or selling Bitcoins, and a photo of the person is captured for each transaction.
"So the technology can handle a lot of the concerns, and I think it is more effective than regulations which are always gonna be a step behind any technology," he said, adding that the small community of Bitcoin players in Singapore often gather to discuss technology-enabled ways to further improve security.
About Mt. Gox, failed exchanges
There are serious concerns, however, over the demise of several Bitcoin trading exchanges resulting in significant losses for customers. More recently, Mt. Gox, which was the global leader outside of China in terms of trading volume, filed for bankruptcy protection. It alleged that poor accounting and security loopholes had led to losses worth more than US$450 million in current Bitcoin rates.
Others including Vircurex, Flexcoin and Poloniex also admitted to losing thousands in Bitcoins due to cyberattacks.
Asked if the shutdowns indicate Bitcoin owners have no assurance they won't lose their money, Moskowitz reminded that there was no such thing as foolproof security. Instead, he urged Bitcoin owners to refrain from leaving their money or Bitcoins on an exchange for extended periods of time, especially amid the current landscape.
"Exchanges serve a specific purpose, to exchange currency for Bitcoins. They should not be treated as wallets," he explained.
In comparing the safety of such exchanges against traditional banks, he noted that banks often do not report incidents regarding online theft. The latter have significantly larger reserves to absorb most losses from theft and also have government backing as well as insurance. In comparison, Bitcoin exchanges have been unable to secure insurance to date, he noted.
While ensuring stronger security will result in higher cost for market players, and this will likely result in higher administrative fees for customers, Moskowitz said consumers would opt for exchanges with more robust infrastructure and that observe industry best practices.
"By providing stronger security, and safeguards and having honest third parties or technologies verify these, the consumer would chose the exchange with the better infrastructure. The total loss of Bitcoin is a much greater risk than paying a slightly higher trading fee," he said.
Mt. Gox was, unfortunately, a poorly run exchange, but its failure should not be reason to stop trading. Noting that Bitcoin remains a secure protocol, he said the demise of exchanges will help make the overall ecosystem stronger as developers will learn from and resolve past mistakes.
There's currently an overemphasis on the fluctuating value of Bitcoins with many waiting to cash out. Moskowitz is hoping consumers will move past this to recognize the potential of the virtual currency as a disruptive technology.