Bitcoins are purely digital records of ownership over a certain quantity of monetary value. A monetary value of one is itself referred to as one Bitcoin. Unlike fiat currencies Bitcoins are unbacked, meaning they do not represent a legal claim on any underlying assets. Bitcoins also referred as “chain of digital signatures” are passed from one person to another using an electronic signature called hash. During this process, the sender passing the Bitcoin onwards, electronically signs the pervious transactions of the Bitcoin and the public key of the recipient they are sending the Bitcoin to.
Bitcoins simpler analogy equates signing for a package that you have received and then writing a forwarding address on the package before sending it onwards. Passing the Bitcoin from one person to another is like playing a game of pass the parcel, except each time the parcel is passed, the history of the parcels locations is written on it. This history creates the Bitcoin “Blockchain” which is essentially a ledger of the Bitcoin transaction history.
Bitcoin and other cryptocurrencies such as Ethereum continue to grow in appeal as viable channels of payments and investment in many countries, with Central African Republic (CAR) being most recent country to launch its own official national cryptocurrency called Sango Coin to facilitate the tokenisation of the country’s natural resources for global investors. In its recent report, the United Nations Conference on Trade and Development (UNCTAD) linked the growing interest in Bitcoin and other cryptocurrencies to its appeal as a cost effective and new way to run financial services due to low fees charged in its exchanges, ability to drive financial inclusion and the speed of transactions comparing to traditional financial institutions which act as trusted parties in facilitating transactions and often spend time resolving disputes and dealing with associated risks. This in turn increases the cost of performing transactions especially over the internet and makes transactions relatively expensive, whilst Bitcoin allow two parties to transact with each other without a third party getting in the way.
Nevertheless, gaps in legal and regulatory frameworks remain the greater challenge across the world to crypto’s adoption into the mainstream financial systems as a payment and investment instrument aside the security and price volatility concerns. Several countries, such as Canada, have developed their own regulations on Bitcoin use and whether or not it’s considered a legal tender, some like Kenya and South Africa are amidst developing regulations. Others strongly disagree with this new innovation and have warned its citizens not to go near this potentially risky financial option as it can be traded fraudulently and held without identification of the residency of the asset holder and of course extensively used for money laundering and other illicit activities. In its recent research on Capital Flow Management Measures in the Digital Age and Challenges of Cryptocurrency,
the International Monetary Fund (IMF) highlights that despite the crypto becoming a significant instrument for payments and speculative investments in some countries, driven mostly by a host of macro-economic, institutional, and demographic factors, challenges posed by the attributes of cryptocurrencies are compounded by gaps in the legal and regulatory frameworks, as the legal status of cryptocurrencies are often not clear.
Bitcoin is definitely not doomed as an alternative to national currencies, and it is slowly finding its way into the mainstream financial systems and its key engineering elements offer possibilities of imagining a radically different approach for architecting electronic payment systems. The technologies embedded within Bitcoin have the potential for supporting the development of more open, contestable, and interconnected ecosystems for the delivery of payment and financial services, much like the internet did for the delivery of communication and content services. By lowering costs and encouraging innovation, the adoption of Bitcoin-like protocols could radically expand access and relevance of financial services globally, especially across borders and in developing countries. Regulating Bitcoin need concerted effort in developing and strengthening data capabilities, availability, quality, and consistency on cryptocurrencies and then establishing stakeholders and international collaborative arrangements for supervision of cryptocurrencies to address regulation, legal and data gaps and leverage the technology to create anomaly detection models and red-flag indicators that will allow for timely risk monitoring. Introducing Bitcoin regulations should go a long way in curbing the impact of money laundering and helping platforms to build systems that are safe and trustworthy.
DFI Alumni and Community Member