IN the recent decade, technological advances have been a boon to the financial industry—with the sector experiencing several breakthrough advancements by the turn of the year.
Among the most recent advances to global financial services is the rise of crypto currencies, particularly the so-called bitcoins.
Virtual currency—bitcoins in its most popular form—is a form of digital money that rose to popularity only in recent years. Unlike electronic money that is backed by cash for the entirety of its value, bitcoins are not backed by any commodity but by the ability of the holder to exchange them for goods.
As bitcoins become a buzzword in the financial technology world and strong demand has been seen for this type of virtual currency, its prices have been effectively propped up at an amazing speed.
Because of the quick rise in bitcoin prices, several fraudsters have come in to lure people to invest in bitcoins with a promise of “getting rich” fast. This does not only create financial instability to the investors of bitcoin scams, but it also spreads an uneducated “fear” of using and getting involved in crypto currencies in general, thereby, missing out on the opportunities brought by the new financial technology advancement.
In his book entitled Bitcoins and Blockchains for Beginners, Earl Dorado claims that bitcoin is not a scam and that people need further awareness and education for them to reap the benefits of this new technology.
“The reason why bitcoin is so hard to fully explain and appreciate is because one needs knowledge in computer science, information technology, finance and economics. That is why, I have written this book to be understood by people without such backgrounds,” he said.
Dorado said rather than focusing first on bitcoin’s increasing price in the market, people should understand why it is more globally adopted and that it gives solutions to current electronic money limitations.
“With the reach of the internet and increases in electronic and mobile commerce all over the world, it is inevitable that various forms of electronic money will be created. Before bitcoins existed, such commerce was done in the form of electronic remittance transactions among banks and payment providers to facilitate movement of dollars or other currencies across the globe faster than physical means,” Dorado said.
“However, there are limitations to this. One, the transactions heavily rely on the trust of a common third party as transactions will normally pass through an institution which must be trusted by both parties all the time—like a bank—to ensure that the transaction is correct and complete,” he added.
Among the other limitations the author discussed are the risks of hacking attacks to electronic commerce.
The built-in defense
Dorado said bitcoin offers solutions to the existing problems of electronic commerce because of the crypto currency’s nature: bitcoin transaction records are decentralized, which means that the network itself has copies of the ledgers of transaction records and is spread across multiple computers. This means that even if one computer is hacked and a copy of its records gets tampered with, that ledger will be invalidated by those from the other places in the entire network.
“What do these mean for people? This means that because of the introduction of bitcoin, it is now possible to reliably transfer money to any other place in the world without a central third party like a bank or remittance company checking it,” the author said.
“Since everyone in the network has a copy of such verified transactions, hackers will need to tamper with records from so many computers around the world just to be successful [and no one has successfully done so as of this writing],” he added.
Cheaper transactions are also expected from bitcoins as there is no central, or a third party, to perform validation and trust. Thus, the overall cost of transactions is lowered, according to the author. He also said bitcoins provide faster and more reliable transactions compared to traditional remittance centers as the bitcoin network is always running to process transactions 24/7.
BSP’s guidelines
The Bangko Sentral ng Pilipinas (BSP) recognizes the potential of crypto currencies in lowering the cost of remittances to and from the country.
In 2017, the central bank launched a set of guidelines on virtual currency—a first of its kind in Asia—seeking to “balance the interests” of welcoming technological advancements in the monetary sector and proactively address the risks that come with such innovations.
Part of the requirements upon registration to the Bangko Sentral ng Pilipinas as a virtual currency exchange is the submission of periodic reports to aid the central bank in monitoring virtual currency usage in the country—which is estimated at around $6 million per month for certain major players.
While other countries have taken a more hostile stance on virtual currencies circulating in their jurisdiction, the BSP said it has adopted a more positive approach to virtual currencies that do not equate to more relaxed monitoring and surveillance of risks.
“We want to maximize the benefits from this technological innovation while adequately managing the risks that come with it. Virtual currencies can help accelerate the delivery of financial services [e.g., payments and remittance] and lower the cost of transactions, which is consistent with our broader financial inclusion agenda,” the BSP said.
Image credits: Vichai Viriyathanapon | Dreamstime.com
5 comments
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