Bitcoin - virtual money

Bitcoin, the worldwide virtual currency, has attracted much attention in the press recently but little is known about what it is and how it may be used.

Bitcoin explained

Bitcoin is a virtual currency that is exchanged digitally and managed by a peer to peer network rather than being issued or tracked by a central authority. It is a form of crypto-currency meaning it is secured and controlled through coded passwords.

Payments are made by sending digital messages to the network. Ownership of the currency is transferred from one address to another, providing a certain level of anonymity. Transfers are uploaded to a public ledger called the block chain which records all transactions and prevents double spending.

Bitcoins are stored in a virtual wallet and can be transferred and exchanged instantly for goods and services.

Use of bitcoin

Some online retailers accept bitcoin but will we ever see a transaction (for example, a share or asset acquisition) where the consideration is satisfied in bitcoin? A number of legal service providers in the US accept bitcoin as payment for their fees but so far it seems only one UK law firm has taken the step to accept the virtual currency.

More traditional activities include the buying and selling of bitcoin or trading bitcoin with recognised currencies. Bitcoins can also be held as an investment in the hope of yielding a large return.

Is it safe?

The security of bitcoin is a real concern. Thefts from hacking are numerous and the lack of regulation means the currency can be used to buy illegal items or launder money. Bitcoins are not legal tender in any country and it is not recognised as an official currency.

The European Banking Authority has recently warned consumers of the risks of buying, trading or holding virtual currencies and other regulators around the world are closely monitoring the growth of those currencies. The recent collapse of MtGox, one of the largest bitcoin exchanges, has inevitably led to calls for increased regulation after it confirmed that there was a ‘high probability’ that 750,000 of its customers’ bitcoins had been stolen. However, whilst some countries have declared bitcoin transactions illegal, HM Revenue & Customs recently announced that it will not charge VAT on the creation or trading of bitcoin, effectively endorsing those transactions in the UK. VAT will be charged where bitcoin is used to pay for goods or services.

More regulation please

It seems likely that the only way confidence in bitcoin will increase is with greater regulation, consistently applied across all jurisdictions. Without that, bitcoin appears destined to remain on the fringes, finding it difficult to achieve mainstream acceptance.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.