Taking the bitcoin bull by its horns

Singapore's regulator last week proposed new rules on exchanges and vendors of virtual currencies, becoming one of the first in the world to do so.

The planned rules will apply to bitcoin, the virtual currency du jour. It will also apply to intermediaries of all virtual currencies, the Monetary Authority of Singapore (MAS) said.

This will affect businesses that buy and sell virtual currencies or that let people exchange virtual currencies, such as the bitcoin, for legal tender like Singapore dollars. These firms will now have to verify the identities of their customers and report suspicious transactions to the police.

The MAS said the move was a pre-emptive one, aimed at thwarting potential money laundering and terrorist financing. Since the bitcoin allows people to transfer digital money between one another anonymously, it is ripe for exploitation for these financing crimes.

MAS will put up its proposals for public consultation soon, and plans to turn them into law within the next 12 months.

The move to impose some kind of regulatory structure is a good first step for Singapore to maintain its edge as a financial centre in the digital age. But how it proceeds will determine whether the Republic stays in the lead.

Understanding bitcoin

First, some background on the bitcoin, which is a kind of digital cash that people can use to buy and sell things.

Bitcoins can be sent anonymously at low cost over the Internet, without using a middleman such as a bank, which may charge high fees.

It has not yet achieved mainstream acceptance, partly due to the relative novelty of the concept and the volatility of bitcoin prices.

The technology for the bitcoin surfaced in 2009. Bitcoins are created - "mined", in industry lingo - by a vast network of computers linked via the Internet.

Unlike fiat currencies that are controlled by central banks and backed by their reserves, there is no one authority behind the bitcoin.

Instead, "miners" earn bitcoins by carrying out complex mathematical calculations on sophisticated computers. The code for bitcoin caps the number of bitcoins in existence at 21 million.

The value of a bitcoin is determined entirely by what people are willing to pay for it and has fluctuated wildly since its inception. The price of one bitcoin spiked to US$1,242 (S$1,572) last November - making it briefly pricier than an ounce of gold - before dropping to around US$630 as of last week.

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