News Column

Bitcoin or Bad Coin? Warnings Mount Against Virtual Currency

December 13, 2013

Financial Mirror (Cyprus)

Warnings are mounting against cryptocurrency bitcoin (file photo)

The dust had hardly settled from the international bailout that brought the economy and the banking sector to its knees and a new storm is brewing over the central bank's warning on Tuesday against the use of the bitcoin, the virtual currency that is proving as controversial as it is popular.

The Central Bank of Cyprus warned that using the bitcoin is 'particularly dangerous', according to the official Cyprus New Agency, given that it is not regulated by any system and its operation is unchecked.

CNA quoted unnamed sources as saying that the government feels that the virtual currency is too risky at present.

While acknowledging that bitcoin is innovative, the same sources pointed out that it is not backed up by anything tangible and it also poses many risks.

Anyone wishing to deal in the currency, the sources suggested, should first weigh all possible risks involved.

The matter has been discussed a few years ago at EU level and it was decided at the time that virtual currency systems should not be regulated as such an action would legitimise them, the sources explained. Instead authorities should issue warnings but it should be the responsibility of individuals to protect themselves.

The response from bitcoin was swift.

Danny Brewster, CEO of bitcoin's international office in Cyprus, Neo & Bee - LMB Subsidiaries Ltd., said that "we have been trying over the last two weeks to reach and arrange a meeting with the CBC so that we can operate under the regulatory framework that they deem appropriate."

"As with the People's Bank of China, the Central Bank of Cyprus, too, has confirmed its agreement that the use of bitcoin by individuals is welcome and holds potential. This statement from the Central Bank is no different to any other central bank in the world," Brewster said, adding that "the use of bitcoin carries risks like any other financial instrument. However, because bitcoin is still only five years old, the infrastructure is still being developed."

The Bank of France warned last week about risks related to the digital currency, adding its voice to growing concerns about the unregulated, online money.

Bitcoin is not backed by any central bank or government, or by physical assets. Their value depends on people's confidence in the currency, international news reports said.

It has been gaining acceptance by the general public and investment community but have yet to become an accepted form of payment on websites of major retailers such as

The Bank of France said the price of bitcoin in legal currencies was inherently volatile and users may find it difficult to convert to real money.

The anonymity that bitcoin offer users also raises the risk that they could also be used for money-laundering and financing of terrorism, the central bank said in a publication.

"Even if bitcoin is not currently a credible investment vehicle and therefore do not pose a significant risk to financial stability, they represent a financial risk for those who hold them," the Bank of France said.

Though the central bank saw no threat to its monopoly on the issuance of legal tender, bitcoin's growing popularity has increasingly attracted the attention of authorities in several countries, including China and the United States.

The Chinese central bank also warned financial institutions last week against trading bitcoin, which has proven particularly popular in China.

The price of the digital currency rose over $1,000 last month for the first time, extending a 400% surge in less than a month and fuelling concerns of a bubble in the making.

The Bank of France warned that speculating on the price of bitcoin could become costly if other users became unwilling to convert gains into legal tender, potentially putting the whole system at risk of collapse if bitcoin demand evaporated.

Noting a growing number of retailers and service providers who accept bitcoin for payment in France, the central bank warned they benefited from no guarantee that the bitcoin could be cashed for real money.

China's government banned financial institutions from trading in bitcoin on Thursday, in what analysts said was a restrained first step towards regulating the digital currency that has exploded in popularity in China.

A statement by the central bank and four other agencies said that, while the computer-generated currency does not yet pose a threat to China's financial system, it carries risks. It did not, however, curtail the use of bitcoin by individuals.

University of Nicosia announced last month that it will start accepting the bitcoin as an alternative way to pay tuition fees.

It said the move was unrelated to the capital controls imposed after the international bailout plan for Cyprus. Rather, it was meant to help foreign students in countries where traditional banking transactions are either difficult or costly to pay for programmes such as online degrees.

The university's chief financial officer, Christos Vlachos, said the institution, which has about 8,500 students enrolled, is the first in the world to take bitcoin payments.

Bitcoin is a cryptography based digital currency that advocates say is counterfeit-proof. Its value is determined by supply which is limited by its design and demand.

Vlachos said payments are free of risk for the university since it immediately converts the digital currency to euros at the day's exchange rate.

He said that the university is also offering a new masters' degree in digital currency, a field he says is the monetary equivalent of the Internet in its infancy. "It's the gold of tomorrow," Vlachos said.

Vlachos said the Cypriot government should set up a regulatory framework to attract digital currency trading companies and boost the bailed-out country's foundering economy.

The university plans to encourage the government to develop the country into a hub for bitcoin trading, processing and banking.

"Bitcoins have value because they are useful, they can travel immediately and they cannot be reproduced by fiat, by anyone. I sincerely wish such transparent and free protocols were available by voluntary concensus to everyone," said Brewster.

"The announcement from the People's Bank of China was heavily misinterpreted and this resulted in a temporary drop in the exchange rate of bitcoin, which today is again approaching $1000. The statement explicitly states that individuals and non-government businesses can transact freely with bitcoin. In addition, Switzerland is soon discussing the matter at a parliamentary level, as to whether or not they should recognise bitcoin as a currency."

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Original headline: Bitcoin or badcoin?

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Source: (c) 2013 Financial Mirror. All right reserved. Provided by, an company

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