Virtual money is the rage, but is it for real?

The recent news of Ukraine's justice ministry carrying out trial auctions using blockchain technology for the first time on Wednesday has got people talking.

Blockchain first emerged as the software underpinning digital currency Bitcoin. In circulation for more than eight years, this cryptocurrency's rise, and proliferation of other such currencies, has been debated widely.

Interestingly, you would have been a millionaire had you spared just $27 in 2009 to buy 5,000 Bitcoins, the world's first decentralised digital currency. One Bitcoin is now worth Dh17,113 or $4,659. So theoretically, your holdings would have been a whopping $23 million. But we are in no way suggesting that it is an asset worth investing in now.

Issuing currencies is a lucrative business, and clearly the inventors of this currency, who we do not know till date, are making the most of the venture. It's intriguing that despite lacking the legitimacy of fiat currencies, the value of Bitcoin has hit the roof.

What is more worrisome, as experts like Yale economics professor Robert Shiller point out is the unreasonable excitement it has created and the lack of regulation in place.

Irrational exuberance has always fuelled bubbles. Events such as the dot-com bust and the sub-prime crisis had their genesis in this irrational exuberance that led to bubble formation in internet companies and the housing market. Heightened excitement around the digital currency seems to be doing just the same.

Initial coin offerings, or ICOs, have already been banned in China, and policymakers are saying it's an illegal way to raise funds.

Digital currencies are the future, say industry experts, but only the ones that are backed by legit institutions should reign supreme. As per a report in the Financial Times, six of the biggest banks in the world, namely Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG and State Street, are together creating a new form of digital cash. They hope to launch it next year for clearing and settling financial transactions over blockchain, the technology that underpins bitcoin.

Globally, the aim is to deepen discussions with central banks and work on tightening data privacy and cyber security. As cryptocurrencies grow, more banks should look to regulate their use for they are not stores of value.

Virtual currencies offer many potential benefits, including greater speed and efficiency in making payments and transfers-particularly across borders - and ultimately promoting financial inclusion. But more needs to be done at the international level to develop and refine policies. "International bodies are playing an important role in identifying and discussing the risks posed by VCs and possible regulatory responses, and they should continue to do so. As experience is gained, international standards and best practices could be considered to provide guidance on the most appropriate regulatory responses in different fields, thereby promoting harmonization across jurisdictions. Such standards could also set out frameworks for cross-country cooperation and coordination in areas such as information sharing and the investigation and prosecution of cross-border offenses," notes an IMF staff discussion

Source: Khaleej Times