What you need to know:
- Bitcoin has a unique design that confounds regulators and monetary authorities attempting to pigeonhole it.
- The Bitcoin Investment Trust is a US bitcoin investment vehicle trading on OTCQX, the most heavily regulated of over-the-counter exchanges.
- I would not recommend it to anyone who is not fully aware of the risk-reward ratio.
On December 15, the Central Bank of Kenya issued a caution on bitcoin, which it termed as a virtual currency. Virtual currency is a broad term encompassing reward schemes such as Safaricom’s bonga points, frequent flyer points, and supermarket’s loyalty points.
According to the European Central Bank, bitcoins are “digital representations of value not issued by government that can be used for payments”.
Bitcoin has a unique design that confounds regulators and monetary authorities attempting to pigeonhole it. It is by no means legal tender in Kenya, or anywhere else, for that matter. Consequently, its legal status varies substantially from country to country.
The US tax authority, IRS, classifies it as an asset with tax payable on capital gains. Across the European Union, bitcoin is accepted as a means of payment after a court in October exempted it from VAT, just like regular cash.
The US Commodities Futures Trading Commission in September defined it as a commodity, just like wheat and crude oil. In the UK, the bitcoin is considered private money and the sale of goods and service in exchange for bitcoin are subject to VAT.
Bitcoin is an artificially scarce economic incentive for securing a decentralised internet-like network — the first of its kind.
One popular application for it right now is an open-source global payment network, and that is just the tip of the iceberg. You see, the network, referred to as the blockchain in tech circles, is also a platform for building all sorts of fascinating applications never before possible.
All are joined at the hip. It is no wonder that governments and legal experts have trouble confining it. Silicon Valley hails it as the greatest innovation in the past 100 years — the internet of money.
The CBK caution highlights three risks associated with bitcoin. One, it says: “Bitcoin transactions are largely untraceable and anonymous, making them susceptible to abuse…” This is a common misconception.
Bitcoin transactions are visible on a public ledger that holds a permanent record of all transactions, which are traceable and pseudonymous, so much so that the UK treasury deemed it low-risk for money laundering and terrorism financing in a national risk assessment report released last October.
Notably, the UK has taken measures to embrace bitcoin and digital currencies as a strategic competitive advantage. Kenya would do well to borrow a leaf from their book.
Secondly, the CBK says: “Virtual currencies are traded on exchange platforms that tend to be unregulated all over the world.” While this may have been true two years ago, it is no longer the case.
Regulation around the world has caught up, bridging the gap between mainstream investors and bitcoin. The Bitcoin Investment Trust is a US bitcoin investment vehicle trading on OTCQX, the most heavily regulated of over-the-counter exchanges.
In Sweden, investors can buy bitcoin via an exchange-traded note listed on the Nasdaq Stockholm stock exchange. Coinbase and itBit are regulated bitcoin exchanges in the United States. Exchange platforms involving bitcoin are run by professionals.
Additionally, in Kenya, purchased bitcoins remain under the full control of their owners at all times. As a digital bearer asset, holders have the key to their coins. Therefore, if BitPesa collapsed or closed business, no single user would lose access to their bitcoins.
Finally, bitcoin is, indeed, volatile as its value fluctuates based on free market forces. There is no central bank to step in with monetary policy because bitcoin is not issued by a central authority.
In fact, it was deliberately designed to be this way right from the beginning. Uniquely, its monetary base supply is capped at 21 million bitcoins, a fact that drives speculative interest, with the expectation that its deflationary nature will ramp up its price over time.
In 2009, one bitcoin was trading at $ 0.001. By November 2013, the price was $1,173. Currently it is just above $450. I would not recommend it to anyone who is not fully aware of the risk-reward ratio.
There is a lot more to bitcoin and my advice is that one conduct one’s own research and due diligence. I am confident that in a short while, bitcoin and the blockchain will emerge as the greatest innovations of our time. Four years from now, people will laugh at how ridiculous the CBK notice is.
Mr Kimani is a bitcoin analyst. [email protected]