First and foremost, let’s get the fact straight head on—cryptocurrency or digital coin is not a currency. A currency is a symbol of a country’s sovereignty. It is acceptable as one only when it is officially recognised as a legal tender by the country’s monetary authority. This is a pivotal constituent in upholding economic stability and justice in a country as well as a fundamental principle of the Islamic code of conduct.
Digitisation has a strong impact on the financial services industry and it is forecasted that we are approaching the third wave of the development beginning 2020. The Fintech Adoption Index 2017 has shown a dramatic result of one in three digitally active consumers using two or more fintech (financial technology) services. It is significant enough to hint that fintech has reached mass adoption. It is given that the banking and financial industry is highly regulated. As such, digital coin would not be able to survive in such an industry. Hence, its growth would have to take place mainly outside of the banking and regulatory domain. This goes to show that a more concerted effort is required towards strengthening the regulatory and governance framework.
In the current digital world development amidst the digital token investing craze, new established companies are raising millions of dollars online to fund their projects via Initial Coin (or token) Offerings (ICOs) by just capitalising on business plans called ‘white-paper’ and a company’s amazing website. Through such crowd sales, the anonymous digital token issuers are able to engage with contributors in exchange for other digital tokens (such as Bitcoin and Ethereum) directly without using intermediaries like venture capital firms and banks. The digital token or asset issued with claims of potential functions as money. Such is what is actually known as cryptocurrency.
Thus, crypto itself is not a currency and it impossible to be considered as money because it is just an encrypted cryptographic algorithm and protocol used in the issuance of the digital unit on a blockchain—distributed ledger technology (DLT)-platform—that acts just as a shield and an enabler. The one that has value is the unit represented in the digital token.
The ICOs companies typically raise money to build new technology platforms or to fund businesses that use digital tokens utilising the DLT platform. It is obvious that some anonymous digital tokens are unguaranteed projects, exposed to high volatility in an unregulated digital tokens exchange and price instability driven by market sentiment among investors and speculators.
The fast-developing ICOs offer beyond just being a virtual currency. The use of blockchain as a base of the digital token is now incorporated with an ownership record, a right to a property claim or an underlying or commodity backed digital asset. The ICOs, however, are vulnerable to money laundering/terrorist financing risks due to the anonymous nature of transactions. ICOs are also vigilant to hackers and fraudsters.
Potential risks faced during ICOs are hackings as happened to CoinDash-CDT ICO which suffered approximately US$7.3 million, parity wallet breaches (150,000ETH stolen from a U.K-based startup), scams (a blockchain startup Enigma defrauded more than 1,500ETH), parity wallet freezes (a bug in software code froze more than $275 million in November 2017) and market breaches (a mining marketplace for NiceHash worth approximately $78 million).
Members of the public are advised to exercise customer due diligence (CDD) to understand the risks associated with the ICOs and investment schemes involving digital tokens. Many of these investments appear to be highly speculative in nature, and consumers should be cautious should there be a promise of high returns. Picking one or more digital token to make it official currency is placing the country at risk and potential financial convulsion.
A team should be designated to identify fraudulent investment schemes and educate the public on the newly-invented scams in the industry. The move made by Bank Negara Malaysia (BNM) in releasing Standard Guidelines on Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT)-Digital Currencies (Sector 6) should be received well with proper educational campaigns.
Undeniably, the surge of financial technology is improving the speed and quality of financial services, the inclusion of unbanked population and, the expansion of funding atmosphere. Yet, the readiness of the industry is at stake. In the given current position, the acceptance of digital token to be a currency would never be possibly good for the industry or the country. The uppermost consideration of such a development is to synchronise the integration between technology and regulatory framework first so as to be able to postulate stability, justice, and protection for the people from any issues of deficiency that may arise.