Many countries are still grappling with the issues of crypto-currencies such as Bitcoin, of which there are at least 70. China's central bank, for example, has ordered financial institutions to halt Bitcoin-related services and products.
With the value of Bitcoin increasing to more than $US1000 this month after social gaming firm Zynga said it would begin accepting the virtual currency as payment, the question is: can crypto-currencies can become real currency?
From the Reserve Bank's perspective, crypto-currencies are not currency, or more specifically not legal tender. They are payment systems.
A bank spokesman says the consistent message emerging from central banks and governments around the world is:
- Digital or crypto-currencies are not legal tender
- They are taxable assets, as with other financial instruments
- Entities that provide (or facilitate) crypto-currency platforms or instruments are captured under laws relating to money laundering and countering the financing of terrorism (AML/CFT legislation).
"The Reserve Bank has a watching brief on the development of digital payment systems and crypto-currencies," he says.
But the bank hasn't done any analysis of uptake or usage. (There have been stories of users in New Zealand.)
"While crypto-currencies have some of the attributes of real currency (reliable means of exchange, unit of account, store of value), they don't have the ultimate backstop that sovereign currencies have," the spokesman says.
"They are not backed by the power of the state insisting that the currency is legal tender (i.e. must be accepted as payment for a debt). Tax obligations can be settled/extinguished by 'tendering' the requisite amount of legal currency but governments have no obligations to accept other forms of payment such as foreign currencies or crypto-currencies."
According to the spokesperson, two contrasting examples illustrate the point:
Real currency: "If a person sells goods and receives $100 in return, then they can be confident that the Reserve Bank is doing its utmost to maintain the quality of our currency as a medium of exchange. And the Reserve Bank ultimately has the backing of the government, with its ability to legislate and enforce rights and responsibilities."
Crypto-currency: "If a person sells goods and receives 100 crypto-currency units, the seller of the goods must rely on the crypto-currency system to ensure that they get their full 100 units' worth of value. If they don't receive that value then they don't have the powers of the state behind them. At best they can try their own enforcement actions backed by their own individual power and resources."
The issue with Bitcoin, for example, is transactions are irreversible. An unfortunate British owner found that out when he threw away a hard drive, forgetting he had 4.6 million pounds in bitcoins stored on it.