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INFLUENCE: Bitcoin the currency of the future?

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Bitcoin is a decentralised digital or virtual currency typically traded on a bitcoin exchange. South Africa’s first rand-to-bitcoin exchange platform, BitX, was founded at the beginning of 2013. Similar to shares traded on a stock exchange, a limit order (to buy or sell at a certain price or better) or an express order (to buy or sell at market price) can be placed to trade in bitcoins. The bitcoin market is highly volatile with many investors being warned about the swings in quoted prices for BTC (the symbol for bitcoins). In late 2012, the price of 1 bitcoin was around US$10, by the end of 2013, it was around US$1 000. Despite this volatility, MtGox, currently the world’s third largest bitcoin exchange, announced in December 2013 that it had achieved a milestone of over one million customers.

With a recent job posting by Glocap (a US hedge fund) for a junior bitcoin execution trader, it seems Bitcoin trading is here to stay – although the job specifications did include a warning that the potential employee should be comfortable working on a volatile, illiquid, and new product.

As an alternative to online trading, the world’s first bitcoin ATM, manufactured by Robocoin, went live in a Canadian coffee shop in October 2013. The ATM resembles an arcade game machine but has a cash acceptor and dispenser. According to recent reports, it continues to be used quite regularly. Customers can exchange cash for bitcoins (and vice versa) and receive them via a QR code to their smartphone wallets or obtain a temporary paper wallet printed by the ATM. The machine uses a biometric handprint system to verify users and to ensure the daily legal limit is not exceeded. The ATM has higher transaction fees and commissions compared to online bitcoin exchanges but offers the convenience of not having to set up online accounts and wait for money transfers. Robocoin plans to launch an ATM in Hong Kong by the end of January 2014.

Storage of bitcoins

After being purchased with conventional currencies, bitcoins are stored in digital wallets which need to be backed up and kept secure. One of the biggest risks of trading in bitcoins is that, unlike electronic banking transactions, they are irreversible. Other concerns are that they are prone to cyber-attacks (if stored online) or accidental loss (if the wallet is accidentally deleted). This has resulted in the use of ‘deep cold storage’, where private encrypted keys to bitcoins are stored on offline servers. Elliptic Vault, a bitcoin storage service that insures bitcoins against loss and theft, was recently launched in London and is underwritten by Lloyd’s of London.

Current use of bitcoins

Advocates of bitcoins cite the faster processing times and lower transaction costs as incentives to use bitcoins. Currently, the main attraction of bitcoins seems to be for investors with excess cash to speculate in the current bull market (where prices are expected to rise) or for foreign nationals working abroad to transfer money to their home countries quicker. However, this may change as more vendors start accepting bitcoins as payment encouraging the spending of bitcoins. It is rumoured that more than a thousand merchants now accept bitcoins. The following are some interesting examples of companies that already accept bitcoins:

•         Overstock.com recently became one of the first major online retailers to accept bitcoins.

  • Xen Accounting, an online Canadian Chartered Accountant firm, announced in November 2013 that they will be accepting bitcoins as a form of payment for their accounting services.
  • WordPress, which runs the most popular blogging platform in the world, began accepting bitcoins for payments and donations in 2012.
  • China’s search giant, Baidu.com, accepts bitcoins for payment.
  • Hedge fund manager SecondMarket recently launched the Bitcoin Investment Trust for institutional and high-net-worth individuals.
  • Brooklyn Café is the first restaurant in Scotland to allow customers to settle their bills using bitcoins.
  • The Australian vehicle manufacturer Tomcar allows customers to use bitcoins to pay for online purchases of commercial off-road vehicles.
  • Jacob’s Tours offers a shuttle and tour service in Cape Town and accepts bitcoins for payment.
  • Ngonyama Okpanum & Associates, a South African company of architects, project managers, urban designers and interior designers, accepts bitcoins for payment.

With the increased acceptance of bitcoin payments globally, there has been a natural growth in mobile bitcoin applications to facilitate a more convenient on-the-go transfer of bitcoins.

Legality of bitcoins

Because bitcoin is a digital currency, it is not regulated by any government. Governments around the world have different views on the virtual currency which is not issued by any of their central banks. The following made news headlines:

  • The German Finance Ministry recognised bitcoin as legal tender which can be used for trading purposes.
  • Russia has banned the use of bitcoins saying it is a money substitute and cannot be used by citizens and legal entities.
  • The Canadian government has decided bitcoin is not legal tender in the country.
  • Bitcoin has been classified as a commodity in Finland after the central bank declared that it did not meet the definition of a currency as there is no issuer responsible for its operation.
  • Singapore is one of the first countries that has issued guidance on the tax implications for companies trading in bitcoins, although the Monetary Authority of Singapore has warned users of the risks and stated that it does not intervene in commercial decisions to accept bitcoins.
  • In December 2013, China’s central bank prohibited financial institutions from dealing in bitcoin services and products and specified that it is not to be considered a currency.
  • Taiwan’s Financial Supervisory Commission and central bank stated that it does not recognise bitcoin as an accepted form of currency.
  • In December 2013, the Reserve Bank of India issued a warning against acquiring and trading virtual currencies stating that they are risky and potentially illegal. This resulted in several bitcoin exchanges in India suspending operations.

Bitcoins in Africa and emerging markets

Bitcoin usage has not quite taken off in Africa. As seen from the examples mentioned, most of the uptake has been in the US, Canada, Europe and parts of Asia. There have been reports of plans to introduce bitcoin payment on a larger scale in Kenya. It has been reported that South Africa, Ghana, Angola, Egypt and Libya have all expressed an interest in installing Africa’s first bitcoin ATM.

Jana, a mobile platform that connects brands with consumers in emerging markets, conducted a survey of 1 800 people across nine emerging market countries – India, Indonesia, the Philippines, Vietnam, Kenya, Nigeria, South Africa, Brazil and Mexico – to see what they thought of bitcoins. To summarise the findings:

  • Only 13 per cent of South Africans surveyed said they had heard of bitcoin. This was the lowest response rate amongst the nine countries.
  • Fifty-eight per cent of respondents said they would be comfortable investing money in virtual currency, with the highest response rate of 74 per cent coming from Kenya.
  • The respondents viewed bitcoins as less safe than banks, more safe than the stock market and comparable to investing in property.

Audit considerations

Auditors will need to develop procedures to verify the existence and completeness of bitcoin transactions and the accuracy of bitcoin valuations. Owing to the unique need for digital wallet storage and related password protection, the impact on tests of controls should also be considered.

Accounting considerations

As more entities start using bitcoins, the question of how to classify and account for holdings of bitcoins under International Financial Reporting Standards (IFRSs) or IFRS for Small and Medium-sized Entities (SMEs) will become more relevant. Considerations include whether bitcoins are within the scope of the financial instruments standards or meet the ‘own-use exemption’ and should be accounted for under the standards applying to non-financial items, for example  inventories or intangible assets. Measurement under a cost or fair value model will depend on the accounting classification. For entities trading in bitcoins, it will be relevant to consider whether you are acting in an agency or principal capacity as this will impact revenue recognition policies. Furthermore, the translation from virtual currency into functional currency will have accounting implications.

Tax considerations

Most tax authorities have not yet released guidelines on the tax treatment of bitcoins. The tax treatment further hinges on whether bitcoins are regarded as currency or assets in the particular jurisdiction. Companies that trade bitcoins could be subject to income tax on gains from their sale if bitcoins are seen as currency. If bitcoins are assets invested in for capital appreciation they may be subject to capital gains tax. There may also be VAT consequences if bitcoins are seen as assets. Where bitcoins are exchanged for cash, this may be seen as a taxable supply. Where bitcoins are exchanged for goods or services, they may be seen as barter exchanges and subject to tax rules on bartering.

 Bitcoin alternatives

Bitcoins will eventually have a fixed number of units (21 million) as they are created through a computer process called bitcoin mining. It is believed that there are more than 70 bitcoin alternatives. Because bitcoin is open-sourced, the code can be taken and modified to create other virtual currencies. Time will tell how viable these alternatives are.

Concluding thoughts

Regardless of what your personal views of bitcoins might be – bitcoins are undoubtedly growing in acceptance around the world. This virtual currency is undeniably having a real-world impact.

The question that remains is whether bitcoins will receive sufficient global acceptance from governments, regulators, entities and individuals to make it sustainable as a currency of the future. ❐

Author: Angie Ah Kun CA(SA) is Senior Manger: Technical Accounting Department at KPMG