New Money, New Challenges: Dealing with digital currency

As we enter a new age of technology, it may be time for an overhaul of our currency system as we know it. For centuries, we have been selling and buying with some form of currency. Whether it was chickens and goats, gold coins or paper money, the world has transacted in one form of currency or another since just about the beginning of time.

Now, perhaps it’s time for the next evolution….digital currency. What is digital currency? Digital currency, or digital money, is a medium of exchange (i.e., distinct from physical, such as banknotes and coins) that exhibits properties similar to physical currencies. However, it allows for instantaneous transactions and borderless transfer of ownership. Both virtual currencies and cryptocurrencies are types of digital currencies. Digital currencies are known as “decentralized digital currencies,” meaning there is no central point of control over the money supply. Cryptocurrencies are a “medium of exchange using cryptography to secure the transactions and to control the creation of new units. Crytocurrencies are a subset of digital currencies.”

There are many types of digital currencies including bitcoin, lite coin, doge coin, and others, with bitcoin being the most popular. Bitcoin uses peer-to-peer technology to operate, with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network.
You cannot hold a bitcoin in your hand. Think of it as a debit card, but you can load it via your cell phone. You can easily transfer it to another party and across borders.

Regulation is just now starting to take place governing such currency. Though it can be used to purchase illegal items and launder money for the purchase of drugs and weapons, bitcoin is not all bad. Imagine being able to send money to a family member anywhere in the world with little or no fees. Imagine a currency that is not tied to any government, inflation, or deflation. Imagine being able to spend bitcoin at Target, Amazon, Subway, or even Virgin Airlines. No imagination necessary, as you can do it today. You can even buy a Tesla with digital currency.

Digital currency cannot be stolen or counterfeited, unless you give up your security code, so getting robbed becomes less of an issue. Bitcoin transactions send bitcoins to a specific public key. A bitcoin address is an encoded hash of a public key. This is sort of like a super long password associated with an account (the account is the public key). In order to use received bitcoins, you need to have the private key matching the public key you received it with. Your bitcoin wallet contains all of the private keys necessary for spending your received transactions. If you delete your wallet without a backup, you no longer have the authorization information necessary to claim your coins, and the coins associated with those keys are lost forever.

Perhaps you have heard of Silk Road, a web site used to move drugs and weapons using bitcoin. The owner and conspirator violated anti-money laundering laws by supplying $1 million in digital currency to people buying drugs on the defunct online marketplace, Silk Road. A Secret Service agent was quoted as saying, “They want to use anonymous currency that allows them to do transactions and move large amounts of money without ever being traced. That’s why digital currency is very important. It’s used for all the bad things.” However, many disagree. According to blotchain.info, there was $53,852,019.82 in transaction volume in USD worldwide over the past year. There are approximately 14,010,350 bitcoins in circulation, not to mention other currencies.

Bitcoins are created each time a user discovers a new block. The rate of block creation is approximately constant over time: 6 per hour. The number of bitcoins generated per block is set to decrease geometrically, with a 50% reduction every four years. The result is that the number of bitcoins in existence will never exceed 21 million.

This decreasing-supply algorithm was chosen because it approximates the rate at which commodities, like gold, are mined. Users who use their computers to perform calculations to try and discover a block are thus called miners.

The UK, U.S., and even the Isle of Man, have begun to regulate digital currencies. The U.S. has issued guidance indicating that, in some cases, digital currency will be treated as wire transfer, and anyone selling it will be required to maintain a wire transmitter’s license. Even states such as NY are clamping down with their own regulations and requiring licenses to process these transactions.

Bitcoin is trading at approximately $231.00 – not bad considering it used to be worth $0.30. It was at $1,900 at one time. In 2010, a gentleman ordered a pizza with bitcoin and challenged anyone to get him the pizza delivered. He offered to pay in bitcoin (10,000) for the two pizzas. Today, those pizzas are worth over 2.5 million dollars. Now that’s an expensive pizza pie!

What about digital currency for pawnbrokers? Imagine being able to take in a loan payment or making a loan on digital currency. Anything is possible in the digital age. So be prepared, because as the use of paper money declines, new and exciting ways to spend will take place. First credit and debit cards, now digital currencies can be tied to an account via your cell phone.  Watch out world – it’s happening now!

Robert Frimet is Managing Member of RMF Consulting Group and is a certified anti-money laundering specialist (CAMS). He has served the pawn, check cashing, payday, title, and other industries since 1991. Mr. Frimet offers compliance services nationwide and may be reached at (702) 596-8370 or at [email protected]