What is cryptocurrency? According to the Bermuda Virtual Currency Business Act 2018, virtual currency means a digital representation of value that:

• is used as a medium of exchange, unit of account, or store of value;

• is not fiat currency, whether or not denominated in fiat currency.

Great legal descriptions, but what it mean to the layperson?

Let’s start at the beginning.

From physical to digital to ethereal currency

We live in a physical world filled with things such as stone, wood, metals, plants, animals, and water. These are tangible, visible, and mostly things of value. Way back when, our ancestors used barter: you have a horse I need, I will trade you for the gold chain you want. Both were valued items, both were used in the exchange of items on a physical basis.

Commoditised money such as minted gold and silver coins were launched into circulation. That meant an individual no longer had to drag his horse 100 miles to barter for a necklace.

Fiat currency — mostly paper money — became the next step. Fiat currency is issued legal tender backed by governments, such as the US government-backed dollars, the European Central Bank-administered euro, and the Bank of England-issued pound sterling. Generally, fiat money, is valid buy is not backed by any commodity, such as gold. It is backed only by the faith of the bearer government. However, it is still tangible and touchable.

Digital, eMoney, and credit and debit cards arrived to represent efficient storage of individuals’ underlying personal cash and assets in digital format in a financial institution with verification available on printed matter and electronic files.

In 2007, the first virtual currency technology emerged in a decentralised private register format — bitcoin. It appeared that an unknown private citizen, a computer programmer, had created a currency that could exist without governmental, institutional, regulatory or financial hierarchy involvement. Just a group of unattached, decentralised global citizens and their computers building a new world exchange that could produce a currency, raise funding, and trade for value.

Virtual currency has no minted coins (some collectable designs exist), paper formats, or touchable, tangible qualities except for your fingers negotiating the electronic interface into the world of buying, selling digital coins. Thus, owning electronic access equipment is a total necessity.

The concept of centralised versus decentralised authority.

Virtual currency is constructed on a computer platform with a decentralised register. No centralised government (organisation) is involved in the production, sale and redemption of Bitcoin, or as with hundreds of emulator virtual currencies.

Conventional centralisation in the control of currency is what we are accustomed to. Governments, financial institutions, and like entities have the ultimate central control (and contradictory roles) of money flows. This comes with intrusive “know your customer” taxation regulations, interest rates, accounting, reporting, and custody of liquid personal and business assets.

It is rare to meet an individual or business that does not have bank or custody accounts. Generally, those exceptions that deal only in hard cash tend to operate under the radar because government interference is resented, or it is to avoid taxes, or hide illicit activities and avoid scrutiny.

Decentralised technology involves many computers and programmers around the world, all of whom are linked together to the computerisation of the transaction processes, and without the intervention of any central authority or financial intermediary. All records are updated virtually simultaneously; operations and customers are anonymous; the software is open-source; and all activity employs cryptography.

Bitcoin, the original virtual currency and blockchain operational technology, is a new global financial disrupter. We are only just experiencing the beginning of these innovative financial concepts.

Virtual currency can be used for good and for corrupt practices.

Bermuda’s Virtual Currency Business Act 2018 recognises our country’s reputation and the financial integrity risks involved; risks that are addressed in depth regarding the proposed or pending operation of virtual currency businesses in Bermuda. Serious details, such as regulatory supervision over public disclosure requirements, anti-money laundering and terrorist financing, fraud prevention, coin price manipulation, and integrity of owners are encompassed within the body of the Act.

Under Section 39 of the Act, “disciplinary measures” regarding the power to impose civil penalties for breach of requirements, it states that “Except as provided in section 12, 57, 66 and 7, every person who fails to comply with any requirement or contravenes any prohibition imposed by or under this Act shall be liable to a civil penalty not exceeding $10,000,000, as the Authority considers appropriate, for each such failure.”

For those interested in studying further, I encourage you to take the time to read both of these illuminating documents.

One thing is for sure, cryptocurrency and blockchain technology is not going away, nor will it replace conventional money.

There is still so much to explore about these ground-breaking initiatives. Stay tuned.

I intend to have these crypto-related features appear on the second Saturday of each month. Future questions to be explored are:

1. How are crypto coins made?

2. Why do we want it, or not? What place will it have in our lives?

3. How do we buy it, convert to it, sell it off and what is the investing risk? Will I get my money back?

4. How well capitalised are virtual currency exchanges?

And please send me your own questions on the topic.

Useful resources:

• Bitcoin History — the Complete Timeline. Visit http://historyofbitcoin.org/

• What Is Bitcoin, and How Does It Work? The New York Times, by Nathaniel Popper October 1, 2017.

• An Explanation of Initial Coin Offerings. The New York Times, by Nathaniel Popper, October 27, 2017

There are several more linked excellent articles. You will need a The New York Times subscription to access them, but for a world perspective the paper is worth it. Visit https://nyti.ms/2yRyhbt

• Bermuda Monetary Authority: Consultation Paper, Regulation of Virtual Currency Business. https://goo.gl/V3nWDL

• Bermuda Virtual Currency Business Act 2018 https://bit.ly/2KfuNod

• Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette, Bermuda. Contact: martha.myron@gmail.com