Cryptocurrency (Bitcoin)

- Definitions
o Block
o Mining
o Peer-to-Peer Network: Sharing information/data.
- Characteristics
o Finite Amount; Number of Bitcoins will not increase; unlike the currencies of
countries which can be printed by the respective Central Bank should they deem
fit/necessary.
o Bitcoins can be lost permanently i.e. password to Wallet ID is lost, hardware
containing Bitcoin is lost.
o Decentralised currency and works on a peer to peer level, no government has
control over it
o Bitcoin works pseudonymously (provides users with a unique Wallet ID), not
anonymously; all transactions are logged in a public ledger that anyone can
access. However, there are limitations in tracing the digital transactions or Bitcoin
address directly to the individual responsible.
o Bitcoin has 3 main denominations so far: Bitcoin, MilliBitcoin (1x10^-3),
MicroBitcoin (1x10^-6). The smallest denomination is called a Satoshi
representing (1x10^-8) BTC
o It is not electronical data the way .mp3 or .exe files are, instead it is an entry on a
global ledger called the “blockchain”. This ledger records every single Bitcoin
transaction that has ever happened.
o When Bitcoin in transacted, there is no delivery of files or items but recording an
exchange in the ledger
o
- Bitcoin Mining
o Requires a computer, internet connection and “mining” software to start “mining”.
o The “mining” activity is actually the solving of mathematical problems to verify
and collect newly broadcasted transactions into a new group of transactions called
a block.
o Each time a “miner” successfully solves the transactions block, they are paid a
‘transaction fee’ from the transactions itself. The ‘mining’ of new Bitcoins is an
additional reward.
o Difficulty of “mining” increases exponentially over time due to the finite amount
of Bitcoins.
o As difficulty increases, “miners” need better equipment, hardware (which leads to
greater energy consumption) to “mine”.
o In 2009, 200 BTC can be “mined” in a few days, but in 2014, it would take 98
years to “mine” just 1 BTC.
o Application Specific Integrated Circuits (ASIC) were designed solely for Bitcoin
“mining”, however as more “miners” are joining the fray, the difficulty increased
further which led to people grouping up to form “mining” pools, where each of
 them deals with a part of the problem and are paid with respect to the share of the
work they had contributed to.
o Transaction given a hash key
What is Bitcoin and Cryptocurrency in particular? (Layman)

- It is a type of virtual currency called cryptocurrency.

- Unlike fiat currencies which are managed by the respective governments and Central
Banks, Cryptocurrencies like Bitcoins are decentralized and works on a peer-to-peer level
similar to file sharing.
- It has a fixed finite amount (21 Million) and additional Bitcoins cannot be produced in the
way that fiat currencies can be printed when the Central Bank sees fit. Hence, there have
been comparisons made of Bitcoin and common hedging commodities such as gold which
are scarce resources.
- Bitcoin works pseudonymously (provides users with a unique Wallet ID as well as
security keys), not anonymously.
- There are other forms of cryptocurrencies such as Ethereum, Ripple etc.

Main characteristics of cryptocurrencies

- Blockchain technology – the information held on a blockchain exists on a peer-to-peer

network as database which is continuously reconciled. Hence, all the records are
accessible publicly and easily verifiable. The technology itself is immune to corruption by
hackers as there is no centralised database.

What are its uses?

- Can be used for ‘direct investing’ for growing cash

- Can be used in Initial Coin Offerings in exchange for digital tokens offered by the
respective company

What are the legal repercussions of such uses?

- Recent case of Quoine and B2C2 highlights the issues caused the speculative nature over
the value of cryptocurrencies.
o Facts
 B2C2 placed orders to sell ethereum at the rate of 10bitcoins to 1
ethereum, and were subsequently credited that day.
 Next day, the trades were reversed by Quoine on the basis that the trade
was due to a technical glitch which disrupted its ability to retrieve actual
market price and caused a huge mark up over the fair global market price.
 BC2C claims that Quoine acted fraudulently as it was stated an order once
filled is irreversible; while Quoine claims that BC2C was being
opportunistic and seeking to profit from a technical glitch.
o Possible Issues Raised
 When are cryptocurrency exchanges allowed to reverse client’s
transactions?
 Due to the highly volatile nature of cryptocurrencies, when can an
‘investor’ be sure that a certain market rate is “at a bargain” or the result of
a “glitch”?
  What form should the remedies take, if any? It would not be easy to issue
damages in recovering any expectant losses (difficult to determine due to
volatility), as such the remedies would be more inclined to come in the
form of restoring the parties to their original positions before the incident
had happened.
- Recent News:
o MAS issued a warning: Cryptocurrencies are not legal tender
- Using of Exchanges
o While convenient, it may not be secure; essentially exchanges manages the bitcoin
account on your behalf (holds your private keys), if these exchanges are therefore
hacked, the private keys may be compromised and the bitcoin wallet may no
longer be accessible.
- Initial Coin Offerings
o What kind of capital market product do the digital tokens represent?
 Current digital tokens have no fixed bundle of rights associated, it is up to
the discretion of the issuer to determine what rights are attached to the
digital tokens, and by extension determine what type of capital market
product such tokens falls under.
 It is possible for the digital tokens to not be classified as capital market
product at all if it does not fit in any of the categories. If it is not covered
under the SFA, investors of ICO will not be awarded the same amount of
protection as other investors of shares etc.
 Furthermore, as there is little regulation, issuers of ICO often set out their
business proposals in “white paper” which is published online. It purports
to be an offering document, but lacks the rigour of an IPO prospectus.
 If an ICO promoter is based outside Singapore, there may incur
enforcement risks even though the promoter may be regarded to be acting
as a financial advisor in Singapore.
o Reality
 While there may be businesses with legitimate purposes and proposals
raising funds through an ICO, there are also businesses which proposals
are badly drafted, investors’ rights and risks are not clearly spelt out.
 The lack of regulation currently over ICOs also allow start-ups with no
track record nor working product and would otherwise not have been
allowed to issue IPOs to raise funds through the public. As such, the risk
of investing through ICOs is much greater. This problem is exacerbated as
it is prone to abuse due to little corporate governance that holds these start-
ups responsible for delivering their projects, or accountable for how their
funds are managed.
 Lastly, if the start-ups do not have a sufficiently competent technical team
managing the digital tokens, it could be prone to security concerns where
hackers can illegally access the digital wallets of investors and steal from
it.