Asset security, regulations tell the future of cryptocurrency

However, the current regulations are not enough to govern the industry


Cryptocurrency’s sustainability and future prospects are largely dependent on how investors view and accept its volatility, continuous threat of security breaches and greater controls by governments.

The National ICT Association of Malaysia research committee chairman Woon Tai Hai (picture) said that although the industry players are concerned, they are at the same time excited about the potential of this non-traditional investment trend.

He said in the end, it is the regulators’ attitude that matters the most.

The analyst told The Malaysian Reserve (TMR) that the interventions include matters such as the security of digital coin exchanges that will influence the sentiment and confidence of the market.

According to Woon, two major factors that have resulted in the free-fall of bitcoin and other cryptocurrencies’ prices in recent weeks and months are the increase of direct interventions by the regulators — right from the ICOs (initial coin offerings) up to its trading activities, as well as the possibility of these exchanges being hacked into.

Woon said with no fundamentals in supporting the level of prices for this new class of asset, the volatility of bitcoin has been driven purely by speculations and the “herd mentality” syndrome for the past three months, which led to a domino effect for other cryptocurrencies.

South Korea, which is the third-largest bitcoin market in the world, has been sending mixed messages on their intentions to further regulate the trading of cryptocurrency.

As a result, all of its major exchanges were removed by the global cryptocurrency trackers and also the last month.

It also impacted bitcoin’s price that fell 6%, while ethereum fell 11%. Ripple also plunges 9% on the same day.

The ban of bitcoin’s anonymous trader accounts also resulted in a US$1,000 (RM3,890) drop from US$11,000 in intraday trading.

Local players will also face the same consequences once the Inland Revenue Board (IRB) freezes Luno, a popular local exchange bank account.

Luno will be allowed to continue its business if the exchange agrees to comply to IRB’s guideline — one of which is to share the identity of the user as well as give a daily trading activity report for compliance and tax-related matters.

Meanwhile Luno said “A few weeks ago, the Internal Revenue Board (IRB) had temporarily frozen the bank account of BitX Malaysia (our local entity in Malaysia), pending an investigation relating to tax matters.

“However, the IRB has now agreed to unfreeze our account while it completes the investigation, and we are working closely with Maybank to have the account operational again,” it said. 

However, the current security asset regulations are not enough to govern the cryptocurrency industry.

Regulations cannot impose stringent policies and rules on the exchanges because they may be residing outside legal jurisdictions.

“It is completely unlike the traditional financial sector institutions (FSIs) where authorities can conduct audits and compliance check on them,” Woon said.

Without this oversight by the authority on the security matter, exchanges can only do their best to protect their investors.

Woon said in order for these exchanges to upheld the confidence of the industry, they must first ensure that their security layers and protocols are at par with traditional FSIs, such as banks.

“This alone may not be enough, but it may perhaps reassure the investors’ confidence to a certain degree as the breaches are still rampant,” said Woon.

Last December, US$64 million were reported stolen from a Slovenian bitcoin mining marketplace NiceHash, while another US$534 million worth of alternative coins, “NEM”, was taken from the Japanese virtual exchange, Coincheck, the following month.

Other inhibiting bitcoin factors include its high processing fee which is US$30 for a small transaction along with the lengthy processing of its transactions.

To solve these issues, the use of Lightning Network (LN) protocol is currently being tested. The protocol allows users to open their own payment channel outside the blockchain system of bitcoin and trade. The channel will be closed once the transactions are done All transactions recorded in this separate channel will be registered in the blockchain system.

“However, with this new LN channel, users will have to learn yet another new protocol and function,” Woon said.

Bitcoins’ price dipped as low as US$6,856 in recent months compared to US$20,000 last December.

Experts in the industry who are still optimistic about the future of cryptocurrency told TMR that there is nothing to be concerned about as bitcoin’s history had proven that it could survive even with the most extreme volatility.

“Bitcoin has proven that it is here to stay,” CRA Global CEO Mohd Roshaimi Mat Rasid said.

Analyst Azizi Ali said bitcoin’s past trend and history are good indicators as to what may happen in the future.

“At the beginning of the year, it threatened to ‘crash’ many times, but it did not, instead it rose even higher,” said the author of “Rahsia Bitcoin” book.

According to Coinmarketcap. com, bitcoin, with US$181.1 billion of market capitalisation and US$9.2 billion daily transaction, registered at US$10,734 yesterday, which is a 0.55% increase in 24 hours.

(The article has been edited for correctness and clarity based on the feedback from the related stakeholders.)