BitCoined – Understanding Virtual Currencies

Very early on in McLeod Governance’s auditing career – about four years after Tim Berners-Lee invented the World Wide Web – we were asked to audit ‘e-commerce’.

The memory of the audit is not one of a mastery of the area but a complete confusion as to what ‘e-commerce’ was.

We understood that the e was a reference to electronic and we understood what commerce was.  We just had no idea what was ‘e-commerce’ was and more importantly how we were going to audit it.  We had – til then – been spectacularly naive to the emergence of the world wide web and its long term implications (and truth be told with hindsight it is likely we all were!).

It is within that context that a recent United States Government Accountability Office report on virtual currencies is well worth a read.

We, by now, all know what is meant by virtual and we all know what is a currency.

But what is a virtual currency and what should we all be aware of as this new form of exchange develops?

The GAO provides an excellent and simple definition of virtual currencies:

Digital representations of value that are not government-issued.

It further notes:

Virtual currencies have grown in popularity in recent years. Some virtual currencies can be used to buy real goods and services and exchanged for dollars or other currencies. One example of these is bitcoin, which was developed in 2009. Bitcoin and similar virtual currency systems operate over the Internet and use computer protocols and encryption to conduct and verify transactions. While these virtual currency systems offer some benefits, they also pose risks.

The report notes several challenges that this new form of exchange present:

  • Virtual currency systems may provide greater anonymity than traditional payment systems and sometimes lack a central intermediary to maintain transaction information. As a result, financial regulators and law enforcement agencies may find it difficult to detect money laundering and other crimes involving virtual currencies.
  • Many virtual currency systems can be accessed globally to make payments and transfer funds across borders. Consequently, law enforcement agencies investigating and prosecuting crimes that involve virtual currencies may have to rely upon cooperation from international partners who may operate under different regulatory and legal regimes.
  • The emergence of virtual currencies has raised a number of consumer and investor protection issues. These include the reported loss of consumer funds maintained by bitcoin exchanges, volatility in bitcoin prices, and the development of virtual-currency-based investment products.

This report should be required reading for anyone that seeks to be prepared for what has the potential to be a fundamental shift in the way that value is exchanged between parties.

Whilst it focuses on the need for greater coordination between the relevant regulatory agencies the report is also an excellent catalogue of the issues that any organisation may face in this emerging space.

And not least – it will save you, the reader, from the depths of ignorance when the moment comes to audit virtual currencies.

May it not be your “e-commerce” moment.


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