What about bitcoins?

The Philippine central bank has announced their plans to regulate “bitcoin operators” earlier this month, as a part of their ongoing program to improve the cyber security systems of banks and alternative financial institutions. According to the central bank, the nation’s policy makers and agencies are collaborating to tighten regulations for remittance companies and exchanges, including bitcoin exchanges, startups, and brokers.

The regulations set to be drafted by the Philippine policy makers could restrict the services of existing bitcoin startups and could force users to provide more sensitive information when dealing with transactions and exchange of fiat to bitcoin.

Did our Central Bank overreact then? Let's have a quick crash-introduction on it below.

What is Bitcoin?

The Bitcoin is a form of currency without notes and coins, it is a digital currency. Transactions are made with no middle men – meaning, no (central) banks, no transaction fees and anonymity.

How to Acquire?

* Exchange - Several marketplaces called “bitcoin exchanges” allow people to buy or sell bitcoins using different currencies (coins.ph, rebit.ph).

* Transfers - People can send bitcoins to each other using mobile apps or their computers like sending cash digitally.

* Mining - People compete to “mine” bitcoins using computers to solve complex math puzzles. This is how bitcoins are created.

In theory, a global digital currency could eliminate the need for exchanges making global commerce easier by increasing efficiency and greatly reducing transaction costs. It is a decentralized currency used to trade for goods and services, not backed by any government, company, or organization.

Our Central Bank’s reaction perhaps is expected. Multiple attempts have been made to regulate anything “online” much like the government attempts to regulate the Internet, which have so far, failed. However, I’d like for governments to keep an open mind with how bitcoin transactions work.

Most techies as well as finance pros familiar with the process (myself included) agree that it is much safer and cheaper because of the balances (block chain) and transactions (private keys) that it utilizes.

The block chain (according to Wikipedia) – “is a distributed database that maintains a continuously-growing list of data records hardened against tampering and revision.” In bitcoin, it is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. Additionally, the integrity and the chronological order of the block chain are enforced with cryptography making it quite secured.

A transaction is a transfer of value between Bitcoin wallets that’s included in the block chain. Bitcoin wallets keep a secret piece of data called a “private key”, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued.

Now as a financial planner, I have a fiduciary responsibility to my clients to only recommend investments that are suitable to their specific investment plan and risk profile. Due to Bitcoin’s highly volatile nature in price movements, this makes it hard to recommend as an investment unless one is willing to go into speculative trading.

As an investment, personally I’m not sold on it just yet (though there is potential), however as geek, I find the concept and purpose interesting and worth developing further for a better financial system!