Tuesday 22 January 2019
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Virtual currencies are too risky, warns BoN

The central bank has made public its position on virtual currencies,  particularly sounding the arlarm on the secretive nature of virtual transactions.
Virtual currencies, also known as crypto-currencies, are mediums of exchange in cyber space using cryptography to secure transactions and control the creation of new units. Initially highly controversial, the best known is Bitcoin, though Ethereum and Litecoin are also widely used. Today, there are more than 800 virtual currencies in use around the world.
In a paper titled “Position on Distributed Ledger Technologies and Virtual Currencies in Namibia”, the bank is particularly wary of the anonymity of transactions and users thereof.
“These potential risks include exposure to greater anonymity or anonymous funding and transfers through virtual exchangers that do not properly identify the funding source, if the sender and recipient are not adequately identified. Decentralised systems are prone to greater anonymity risks as a result of how they are designed and function,” said BoN.
For instance, said the central bank, Bitcoin addresses which function as accounts, do not have names or other customer identification attached.
“Furthermore, Bitcoin protocol does not require or provide identification or verification of participants. Generation of historical records which can be tied back to an individual’s true identity is also a challenge. Virtual currency systems can be accessed via the internet and can be used to make cross-border payments and funds transfers also increase potential AML / CFT risks. Virtual currencies commonly rely on complex infrastructures that involve several entities, often spread across several countries, to transfer funds or execute payments. This segmentation of services means that responsibility for AML/CFT compliance and supervision/enforcement may be unclear. Moreover, customer and transaction records may be held by different entities, often in different jurisdictions, making it more difficult for law enforcement and regulators to access them. Components of a virtual currency system may be spread across various jurisdictions which may not necessarily have adequate AML / CFT controls,” BoN explained.
Section 20 of the Act declares the currency of Namibia to be legal tender in Namibia. The same Act further recognizes the South African Rand as a legal tender in Namibia and as such, the two currencies (NAD and ZAR) also known as “fiat currencies” are considered as the only two legal tender currencies in Namibia. Section 20 of the Act states that notes and coins issued by the Bank shall be regarded as legal tender in Namibia.
The FATF1 makes a distinction between virtual currencies and e-money by stating that electronic money (e-money) is a digital representation of legal tender currency, which is also referred to as fiat currency. In its digital form, e-money still carries its original value equivalent to that of its legal tender currency. Another notable distinction is that the supply of e-money depends on the fiat money in circulation, which is controlled by the central bank, whilst the supply of virtual currencies solely depends on the issuer’s decision or the community that uses or controls the specific virtual currency.
The Exchange Control Act of 1966 (Excon Act) does not make provision for the establishment of virtual currency exchanges or bureaus in Namibia.
The Bank however understands that virtual currencies, when exchanged for legal tender / fiat currency can be used to facilitate payment transactions, remittances and many other financial services. However, due to the lack of a legal premise, the Bank is unable to endorse such activities in Namibia at the moment.”
According to the FATF4, virtual currencies that can be exchanged for real money or other virtual currencies are potentially vulnerable to money laundering and terrorist financing abuse for various reasons.
BoN further stated that currently in Namibia, the use of virtual currencies to buy goods or services is not prominent enough to affect monetary policy, price stability or the demand for money.
“Its interaction with the real economy is somewhat low and mostly limited to the internet and online foreign-merchants that accept such currencies in exchange for goods and services. As such, it is the current position of the Bank that virtual currencies do not pose any significant threats to the financial stability or monetary policy of Namibia, given its limited presence in the Namibian financial system at the moment,” said BoN.
The Bank noted that distributed ledger technologies could introduce efficiencies and less costly methods in the financial market space.
“Such technologies, however, normally come with undue risks and thus require deeper understanding. In this regard, further studies will be required to fully understand the possible uses of distributed ledger technologies, the possible impact it might have on other sectors of the economy and how its functionalities can be harnessed to improve efficiencies in the financial sector.”
“Virtual currencies are not legal tender and are considered unsafe to users that are unaware of the risks it possesses. The Bank does not consider virtual currencies to be the equivalent to the Namibian currency despite there being similarities from the functions of money and measure of value perspective.
Additionally, the trading of virtual currencies in Namibia is not currently regulated and individuals that engage in such trading would be doing so at their own risk and should exercise caution. Virtual currencies are known to fluctuate when exchanged with recognized legal tender currencies, and as a result, the yields may not be known at all times,” warned BoN.

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