The use of virtual currencies is maturing, and responses to their use are rapidly evolving. Virtual currencies are a paradigm-busting phenomenon that test the existing frameworks of central banking, taxation and currency.
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Virtual currencies, such as Bitcoin, are also a concern for IT professionals, as potential administrators of systems that may use them. So, what are the compliance implications of the use of virtual currencies and what are the knock-on effects on storage and backup?
In this podcast, ComputerWeekly.com storage editor Antony Adshead talks with CEO of Vigitrust, Mathieu Gorge, about the definition of a virtual currency, the compliance environment developing around them and the key concerns for IT departments over their use and storage.
Antony Adshead: What are virtual currencies and what compliance requirements affect them?
Mathieu Gorge: First of all, we have to realise we have been using virtual currencies since we’ve had online banking. So, right now, if you’ve got an online bank account, technically you use a virtual currency.
The difference here is that we’re now talking about fully digitised currencies (ie currencies that are typically not printed out as legal tender and that are stored on a network).
So, if you look at Bitcoin, which will be the main digital currency at the moment, we need to understand it is an open-source protocol for payment.
That’s Bitcoin with a capital B; bitcoin with a lower case b is an actual payment value or digital tender whose value fluctuates. As of today you can get roughly $373 for a bitcoin. That’s a crypto-currency (ie a currency that is posted on an open network that is fully encrypted).
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With Bitcoin and with any digitised currency there is no central bank because it is an open-source protocol and doesn’t belong to a state or union of states, such as the US or EU, for example.
It is, therefore, hard to regulate and while you can buy or sell without having to use a trusted third party. Typically, people use crypto-currency exchanges that are often not subject to regulation.
Most states want to regulate for a number of reasons. They want to implement consumer protection, anti-fraud and anti-money laundering measures, data protection, and they also feel they are missing out on some tax opportunities.
Some countries have already started to regulate. For example, the central bank of Bangladesh has threatened any Bitcoin user with 12 years in jail. Bolivia has banned the use of Bitcoin. France and Germany have started to regulate around taxation and Bitcoin.
In the US, four states have started to issue regulation and guidance. The central bank of Ireland has started a working group, while, in the UK, there is already a working group well under way with regards to regulating the use and security of virtual currencies.
Antony Adshead: What are the implications for storage and backup of the use of virtual currencies?
Mathieu Gorge: When you use virtual currencies you can store them online or offline.
Essentially, you are storing an encrypted file, so you can store it on a USB or external hard disk. Some people use their smartphones because they can use applications that allow them to double up as a digital wallet to trade in virtual currencies. Other people prefer to use the cloud.
The main issue with storing crypto-currency is the security of the currency. Is it fully secured? Can someone gain access to it? And also can you track the currency (ie the movement of the currency)?
With the open-source protocol we’re using, there is a publically available list of all the transactions on a site called Blockchain.com so users can track any type of transaction done by the virtual community using the currency.
Having said that, even though you can track back down to an address, the address is not necessarily linked to a user per se because you can anonymise your address.
So, one of the issues here is how do you track the currency and ensure that a file stored by you and that belongs to you is no longer there that you can trace it back. And that’s one of the main issues with regard to storing crypto-currency.
Best practice advice in the industry today is to use a third-party provider that has a secure digital wallet, which also allows you to double up as an exchange for crypto currency and that is somewhere on the cloud.
In an ironic type of way, we are going back to physical security because if you store your digital currency on a smartphone and you lose the phone, in most cases you lose the currency with no way of getting it back. Whoever ends up with the device, if they can get on to it, will have access to the currency.
So, I think we’re going to see some movements on that over the next few years. It’s also very likely we’re going to see some new crypto currencies coming out; Bitcoin is one of them but there are already another five or six worth looking at.
Storage and backup of the currencies will be an area worth keeping an eye on because security is paramount and you see a lot of people in the security industry trying to improve the security of crypto currency and especially the security of its storage.