IMF vouches for virtual currencies while rift threatens bitcoin

[TOKYO] The International Monetary Fund extolled the potential benefits of virtual currencies and said they warrant a more nuanced regulatory approach, at a time when the future of bitcoin, the most well-known example, is in doubt.

"Virtual currencies and their underlying technologies can provide faster and cheaper financial services, and can become a powerful tool for deepening financial inclusion in the developing world," IMF Managing Director Christine Lagarde said in a statement Wednesday to accompany the report. "The challenge will be how to reap all these benefits and at the same time prevent illegal uses, such as money laundering, terror financing, fraud and even circumvention of capital controls."

While Japan and Hong Kong have taken a more hands-off approach, Russia is weighing criminal penalties for trading in cryptocurrencies and may consider a complete ban. The call for more enlightened regulation and increasing mainstream acceptance comes as a split among the core developers of bitcoin threatens the world's most popular virtual currency.

"I will no longer be taking part in bitcoin development and have sold all my coins," Mike Hearn, a high-profile developer, wrote in a post on Medium last week. Bitcoin "has failed because the community has failed." The disagreement revolves around transaction size limits and has divided the community into several camps such as Bitcoin XT, Bitcoin Core and Bitcoin Classic, each representing a different way to structure its decentralized public ledger. The price of bitcoin dropped more than 10 percent after Hearn's post, according to research from CoinDesk. It traded at about $379 on Jan. 20, about a third of its peak in 2013.

Regardless of whether bitcoin survives the crisis, the IMF concluded in its report that virtual currencies are here to stay. They will come in many shapes and flavors, ranging from smartphone coins for in-game purchases tightly controlled by publishers to pseudo-anonymous cryptography-driven currencies with no central authority.

The ability to securely carry out transactions without central oversight, known as blockchain technology, could reduce costs of international transfers, shorten wait times and enable smart contracts, according to the report, which was presenting to a panel at the World Economic Forum in Davos, Switzerland. That same quality poses a unique challenge to authorities seeking to monitor and regulate virtual currencies with transnational reach and no one in charge.

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