It has been reported that Tyler and Cameron Winklevoss have announced that they plan to float $20m worth of shares in a fund which will invest in the Bitcoin virtual currency on a stock exchange. This is subject to the approval of the U.S. Securities and Exchange Commission and the backing of an exchange which would quote prices to buyers and sellers of its shares at all times. The Winklevoss brothers are known for their dispute with Facebook’s Mark Zuckerberg.
What is Bitcoin?
Bitcoin is a cryptocurrency that was launched in 2009. This is a type of digital currency that uses cryptography to control its creation and management, rather than relying on any monetary authorities or financial institutions. Bitcoins can be transferred through computers or smartphones without an intermediate financial institution or government managing it. They are in effect computer files that are stored locally on the owner’s computer or in an online repository.
A mathematical formula is applied in order to create the currency. This process is referred to as "Bitcoin mining". The currency is used to buy various goods and services including items from both ecommerce sites and real-world shops. It has been reported that it has been used to buy items ranging from electronic products, to pizza and illegal narcotics.
Bitcoin’s value has been particularly volatile. At the start of the year it rose from $13 in January to a peak of $260 in April and back down to approximately $90. It has been reported that the key feature of Bitcoin is that its supply can never exceed a certain number - 21 million. The finite number of Bitcoins which are allowed to exist has led to speculation that their value may rise further.
Plans for Floatation
The Winklevoss brothers have reportedly filed papers with the US Securities and Exchange Commission which set out proposals for an initial public offering of a Winklevoss Bitcoin Trust that would issue shares enabling investors to gain exposure to Bitcoins without holding the underlying currency. An entity called Math-Based Asset Services has been set up to act as the sponsor of the trust. However, it is worth noting that the filing states that “the sponsor and its management have no history of operating an investment vehicle like the Trust, their experience may be inadequate or unsuitable to manage the Trust".
The recent announcement by the Winklevoss brothers has again raised questions as to the regulation of virtual currencies. It has been reported that regulators are particularly concerned with regard to the use of virtual currencies for money laundering purposes. These concerns are highlighted by the recent charges announced by the US Department of Justice against several individuals connected with Liberty Reserve.
It has been reported that some virtual currency exchanges have attempted to reassure authorities that they will be subject to the same kind of regulation as established currencies. A way in which this may be achieved is by requiring them to register as a money services business which is required to comply with money laundering laws. However, while Bitcoin (and other virtual currencies) remain unregulated, concerns are likely to remain about the potential for the currencies to be exploited.
Further reading: Liberty Reserve: Individuals charged with Money Laundering.