Virtual cash poses security risks, Deakin expert warns

Deakin University's international financial crime expert, Professor Louis de Koker has warned there are many security and regulatory issues to be resolved if virtual currency is to replace hard cash as predicted at a forum in Sydney yesterday. (Tues, 5 June)

HSBC told the forum it was working under a planning assumption that virtual currencies will become mainstream in three to five years.

Virtual currencies are also expected to be considered in an RBA report on innovation due out soon.

Professor de Koker said that banks, finance institutions and companies such as Facebook would need to sort security issues if they wanted to grow this market beyond a gaming niche.

"Growth requires the confidence of users," he said.

"Users will need to be confident about protection against theft, hacking and unauthorised surveillance before they will invest substantial amounts."

Professor de Koker said the regulators were concerned because virtual currency poses money laundering and terror financing risk.

"Virtual currency is often anonymous and can be used to evade existing financial integrity control measures," he said.

"Depending on how the currency is designed, virtual currency issuers may need to comply with a raft of existing regulations, for example money transfer rules, prepaid card regulations and consumer protection rules."

Professor de Koker predicted that if virtual currency became mainstream, the regulators would step up their controls to protect financial stability.

"You cannot have banks and super funds investing substantial funds in unstable virtual currencies that may disappear or lose their value overnight," he said.

"If the market grows, more extensive controls will need to be imposed on issuers of virtual currencies."

Professor de Koker is an expert on the international regulation of financial crime and money laundering.

His latest work is with the World Bank on how to protect users of mobile phone banking, particularly those in developing countries, against financial crime.