The Banking Executive Magazine - October Issue 2022

Virtual Assets Basics 8. Confirmation of transaction: Once the transaction is included in a block, the sender and re- ceiver will receive a confirmation in their Wallets that the transac- tion has been completed. Once the transaction gets included in a block, it cannot be reversed or tempered. A set of virtual asset’s transactions creates a block and these blocks are kept upon creation with the transaction hence this process is termed as Blockchain. IMPACT ON FINANCIAL SYSTEM Virtual assets may increase the effi- ciency of financial system by com- plementing and substituting existing currencies and assets. Virtual assets could improve the efficiency and convenience of payment and settle- ment systems, as their transaction fees are low and they can be trans- ferred without physical or time con- straints and engaged in transactions with versatile manners. However, current virtual assets have limited functions of money, due to high price volatility, social costs and low ac- ceptance. Furthermore, virtual assets incorporated into the financial mar- ket as new assets could expand in- vestment portfolios providing functions of speculation, diversifica- tion, and hedging capabilities. IMPACT ON ECONOMIC GROWTH Virtual assets can contribute to finan- cial innovation and economic growth by expanding the blockchain ecosystem through enhancing blockchain’s network externality. Vir- tual assets contribute to the growth of blockchain ecosystem by provid- ing economic incentives to coin min- ers. The growth of ecosystem in turn, leads to an increase in the value of virtual assets, reducing the opportu- nity cost of holding virtual assets and eventually contributes to its own de- velopment. Additionally, growing in- terests in virtual assets can also lead to the growth of innovative industries such as metaverse, Non-Fungible Token (NFT), and Decentralised Fi- nance DeFi as well as improving fi- nancial services using blockchain. CHALLENGES AND MISUSE OF VIRTUAL ASSETS The low transparency and the lack of regulatory framework are major chal- lenges facing virtual assets markets. Guaranteed anonymity in transac- tions increases chances of illegal transactions. The price volatility of virtual assets and market liquidity risks are also major challenges. Moreover, there are various potential misuses of virtual assets by criminals for money laundering purposes. Po- tential misuse include: • Predicate crime: raising funds through illegal activity by selling il- legal goods or services in return for virtual assets. • Placement: converting ill-gotten virtual assets into fiat currencies within a traditional financial sys- tem. • Hiding: Crypto-based transactions can generally be followed with blockchain analytics, however there may not be any link between a transaction and any given indi- vidual when conducted outside of the regulatory perimeter. Criminals can also use anonymizing services like mixers and tumblers to break the links between crypto transac- tions. • Layering: Converting fiat assets into virtual assets, exchanging vir- tual assets, conversion between virtual assets and converting virtual assets into fiat currencies. • Integration: similar to laundering of dirty fiat money, an online com- pany that accepts crypto payments can be formed to legitimize in- come and clean dirty cryptocur- rency. FUTURE OUTLOOK A structural change of the virtual asset market is expected in the fu- ture. More robust regulatory frame- works are expected to be in sight in order to ensure consumer protection and the soundness of financial sys- tem. Since 2020, major countries like the European Union EU and the United States US have been prepar- ing regulatory measures to protect consumers and secure financial sta- bility. The issuance of central bank digital currency (CBDC) will be actively considered to improve the security and efficiency of payment and settle- ment systems. The timing and form of the introduction of CBDC, as well as its implications on the monetary policy and financial sectors, are being carefully considered in various countries around the world including Arab countries. Virtual assets are changing the face of finance and their use is growing rapidly, similarly the virtual asset service provider sector is growing equally fast. New regulatory obliga- tions and rules will have an impact on both virtual assets and virtual asset service providers in equal measure. GLOSSARY OF TERMS Below is a glossary of terms related to virtual assets based on definitions from Financial Action Task Force (FATF), International Monetary Fund (IMF), Group of 20 (G20), Financial Stability Board (FSB), and the Inter- national Federation of Accountants (IFAC). Virtual Asset (VA): A virtual asset is a digital representa- tion of value that can be transferred or used for payment. It does not in- clude digital fiat currencies. Cryptocurrency: A decentralised virtual asset that is protected by cryptography that can be used as a means of exchange, transferred, stored and traded elec- tronically. The most popular of the thousands of cryptocurrencies are Bitcoin and Ether. NON-FUNGIBLE TOKEN (NFT): A completely unique virtual asset. While there are many Bitcoins, there is only one of each NFT. These often represent a specific piece of digital ISSUE 166 OCTOBER 2022 the BANKING EXECUTIVE 11