Representing a great opportunity for financial innovation, virtual currencies represent a ‘natural fit’ with e- and m-commerce transactions.
However, virtual currencies will never fulfil their potential if steps are not taken to mitigate the known security vulnerabilities posed by digital currency or e-money.
Clearly, compliance with regulatory frameworks that require payment traceability will need to be achieved, and the EC initiative to amend Article 65 of the Fourth Anti Money Laundering (AML) Directive could be regarded as a first attempt to regulate the use of virtual currencies in the European Economic Area.
In this insight paper, the SPA acknowledges the need for laws to prevent the misuse of virtual currencies, but discusses why a balanced and proportional approach that safeguards technical advances while combatting the risks associated with anonymity needs to be explored.
Reviewing some of the use cases that validate the need for privacy-supportive virtual currency exchange, the SPA discusses the possible technology scenarios that would enable the linking of identity credentials with the virtual units that are transferred.
We also set out some guiding principles that will need to be considered in relation to the mapping of all various identities that relate to digital currencies – the digital identity of the digital currency at issuance, the currency issuer, the purchaser, the acceptor and the entity that redeems digital currency units. This mapping will be vital to enabling the secure authentication of transactions and preventing attempts to steal identities for criminal purposes.
The paper also explores why the use of digital/virtual currency in e-commerce scenarios will require the issue of anonymity to be considered in some detail. Clearly, customers will need to be able to prove payment, while merchants will need to know the identity of customers for the delivery of physical goods as well as for billing and customer management.
Without trust, virtual currencies will remain caught between promise and reality and collaboration will be required to establish appropriate ID systems and mechanisms. Alongside discussing the digital identity and management frameworks that will be required to address how virtual currencies are issued, processed and redeemed, this paper evaluates the potential sources of trust for digital currencies that are worthy of further exploration and sets out six high-level objectives for any digital currency scheme.