Evolution, trading and security issues about cryptocurrencies on the Czech financial market

Ten years have passed since the cryptocurrency Bitcoin was founded by a person or a number of people operating under the name Satoshi Nakamoto. Since then, the cryptocurrency has gone through a turbulent development, being praised as well as damned. Nevertheless, it still holds the strongest position on the cryptocurrency market. Bitcoin, together with other cryptocurrencies, are becoming increasingly interesting for investors and corporations. They are beginning to realise that not having a minimal share of capital in a form of cryptocurrencies, or not actively operating with cryptocurrencies, could be a limiting factor in the future.

Bitcoin enables someone to make payments without centralized authority (banking institutions) to anyone in the world. There is no need to open an account as in the case of banking institutions, all that is needed is a downloaded Bitcoin wallet. Payments are made only through such wallets, which include a unique digital signature of the sender and the recipient of the given cryptocurrency. Bitcoins can be obtained primarily by so-called currency mining, which involves placing a new payment into a blockchain and finding the right hash, i.e. the right control key of the given transaction by using powerful computers. A regular cryptocurrency user is more likely to buy Bitcoin on the stock exchange, cryptocurrency exchange or Bitcoin ATM.

The field of cryptocurrency security went through a steady progress in the last couple of years. The type of the cryptocurrency wallet – the tool that enables someone to operate with the cryptocurrency – is the most important issue regarding deposit of cryptocurrencies from the security perspective. In general, wallets accessible online, the so-called "hot wallets", are much more vulnerable than wallets which must be physically activated and connected to a network before use – the so called “cold wallets”. Distribution of stored cryptocurrencies between these wallets and the correct access setting for employees and services to these wallets is key for minimizing the risk of loss or misuse, caused either by internal or external attack. It is also necessary to conduct a regular audit and update the security standards according to the needs of the company. Although we cannot yet consider these procedures to be standardized, several consultation agencies already offer turn-key cryptocurrency security solutions, thus companies do not need to develop these solutions internally.

From the perspective of the Czech National Bank and the Ministry of Finance, Bitcoins are not considered money or investment instruments, as digital currencies are not regulated by the Central bank. Digital currency does not have the official currency status according to the Czech legislation. Based on the instructions of the Ministry of Finance, Bitcoins should be registered as stocks of their kind. Despite this legislative view, the Czech Republic belongs to the group of countries where payments through cryptocurrencies are being utilised the most.

Current development on the Czech market

As of June 2018, Pražská plynárenská, one of the most important domestic energy suppliers, joined the group of companies that do not hesitate to use new blockchain technologies and enabled payment of advances and invoices in Bitcoin for any of their customers who use their customer portal. Pražská plynárenská was not the first company on the Czech market to accept payments in Bitcoins, but it was the first corporation in the Czech Republic that applied modern payment technologies and, as a result of that, earned great recognition in the Bitcoin community.

Pražská plynárenská immediately transfers the collected payments in Bitcoin to Czech crowns via the payment gateway in which the customer pays the selected payment from his Bitcoin wallet. Therefore, the company collects all payments in a domestic fiat currency (CZK) and eliminates the risk of volatility associated with the possession of cryptocurrencies. This solution is attractive for businesses who hereby can offer customers an additional payment method, that can be cheaper than a traditional card payment.

The first banking institution to achieve a breakthrough in the world of traditional finance was Expobank CZ. Since October 2018, this bank has allowed its clients to buy, sell and hold Bitcoins with the use of their account. So, a unique account was created, the first of its kind at least on a European scale, where clients can store their Bitcoins. It is not just a classic financial product, but basically a link between traditional banking and the modern world of FinTech. Expobank's new NEO account makes it easy to invest into Bitcoin. No traditional bank yet allows cryptocurrency trading. This step opens up, for the first time, the opportunity for conservative investors to add cryptocurrency to their traditional portfolio. The exchange of Bitcoin is provided by the bank's partner, IP wBTCb solutions, which has been running Bitcoin banking on its own platform for a long time.

In normal operation, IP wBTCb solutions immediately sells or purchases the exchanged Bitcoins for the current exchange rate on the cryptocurrency exchanges. However, it is necessary to maintain a certain amount of Bitcoins in a long-term ownership for the proper functioning of these services. Although the right optimization can reduce this amount, it cannot be eliminated. Thus, a cryptocurrency-based company must solve primarily two aspects: appropriate security mechanisms to protect stored cryptocurrencies against theft or losses caused by technical problems and the exchange rate risk arising from the volatility of the cryptocurrency.

Launching Bitcoin futures trading on American CBOE and CME exchanges considerably simplified hedging of Bitcoin reserves in companies that can therefore, either alone or through an intermediary, hedge against exchange rate fluctuations almost as easily as with conventional currencies. On the day the company purchases or otherwise acquires the cryptocurrency that is needed to be held in its reserves for some period of time, it simply sells the corresponding amount by opening a short stock exchange position. This position is closed once the cryptocurrency in reserves is used for payment or written off for a different reason. Such a choice also existed in the past, however, it was linked to many problems and its usability in practise was significantly smaller than today. There is a growing number of entities that offer this service. Further development of this service, which minimises the exchange rate risk and thus significantly simplifies the access to cryptocurrencies for those who could not use them because of volatility reasons in the past, can be expected in the future.

Jan Madera
Head of Corporate Finance and Treasury
Pražská plynárenská