Singapore's first bitcoin ATM opens for business

How does a bitcoin ATM work?

Amid the chaos of the Mt.Gox shutdown, Singapore's first bitcoin vending machine opened for business on Thursday, allowing residents in the city-state to exchange their cash for the virtual currency.

Installed in The Spiffy Dapper, a low-key cocktail bar in the city's central business district, the bitcoin automated tele-exchange machine (ATM) is also claimed to be the first in Asia, according to Tembusu Terminals – the Singapore-based start-up behind the machine.

The Tembusu ATM, which accepts as little as S$2 (US$1.50), dispenses a piece of paper with a QR code. The code can be scanned by a mobile app, after which bitcoins are deposited into the user's account. Customers are charged a 5 percent transaction fee.

"Right now, there around 30 outlets – ranging from food stalls to electronics shops - in Singapore that accept bitcoins, and the amount of usage is going up," said Peter Peh Sik Wee, managing partner at Tembusu.

(Read more: Bitcoin's back to the wall as it fights to survive)

"[There are] customers going up to shops saying we want to pay you in bitcoins, but we don't know how to get the bitcoins to pay you, so we want to fill this market," he added.

However, customers cannot deposit bitcoins in exchange for cash yet -- but the company says this function should soon be added. Tembusu aims to install around 100 machines in retail outlets across the island by the year-end.

The company, which took two months to develop the ATM, revealed that the total cost of the hardware in the locally-manufactured machine was S$3,000.

(Read more: Robocoin rolling out first bitcoin ATM in the US)

The country's de facto central bank, the Monetary Authority of Singapore, does not regulate virtual currencies such as bitcoins. However, Singapore-registered companies who exchange the digital currency for goods and services must pay taxes for these transactions.

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The launch of the ATM comes days after the abrupt shut down of Tokyo-based Mt.Gox - once the world's biggest bitcoin exchange.

While the Mt.Gox debacle has undermined confidence in the cryptocurrency, the Tembusu team was comforted by its resilience.

(Read more: Mt.Gox goes offline - Is bankruptcy next?)

"We're glad had how resilient the currency has been in the face of Mt. Gox fiasco. Before this happened, there was a shadow hanging over regarding whether the currency could survive Mt. Gox falling from grace. We can safely say it has," said Jarrod Luo, managing partner at the company.

The price of bitcoin hovered around $565 on Thursday, according to CoinDesk which tracks the price on various major exchanges, recovering some of the losses seen earlier this week.

—By CNBC's Ansuya Harjani. Follow her on Twitter @Ansuya_H