The brave new world of Bitcoin
Given the convenience of established currency and payment systems, what is driving the ever-growing interest in Bitcoin and other virtual currencies?
Bitcoin was developed largely as a response to the global financial crisis when the risks of relying on ‘trusted’ financial counterparties and intermediaries became obvious. The original white paper by Satoshi Nakamoto is a good starting point to understand some of the potential attractions of virtual currencies.
Many people are supportive of the fact that virtual currencies are not controlled by the government or banks. The global financial crisis – and perhaps even more so the response to it, such as the bailouts of private companies using public funds and the significant inflation of assets as a result – has led to a countercultural drive away from central government and traditional financial institutional means of control. In short, people have lost trust in public institutions.
Virtual currencies are assets that are largely held outside the existing financial system. In the event of currency crashes or hyperinflation, many holders perceive virtual currencies to be a safer store of value.
The use of virtual currencies is also attractive for sending and receiving money internationally, as it can be done quickly easily and involves minimal transaction fees and exchange rate costs. Virtual currencies can also be used by the unbanked and the underbanked to exchange value.
The phenomenal rise in the price of Bitcoin, Ether and other virtual currencies has given rise to speculative interest that attracts new people to the currencies and the underlying technologies.
One of the initial attractions of virtual currencies was the perceived anonymity in respect of the value held and transferred. However, criminal and terrorist organisations are beginning to realise that an immutable public ledger showing all transactions between participants is not the best means of avoiding detection – even if digital wallets are not directly linked to their personal data.
More recently, there has been significant interest in the use of virtual currencies as a form of largely unregulated crowdfunding – often referred to as ‘initial coin offerings’ – whereby blockchain-based tokens are issued in exchange for cryptocurrencies (often Ethereum) to develop new products, platforms, currencies and technologies.
Has your jurisdiction taken steps to regulate virtual currencies? What is their current status?
There is no legislation that directly regulates virtual currencies in the United Kingdom. Further, virtual currencies do not fit neatly into the existing financial regulatory regimes, such as those regulating financial instruments, securities, payment services, electronic money and anti-money laundering.
While transactions involving virtual currencies fall outside the scope of existing UK anti-money laundering laws, the government has announced its intention to apply anti-money laundering regulations to virtual currency exchanges and custodians. This corresponds with the proposed changes to the EU Fourth Anti-money Laundering Directive. It is anticipated that at some point in the future the use of virtual currencies will eventually be regulated to some degree, but it is unknown how and to what extent.
The UK authorities have taken a liberal and pragmatic approach to virtual currencies to date. This supportive environment is evidenced by the regulatory sandbox approach taken by the Financial Conduct Authority (FCA), which enables fintech innovation in areas of legal and regulatory uncertainty or potential public policy risk areas. The Bank of England is also taking steps to create its own digital currency and ensure that the use of new technologies and market participants can be factored into the wide-ranging review of the Real-Time Gross Settlement (RTGS) system.
This support from the UK authorities has not been mirrored by the major UK banks that control much of the sterling settlement system. Most banks – with some exceptions – have systematically and intentionally decided not to provide support for virtual currency-related businesses and transactions as a matter of policy. This is holding back the development of the sector in the United Kingdom.
In respect of the use of cryptocurrency for crowdfunding, the FCA is currently watching with interest while warning consumers of the risks. The FCA sandbox approach may prove to be helpful in this area.