Discussion around Bitcoin and other digital currencies has already moved on from the autumn’s headlines, dominated by their use to pay for drugs and other illegal items purchased through the now-defunct Silk Road online marketplace. With increasing backing from larger online and bricks-and-mortar retailers, now apparently including Virgin Galactic, smaller businesses will naturally consider whether they are missing a trick.
As ever when dealing with nascent technologies, there are a number of points, both legal and commercial, that require careful consideration before businesses jump onto this latest bandwagon:
Security and risk of loss
The process of making and accepting payment for goods and/or services in Bitcoin is afflicted by an inherent lack of security. Once received, Bitcoin are stored in an online “wallet”. This is essentially a computer file which holds the virtual currency either locally on the user’s hard drive, or remotely through a specialist Bitcoin storage cloud service.
Such services have been subject to a series of well-publicised attacks, not least that on inputs.io whereby hackers made off with 4,100 Bitcoin worth a cool £2.5m at today’s exchange rate. The anonymity of Bitcoin makes it highly unlikely that the perpetrators will ever be traced. Following that attack, the founder of the site released a statement declaring (seemingly without irony) that Bitcoin was only secure if stored on private computers not connected to the internet.
In a similar vein, although those involved in Bitcoin exchanges are desperate to shake off the taint of criminality, the European Banking Authority’s warning last month highlights another real risk of online Bicoin storage that remains live and well:
“As transactions in virtual currency provide a high degree of anonymity, they may be misused for criminal activities, including money laundering. This misuse could lead law enforcement agencies to close exchange platforms at short notice and prevent consumers from accessing or retrieving any funds that the platforms may be holding for them.”
Even offline storage presents its own risks of accidental loss. Aside from the obvious risks of a hard-drive failure or an ill-timed fire or flood, rarely has there been such scope for innocuous human error to prove so costly. Few people can have missed the photographs of the gentleman pictured looking forlornly across the huge Welsh landfill site in which his old hard drive had been buried after being accidentally binned four months previously whilst still holding Bitcoin worth £4.6m.
However, last week the UK’s first insured vault for the (offline) storage of Bitcoin opened in London, perhaps signalling the first real steps towards businesses being able to rely on deposits placed in someone else’s hands.
Uncertain legal status in the UK
Despite Bitcoin having been around for several years, only in the last few months have regulators been scrambling to properly get to grips with them.
HMRC in particular has struggled to get to grips with digital currency. In 2011 HMRC’s position was that people would not incur a tax liability when trading in Bitcoin as long as the profits were not converted into regular cash (with the income becoming taxable if they did). Last autumn HMRC reconsidered their position and arrived at a rather clumsy conclusion that Bitcoin should in fact be classified not a currency but rather as ‘single-purpose vouchers’, which in principle would be treated like any other asset and be susceptible to both VAT and Capital Gains Tax. However, under significant pressure from industry players, HMRC last month promptly retreated from that classification and withdrew its previous guidance.
The message is clear: the authorities have no real idea on the proper tax treatment of Bitcoin transactions and new legislation will probably be needed to clarify the position in terms businesses can rely on.
A more involved question is whether Bitcoin can reliably be considered as intangible “property” as a matter of English law. We are not aware of there having been any direct judicial consideration on this point, but by loose analogy with the Court’s position on Carbon Credits, it seems likely that they will be. It also seems likely, however, Bitcoin themselves will not be treated as “goods”, and so should they be misappropriated the rightful owner would have no damages claim for conversion, but merely a proprietary restitutionary claim to enforce their property rights in Bitcoin by tracing the individual Bitcoin that have been taken or the proceeds of conversion into another currency.
Whilst Bitcoin is often referred to as a new kind of currency, it is probably better to think of Bitcoin as a pool of virtual (and, let us remember, inherently valueless) tokens rather than physical coins or notes. However, in common with real-world currencies, the value of Bitcoin is based primarily on speculation, supply and demand.
The price of the Bitcoin has rocketed and fallen repeatedly over the last year or two, from a few pennies to a high of around £730 towards the end of last year.
This unparalleled volatility probably represents the biggest single challenge to business – the possibility of a payment accepted for good or services one day being worth only half that value the next is an obvious barrier to acceptance.
Proponents of Bitcoin suggest that this volatility will reduce as the rapidly-evolving regulatory picture becomes clearer, but in the meantime there seems no good answer to this point save for the cumbersome exercise of converting Bitcoin taken in payment to a real-world currency as soon as received.
For now, then, Bitcoin remains a somewhat precarious prospect for businesses, in the face of a limited demand from customers. It may well be that the popularity of the Bitcoin continues to grow, and bolder businesses attempt to distinguish themselves in their market place by using and accepting Bitcoin. Those that do will surely first need concrete answers to the issues above.