(Note: the below is a high level review of certain potential issues and is not to be relied upon in any definitive manner nor as legal and/or regulatory advice).

Introduction and Purpose of the Digital Currency Consultation

On 3 November 2014, HM Treasury issued a “Call for Information” consultation on Digital Currencies, the purpose of which was outlined as being:

“to enable the [UK] government to examine the potential benefits that digital currencies could bring to consumers, businesses and the wider economy, and look into the potential barriers that digital currency businesses face when trying to establish themselves in the UK”.

It is understood that following a review of such matters, as well as any potential risks, the UK government will decide how it may possibly intervene / regulate in this space.

Deadline for responses

3 December 2014 10.30pm

What does the Digital Currency Call for Information Cover?

The consultation only deals with ‘digital currencies’ and it makes a distinction between what it considers to be “digital currencies” as opposed to “virtual currencies”. “Virtual currencies” are treated as being those that are issued and usually controlled by their developers and used and accepted among the members of a specific virtual community – such instruments are out of scope of the consultation. Further, the consultation is focused on the use of digital currencies as they are used as a payment method (rather than a speculative asset).

What questions are being asked?

There are 13 questions posed by the consultation (which for reference purposes are set out below) and they are relatively broad in the sense that they should allow many stakeholders in the market to provide useful responses, from both a general business sense as well with a legal/regulatory filter. In particular, they range from general queries into the benefits and risks of digital currencies, but also show an interest by the UK Government into the market’s response to overseas regulators, in particular by asking for information on the impact the recent FinCEN’s decision in the US to regulate certain operators of digital currencies.

Why is this important?

This consultation is a key and important channel to feed into the legislative process of an industry at its ‘regulatory infancy’, particularly with a jurisdiction which has made it clear that it wants to support innovation in this area. While not to pre-judge any potential response, it is hopeful that many stakeholders will respond with a view to encouraging the UK Government to take a clear, tailored, and cross-jurisdictional approach in any potential intervention. It is then hopeful that this payment ecosystem will build upon its well known benefits and also continue to develop its credibility, management of risks and popularity with consumers, merchants and other stakeholder in the banking and financial services sector.

List of Questions

Question 1

What are the benefits of digital currencies? How significant are these benefits? How do these benefits fall to different groups e.g. consumers, businesses, government, the wider economy? How do these benefits vary according to different digital currencies?

Question 2

Should the government intervene to support the development and usage of digital currencies and related businesses and technologies in the UK, or maintain the status quo? If the government were to intervene, what action should it take?

Question 3

If the government were to regulate digital currencies, which types of digital currency should be covered? Should it create a bespoke regulatory regime, or regulate through an existing national, European or international regime? For each option: what are the advantages and disadvantages? What are the possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)?

Question 4

Are there currently barriers to digital currency businesses setting up in the UK? If so, what are they?

Question 5

What are the potential benefits of this distributed ledger technology? How significant are these benefits?

Question 6

What risks do digital currencies pose to users? How significant are these risks? How do these risks vary according to different digital currencies?

Question 7

Should the government intervene to address these risks, or maintain the status quo? What are the outcomes of taking no action? Would the market be able to address these risks itself?

Question 8

Should the government regulate digital currencies to protect users? If so, should it create a bespoke regime, or regulate through an existing national, European or international regime? For each option: what are the advantages and disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)? What other means could the government use to mitigate user detriment apart from regulation?

Question 9

What are the crime risks associated with digital currencies? How significant are these risks? How do these risks vary according to different digital currencies?

Question 10

Should the government intervene to address these risks, or maintain the status quo? What are the outcomes of taking no action?

Question 11

If the government were to take action to address the risks of financial crime, should it introduce regulation, or use other powers? If the government were to introduce regulation, should it create a bespoke regime, or regulate through an existing national, European or international regime? For each option: what are the advantages and disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)? What has been the impact of FinCEN’s decision in the USA on digital currencies?

Question 12

What difficulties could occur with digital currencies and financial sanctions?

Question 13

What risks do digital currencies pose to monetary and financial stability? How significant are these risks?