(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).
Towards the end of 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”.
After receiving over 120 responses from various stakeholders, the UK Government has issued its response and its proposed next steps.
The response
Jumping straight to the next steps, the response outlined the following:
- The government intends to apply anti-money laundering regulation to digital currency exchanges in the UK, to support innovation and prevent criminal use. The government will formally consult on the proposed regulatory approach early in the next Parliament.
- As part of this consultation on the proposed regulatory approach, the government will look at how to ensure that law enforcement bodies have effective skills, tools and legislation to identify and prosecute criminal activity relating to digital currencies, including the ability to seize and confiscate digital currency funds where transactions are for criminal purposes.
- The government will work with BSI (British Standards Institution) and the digital currency industry to develop voluntary standards for consumer protection.
- The government is launching a new research initiative which will bring together the Research Councils, Alan Turing Institute and Digital Catapult with industry in order to address the research opportunities and challenges for digital currency technology, and will increase research funding in this area by £10 million to support this.
Benefits / risks of bitcoin and associated digital currencies
One of the overarching key themes of the response was that the UK Government considers that the ‘distributed ledger’ technology that underpins digital currencies has significant future promise as an innovation in payments technology – something to be fostered.
The response also took due note of the key benefits of digital currencies, including: cheaper and faster payments; the use of a more efficient (non-intermediary) infrastructure; the adoption of cost effective micro-pricing / micro-transactions such as internet tipping, charitable giving and micro-payrolls; greater privacy and security of payments; potential for increased innovation as well as its perceived benefit in reach and cost savings for cross border transactions.
On the flip side certain risks were also identified, including the following: the use on online marketplaces for illegal / illicit purposes and the risks associated with having an opaque / “pseudonymous” payment service.
Areas to closely monitor
As set out in the response’s next steps, we can expect to see regulation in the UK for certain bitcoin and associated digital currency businesses and any associated consultations will require careful monitoring to determine its ultimate impact on stakeholders. In particular, there are a number of areas to focus, including:
- How the term ‘digital currencies’ will be defined in any such regulations (the response hinted that non-decentralised schemes could also fall within scope)
- Which digital currency businesses would need to apply AML rules – that is, what will be considered an ‘exchange’ for this purpose
- How existing legislation (or principles from the existing) may be applied – particularly in light of the current revisions to the AML Directive and PSD, and
- From a political level – whether the work to be carried out in the ‘next Parliament’ will continue as planned if there is a change of Government in May.