The Development and Usage of Bitcoin in the UK
The advent of financial technology has revolutionised many industries, prompting Central Banks to research, develop and field their own versions to keep abreast of financial developments. One such revolutionary tech is Bitcoin (cryptocurrency), and recently, the Bank of England published a document assessing the implications of a Central Bank Issued Digital Currency (CBDC). This push is accompanied by questions of regulation, with Dr Cathy Mulligan, co-director of Imperial College London’s Centre for Cryptocurrency Research and Engineering, questioning whether poor UK policy engagement is hurting UK start-ups who depend on blockchain and crypto-currency like platforms.
The UK public is certainly interested in using cryptocurrency, with real-world organisations including a meet-up and a Bitcoin foundation as well as being home to popular Bitcoin services. However, even with the rise of popularity, the UK is relatively silent on cryptocurrencies as a whole.
After an initial knee-jerk reaction to levy VAT against all cryptocurrency activity, the UK then adopted a better regime and currently, whilst still unregulated, Bitcoin is likened to a ‘foreign currency’ for most purposes, including VAT. Further, Bitcoin miners are not subject to VAT as the act of mining is not classed as an economic activity, nor will VAT be added to Bitcoin when it is used as currency for goods or services. VAT is due in the normal way for any goods or services sold in exchange for Bitcoin or other similar cryptocurrencies, with the value being taken from Sterling at the time of the transaction. Simply put, Bitcoin is legal although unregulated.
Certainly, governments must take action to prevent a capacity for a currency to be used to facilitate crime, and the UK’s Financial Conduct Authority is the body for protecting consumers in these instances. However, the FCA has remained silent on Bitcoin regulation, taking the position that the body does not regulate cryptocurrencies at this moment, leaving businesses in the shadow about how to proceed with integrating cryptocurrency into their business models.
Crime Does Pay
3% of global money laundering
is now done through cryptocurrencies
Another side to the regulatory battle is the call from UK authorities, including the Police, to deem cryptocurrency as cash in certain instances to help with seizures of items used to carry out criminal activities. A new report, published by the N8 Policing Research Partnership, details the issues that law enforcement agents face when tackling cyber crime – the report states, ‘Cryptocurrencies have increasingly become a common method of value exchange in a number of types of criminal activity,’ citing the WannaCry ransomware attack as proof. Problems are exacerbated by the lack of regulation for Bitcoin ATMs and the report continues to list several other hurdles, aside from regulation, that services face, from a lack of experience in dealing with cryptocurrencies to identity issues associated with cryptocurrencies. Categorising Bitcoin as cash for the purpose of seizure legislation could help stem crime, as according to Europol, 3% of all money laundering globally is now done through cryptocurrencies, but UK police face issues with legal grey areas over how to handle cryptocurrency related offences. Empowering authorities with knowledge of cryptocurrencies can help deter usage or lead to better crime control.
Moreover, a further niche difficulty is added when one considers the ‘extra-territorial’ scope of certain US laws that catch foreign businesses conducting or producing services for US citizens. The silence from the UK worsens this position, as US regulations take a stronger foothold over how UK businesses can use currency, from stronger anti-money laundering provisions that require positive acts in regards to stopping the activity to due diligence obligations and registration requirements for the location of their services. Without a clearly defined legal landscape, UK businesses are left to fend for themselves.
Dr Swarup, author of Money Mania and a principal at Camdor Global Advisors, opines that Brexit could allow the UK to become a hub for cryptocurrencies. Using strong policy engagement with London’s continued economic prowess, this could allow the UK to take strides in the right direction and foster an environment that is not only conducive to start-ups but also to cryptocurrency adoption. Of course, Bitcoin and like-currencies are stronger in emerging economies, due to the legitimacy and stability (in-comparison to the native currency) that Bitcoin offers.
Central Bank Issued Digital Currency
As noted by the Bank of England, currently individuals can only hold central bank money in physical form – as bank notes. Adopting a digital currency system has wide-ranging implications for policy and stability.
The BoE’s 2016 research questions on Digital Currencies the expected wide-ranging effects, from Macroeconomic disturbance including impacting factors such as volatility to how the stages of introduction could change economic growth, leading to further questions of how a CBDC would interact with monetary policy or even how it would be technologically possible. Undoubtedly, a CBDC would increase certain risks, for example, it might speed up the change in bank rates but this could cost some financial stability by increasing interest rates across the economy.
A CBDC could lead the way for the replacement of cash in the future, increasing the efficiency of design, production, distribution and destruction of bank notes.
Aside from a CBDC being classed as legal tender, a further prominent issue is competing with decentralised currencies. The development of Bitcoin was in part, fuelled by a will for freedom from central authorities – the idea of blockchain is that you do not need to trust the other side in a transaction. Bitcoin also has the advantage that it cannot be manipulated in terms of supply versus time, due to the already-published cap on issuance, meaning that the price cannot be manipulated to deflate, for example.
Additionally, Central Banks lack the technical expertise to conduct such ventures and again, would be competing with the private sector for talent. A lack of technical expertise could harm implementation, or reach further back with a lack of experience stifling innovation for CBDCs. A broken system would be worse than no system.
Moreover, legislators would have to keep pace with the changing landscape. An issue for CBDCs is upgrading the technology, for example with Bitcoin, a segment of members forged the new Bitcoin Cash, and with a second fork possibly approaching, such developments causes issues for the speed at which CBDCs can react. An advantage that CBDCs clearly have over Bitcoin and other coins is in terms of identity verification. Whilst not entirely anonymous, Bitcoin certainly makes capital controls difficult to enforce. The ledger is completely public but the identities are anonymized, thus with a little digging one can uncover the identity of another user. The issue is, one user can have several accounts, each with different aliases. Under a CBDC, identities are tied to your legal name. This also brings an interesting question about the amount of information authorities should have readily available on people and their transactions in the fight against crime.
Fundamentally, the CBDC would not be traded the same way Bitcoin would be traded. A CBDC would use the domestic currency as a unit of account, reflecting the movement within the domestic economy. Their shared similarities is what is causing concern: if a CBDC is issued but pales in comparison to the ease of use and prowess of Bitcoin, then the value in using it would be diminished. With that said, the legal status of a CBDC as tender would require vendors to digitise and accept it as legal tender, whereas Bitcoin would be left to the intent of the individual. Both CBDC and Bitcoin would exist in the same ecosystem, but they would perform two entirely different roles.
Bitcoin and altcoins, especially Ethereum, are renowned for their adoption by start-ups and progress in innovation. Tech companies have sought to launch their own currencies in ICOs to raise capital and get around lengthy and technical financing legislation. On the other hand, a CBDC would be weighed down by all the regulations that a normal currency experiences. Further, implementing a CBDC raises several obstacles, the creation of the framework, altering of policies, enhancing adoption, legal requirements etc.
Too much regulation mitigates advancement, stifles innovation and ruins progress. Too little dampens the petri-dish effect and blinds entrepreneurs. The UK has remained silent in a ‘sit and wait’ mode, passing tax guidance on Bitcoin but nothing more. Perhaps the UK should adopt similar stances deployed by Japan to facilitate crypto-growth, making London attractive to start-ups post-Brexit. Certainly, a CBDC could eventually rival Bitcoin, but the reform such a new currency would bring with it should be welcomed, so long as it facilitates growth and instils fair rules for ICOs, adoption and planned use.