Photo by DAVID ILIFF. License: CC-BY-SA 3.0
The UK has issued a report in response to its earlier call for information, outlining the government’s plan for digital currencies in the near future, but is by no means a comprehensive report on what they plan to do. While other cryptocurrency media outlets are praising what they see as a soft-approach, this reporter sees some concerning language in the document that other media organizations seem to be ignoring.
The regulation comes after a call of inquiry by the UK Treasury in which they asked for advice from experts from both the traditional financial and Bitcoin fields. The resulting conclusion is that anti-money laundering (AML) laws should be applied to exchanges in a way that encourages innovation. There is also talk in the report about research into a “central bank issued” digital currency that should be watched closely.
Looking at the full document reveals some concerning comments, despite other media outlet’s apparent admiration of the report.
While the document does acknowledge the potential of digital currencies, that should not ease the concerns of digital currency advocates. The much criticized BitLicense in New York also touted the innovative aspects of digital currencies, but that didn’t prevent it from recommending some very restrictive policies.
Among the most concerning comments in the report was the UK government’s plan to research ways digital currencies could be seized if used in transactions related to illegal activity.
“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.” [Emphasis mine]
One of the highly touted features of digital currencies like Bitcoin is that the holders of it cannot have their digital currencies seized by another authority (although Ross Ulbricht might disagree). There are only three possible ways the government could accomplish this. The first would be to attack the “problem” at the exchange level. Most users buy their bitcoins at an exchange and many keep a significant amount of their holdings on exchanges. One way for a government to seize Bitcoins would be to force those exchanges to close the accounts of suspect users and hand the funds to law enforcement.
The obvious move to get around this would be to hold your coins in your own wallet, on your own computer or in a cold wallet. However, the UK government is almost certainly aware of this tactic, or if they aren’t, they will be after their research period is over. In order to prevent that, the government could work with the fiat industry and local exchanges to ensure that individuals they suspect of criminal activity are essentially blacklisted from the currency’s on-ramps.
Of course, banned users could find a way into bitcoin by selling fiat locally to an individual or providing a good or service online, but that kind of regulation would still damage bitcoin’s ecosystem significantly.
If the government determines that preventing all forms of illegal activity with bitcoin is a priority, then they will have to do something about peer-to-peer (P2P) trades. Any regulation regarding P2P trades that can be imagined, would likely be a nightmare scenario for bitcoin. While it is unlikely any regulation would be successful in preventing these kind of trades, attempts to do so could still be very damaging to individuals and the ecosystem as a whole. The report seems to indicate that the government will focus on exchanges, but does LocalBitcoins count as an exchange in their mind? Would an unregulated and untaxed P2P transmission of say £30,000 draw their attention? These answers will only come with time.
The last possibility would be the UK government to researching ways to defeat Bitcoin’s SHA-256 protection. Any attempts to do so would almost certainly be a waste of tax payer money, as it is likely to fail. If they succeeded, however, it would spell the end for Bitcoin. Such a move would seem counterproductive to the UK Treasury Department’s stated goal of encouraging innovation, but other agencies in the same government have proven a willingness to degrade consumer safety and technological advancement in the name of national security, this reporter sees no reason why they should be given the benefit of the doubt in this case.
While this last possibility is unlikely, any attempts to discover methods that would allow law enforcement to seize Bitcoin should be taken very seriously by the community.
The potential for a central bank issued digital currency is something that should also be watched with caution. A competing, centralized, government backed digital currency could be a boon to the digital currency world, or it could represent the premature death of decentralized currencies. In an ideal scenario, it would be used as a highly regulated but stable, complimentary digital currency that works alongside both fiat current digital currencies and provides an on-ramp to the digital world with less friction. Alternatively, it could be pushed as the legal and government backed alternative to the “criminal” Bitcoin. It all depends on what the UK Government determines are the advantages and disadvantages of allowing the central bank create their own cryptocurrency.
There were, as mentioned by other media outlets, some positives to take from report. First, it repeatedly mentions a commitment to supporting the innovations that come out of the digital currency space, although this reporter remains unconvinced that it is anything other than pretty rhetoric.
Second, the report mentions a £10 Million research investment increase, in order to “address
the research opportunities and challenges for digital currency technology[,]” in co-operation with the Alan Turing Institute, Digital Catapult and “Research Councils” but it is unclear exactly what the specific goals of the research would be.
As CoinDesk points out, there is also some interesting financial sector regulation included in the UK’s recent budget, including a regulatory “sandbox”. The idea of the sandbox would be to allow companies to provide innovative technologies under light regulation, assuming customers are informed. Presumably, this could be applied to digital currency companies as well as projects like Apple Pay, although the budget does not mention cryptocurrencies specifically.
This report is being touted as something less ham-handed than New York’s BitLicense proposal. However, the fact is, that this isn’t anything close to a comprehensive report on how the UK plans to regulate digital currencies. Rather, it is just a response to the comments it received from the industry leaders and companies in related markets.
There is concerning language in this report. We do not yet know the UK’s regulation plans, it is doubtful the government itself is completely aware of what it is going to do. All we know is that the UK is looking into regulation and that, despite their nice words about innovation, they are very concerned about the currency’s potential for illegal activities. We have seen governments in the past attempt and continue unsuccessful regulation for decades. This report tells us very little about their actual regulation plans, and pretending that it does anything other than tell us that regulation is coming, is only going to result in the community being caught off guard.
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