19 Mar UK to regulate Bitcoin

Digital currencies featured significantly in the [2015 Budget](https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/413949/47881_Budget_2015_Web_Accessible.pdf) published by HM Treasury (the UK’s Finance Ministry) on 18 March 2015. Affirming its determination to drive increased competition in banking, the UK government details its plans to establish a supportive framework for digital currency businesses. It hopes to achieve this by a judicious mix of carrot and stick – in fact, a rather big bag of carrots and a pretty short stick. In August 2014, the Chancellor of the Exchequer (UK Finance Minister), George Osborne, expressed broad support for UK FinTech (financial technology) companies and announced that the government was looking into the benefits and risks associated with digital currencies and their underlying technology. A call for information followed in November 2014 which attracted over 120 written submissions. A summary of the responses and government’s plans based on them are detailed in a [paper](https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414040/digital_currencies_response_to_call_for_information_final_changes.pdf) published with the 2015 Budget. Central to government’s thinking is its belief that distributed ledger technology ‘has significant future promise’. Even though the paper focuses on payments innovation, other parts of government are already considering wider use cases, as revealed in a recent Bank of England research paper. Government’s key proposal is to apply anti-money laundering (AML) regulation to digital currency exchanges in the UK. While regulation – any regulation – is anathema to some, AML regulation is actually something the UK industry has been asking for, for some time, founded on the belief that it will plant credibility in the minds of consumers and banks alike. Opening a UK bank account has been nigh impossible for any business even vaguely associated with digital currency. The most frequently cited reason for being denied an account, or having one closed, is banks’ inability to ensure AML compliance. Without a regulatory regime for AML, countering terrorist financing and handling funds belonging to politically exposed persons, banks and payment institutions are exposed to a higher risk of infingement and fines. Not a good situation when banks are de-risking generally. That all changes with the introduction of AML regulation. For exchanges, at least. It remains to be seen whether banks – particularly the Big Four who, for now, control the sterling clearing system – become more amenable any time soon. The government also wants to ensure law enforcement has effective skills, tools and the 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. This is hardly surprising. Infinitely more realistic an approach than it took with earlier pronouncements on controlling the use of cryptography. Regulatory certainty and the ability to be regulated in the UK will likely attract more digital currency startups and venture capital to London. CoinJar, recently re-headquartered in the UK, are cited as an example in Budget documents. AML regulation is a win-win for government and the industry. In one go, George Osborne has succeeded in stimulating a nascent industry, attracting entrepreneurs and venture capital, meeting recommendations from the European Banking Authority (EBA) and placating Home Office (Interior Ministry) concerns about criminal and terrorist use of virtual currency. A deft piece of work and an inspiration to other jurisdictions. To bolster its support for digital currency businesses in the UK, the government intends to put money where its mouth is by providing an extra £10 million to address research opportunities and challenges for digital currency technology – a clear indication the government wants the UK to lead in blockchain and similar technologies. The idea is to bring together industry with several of the UK’s seven research councils, the Alan Turing Institute which focuses on Big Data and algorithm research and is headed by some of Britain’s leading universities including Oxford, Cambridge, Edinburgh and University College London, and Digital Catapult – a rapid business accelerator focusing on the collection, transport and analysis of data. The government also announced that it is to work with the British Standards Institution (BSI) and the industry to develop voluntary standards for consumer protection, a proposal being championed by the UK Digital Currency Association. In an accompanying publication [*Banking for the 21st Century: driving competition and choice*](https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/413885/Banking_for_the_21st_Century_17.03_19_40_FINAL.pdf), HM Treasury proudly boasts that all these measures together will increase competition ‘… by supporting the growth of technology that can be adopted by banks and non-bank providers’ promoting new products and allowing existing products to be delivered more cheaply and efficiently. This may not have been what early Satoshinistas had in mind but it certainly will be good for business. *Money* has already taken over Bitcoin and it will continue doing so and at an ever-increasing rate. The government is in no doubt these measures, taken together, ‘place the UK at the forefront of the development of digital currencies’ and will make the UK the go-to place for digital currency and related technology firms. None of the proposed measures will happen overnight. Formal consultations will only start in the next parliament, to be formed after May’s general election. Public policy and legislation take time. Of course, this government may not be returned to power then but I suspect there is will not be too much disagreement across the political parties on this issue. In marked contrast to other jurisdictions where individual regulators have formulated narrower policy agendas, the UK has shown that joined-up government really works. The result is a comprehensive policy that takes into account all the risks and benefits and all sections of government. For once, a government has tackled it the right way, striking a thoroughly pragmatic balance between the interests of the state, the consumer and the industry. The UK is not the first jurisdiction to take this approach – the Isle of Man got there first – but it leads the way in the EU and across most of the the great nations. I would not be surprised if the UK sets the European agenda on digital currencies.