I’m pretty libertarian in my political outlook. I believe in free trade, minimal government intervention and generally letting people get on with it – all that kind of stuff. So it’s not often you find me praising government action. But in the case of Bitcoin, the UK authorities seem to be getting right.
Last August, UK Chancellor George Osborne made a deliberate show of buying £20 of bitcoin from an ATM in Canary Wharf. He wanted the media to take notice. Care was taken to make sure the press were there in large numbers, so that there were photographs and a story. Speaking on the same day at the Innovate Finance conference he declared, "My message today is simple: we [Britain] stand at the dawn of new era of banking. Now let's get on with it."
He said he wants the UK to become the global centre of FinTech. And he clearly envisions digital cash systems – of which bitcoin is the first and most famous example – playing big part in the future of finance. My sources tell me Osborne is frustrated with the large banks. He feels they have undermined his reputation.
He wants as much innovation and disruption as possible. Insiders also tell me (but even just a simple glance of the Bank of England twitter feed reveals as much) that many at both the Treasury and the Bank of England are great admirers of bitcoin. And it seems there is some kind of plan.
Accompanying Osborne’s budget last month came a landmark report from HM Treasury announcing a series of initiatives dealing with digital currency. It makes no bones about the fact that it wants digital currency entrepreneurs to "flourish".
In the tradition of the open-source development of bitcoin, the report was, in a way, crowdsourced. Last November there was a call for information. It attracted 120 responses. These came from a wide range of sources – existing digital cash companies, banks, payments firms, academics and other government departments. And it’s no surprise to discover that the report, unlike the fearful reaction of governments in other countries, is largely positive. It is also sensible.
The report first shows awareness of the potential of digital cash, saying: "The government considers that digital currencies represent an interesting development in payments technology ... the potential advantages are clearest for purposes such as micro-payments and cross-border transactions." But it’s not naïve enough to ignore the fact that bitcoin gets used in the online black marketplace.
Anti-money laundering legislation will apply. The report notes that UK bitcoin businesses have struggled to gain access to banking and other professional services. Banks have claimed that the lack of regulation is the key reason for denying these services. Government action would seem to be addressing this.
The other announcement
We must also consider another announcement which was made on the same day as the report. The Treasury will work with the financial services regulator, the Financial Conduct Authority and the Prudential Regulatory Authority to develop a "regulatory sandbox" for financial technology companies.
What does that mean? A sandbox, according to Wikipedia, is a computer ‘security mechanism for separating running programs. It is often used to execute untested code, or untrusted programs from unverified third parties, suppliers, untrusted users and untrusted websites.’ In other words, an environment is being quite deliberately created for entrepreneurs to test ideas and systems quite legitimately in a lightly regulated environment with customers’ so-called "informed consent".
UK regulation is said to be 'a million times better' than that of the US
Other initiatives in the Treasury report
Another major initiative announced is that £10m will be invested in research into digital currency technology. (Beneficiaries of this will be the publicly funded research agencies known as the Research Councils, the Alan Turing Institute (which studies big data) and Digital Catapault (a non-profit group which aids small businesses by sharing big data).
There is one final component to the report – a "pioneering" framework of voluntary standards for consumer protection. Working with the British Standards Institution and the digital currency private-sector, a series of "best practice" standards for consumer protection will be created. Again, the report shows a good understanding of bitcoin as it correctly identifies the three main consumer risks - storage security, fraudulent or insolvent exchanges and price volatility. And it re-emphasizes the main thrust of Osborne and the Treasury’s action – to help this burgeoning new industry avoid "disproportionate" regulatory burden.
What does this all mean?
I spoke to Adam Cleary, head of the UK Digital Currency Association, and asked him to compare UK regulation to American. He said, "it’s a million times better".
And the proof of the pudding is in the eating. It is re-enforcing a growing trend.
Despite the fact that London is an almost prohibitively expensive place to set up a new business, it is turning itself into a centre for digital currency innovation. The large majority of bitcoin investment may come from the US, especially Silicon Valley – something like 73 per cent of bitcoin investment comes from North America – but they are choosing to operate in London.
Blockchain and Coinbase are probably the two most famous bitcoin companies. Blockchain is largely funded from the US, but it is based here. Coinbase recently $75m (valuing the company at $400m), but if you look at the Ts and Cs when you open a wallet, you’ll find that you are contracting with a company based in the UK. The Times reports that Coinbase is now in talks to set up a regulated bitcoin exchange in Britain.
Part of these decisions lie in the simple fact that London is a groovy place to be, but part of it is also the fact that the regulatory environment is consistent and favourable. The message to governments is simple: get your regulation right and the entrepreneurs will come.
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Dominic Frisby is the author of Bitcoin: The Future of Money?