News that the UK government will seek to regulate digital currencies made waves in the local startup community.
The UK Treasury report, revealed as part of chancellor George Osborne’s annual budget, outlined plans to curb criminal activity via AML (anti-money laundering) regulation and allow digital currency companies to opt-in to standardised consumer protections following May’s election. The government also proposed injecting £10m into research on digital currencies as part of its larger pledge to innovation in FinTech.
While many of the 120 submissions that informed the Treasury’s plans came from payment bodies, banks, academics, consultancies and fellow government agencies, bitcoin companies also weighed in on the future of digital currency regulation in the UK.
Now that the report and its conclusions are public, are the UK’s crypto startups happy with the balance that has been struck? We tracked them down to find out.
Chief among the Treasury report’s proposals was the introduction of anti-money laundering regulation for digital currency exchanges operating in the UK.
The exact scope of this regulation (and the regulator enacting it) will be up for debate in the next parliament, but it is likely that exchanges in the UK will have to perform tighter background checks on the digital currency flowing through their books. In turn, customers buying bitcoin may no longer be able to do so anonymously.
Marc Warne, founder of UK bitcoin marketplace Bittylicious, praised the sensibility of the proposals, but questioned regulating crypto-only exchanges at this early stage:
“A light touch approach, such as HMRC’s general AML policies, make sense for fiat-to-crypto exchanges, and many legitimate businesses in the UK are already implementing such procedures, even if not required. Some AML regulation for digital currency exchanges makes sense to me, but I feel it may be wise to limit this to on and off ramps at this stage rather than crypto-to-crypto exchanges.”
QuickBitcoin co-founder Hugh Halford-Thompson was also impressed by this ‘light-touch’. He, like many others, hopes that the government’s actions will help bitcoin companies score banking relationships, which have so far proved elusive both in the UK and abroad.
“It’s good that they see our industry as a nascent one where heavy handed regulation could be detrimental. The government has a real chance here to legitimise the sector. I hope that with this banks will change their tack and stop blacklisting the word ‘bitcoin’.”
Not everyone agrees, however.
Rather than legitimising the industry, Akin Fernandez, who runs London’s bitcoin voucher shop Azteco, said he suspects the Treasury’s “artificial restrictions” will force the UK’s bitcoin companies to move abroad. He added:
“It’s the opposite of what we asked for. In our submission, we made it plain that arbitrary, irrational regulation is precisely what is not needed. We wanted Britain to be the top destination for bitcoin startups. As far as Azteco is concerned, we can incorporate in any jurisdiction, and will choose the one that is best suited to our business model.”
Bitcoin firms already implementing background checks on customers are more welcoming.
Speaking to CoinDesk, a spokesperson from London-based bitcoin derivatives trading platform, Crypto Facilities, said the company already has “strict” KYC and AML procedures in place and is prepared to comply with “reasonable guidance” from the government. The company also welcomed what it termed as the UK’s active and open approach towards digital currencies, adding:
“We think best practice standards would benefit the industry, provided that they do not unduly burden UK-based businesses, reflect the intricacies of digital currencies and are commensurate with the limited resources of many digital currency-related companies and the early stage of the industry as a whole.”
One of the UK’s top Local Bitcoins traders, who wished to remain anonymous, says the regulations will probably be workable for his business, which also requires users to present proof of identity. He has made several thousand trades since joining the platform.
“Due to fraud risks the ID we require currently is generally stricter than [traditional] AML requirements so it won’t be that big a change on the customer side. There will be more admin in making and maintaining records so there will be time and costs to be met. However, the devil is in the detail and we won’t know that for a few months.”
Much like New York, which announced that software developers would be exempt from its forthcoming BitLicense, there is no indication that the UK will require digital currency startups to comply with regulation if they do not hold customer funds.
Blockchain, which operates an office in East London, provides a range of bitcoin tools, including a wallet service. Unlike other wallet providers however, its users retain custody of their private keys.
The company’s Global Policy Counsel, Marco Santori, praised the line the report has drawn between exchanges and other bitcoin businesses:
“If any digital currency business model creates a risk of money laundering, it’s the exchange model. HMT (Her Majesty’s Treasury) did research sufficient to understand this, and has decided to control for it by developing AML requirements. This is in welcome contrast to the blunderbuss approaches we’ve seen in other jurisdictions.”
He added that the Treasury’s proposals are likely to put consumers first:
“As to consumer protection, HMT has rightly focused on custodians, and the resulting framework will likely be opt-in. This approach respects consumers’ right to choose the custodian of their funds, which Blockchain supports. Though Blockchain, as a non-custodian, will likely not be directly included in this framework, the company sees it as a step in the right direction, and an opportunity to further develop a consumer-friendly regulatory landscape.”
Jonathan James Harrison, formerly of ATM startup Satoshipoint, started a new software venture, Telebit, last month. The service, which operates on Telegram, lets the messaging app’s 50 million monthly users send bitcoin to each other without the need to register. Unlike Blockchain, Telebit does store users’ funds in a centralised company wallet.
“This report shows the UK government is supporting digital currencies and the innovation they bring, which is very positive news. For us at Telebit, we operate in a crypto-only environment and will not be subject to these new AML regulations.”
He added that the report comes as welcome news to bootstrapped startups who may be unable to afford legal advice and compliance officers.
The Storage Providers
While respondents to the Treasury’s Call for Information were fairly united on the need for crime prevention, they were more divided on the subject of consumer protection. Just under half didn’t think the government should regulate on the subject, while others advocated to adapt existing FCA frameworks for consumers.
The government’s conclusion fell somewhere between the two camps, advocating for a set of voluntary industry standards developed in consultation with the BSI (British Standards Institution) and the bitcoin community.
Indeed, bitcoin custodians – companies who hold funds on behalf of customers – have been moving towards standardised practices for some time. Multi-sig wallet provider BitGo recently joined with C4 to create a draft Cryptocurrency Security Standard (CCSS), while UK bitcoin vault Elliptic has taken steps to audit and insure its operations.
Elliptic‘s CEO Tom Robinson said the Treasury’s conclusions mirrored the recommendations put forward by the company:
“It is positive that the industry is being left to develop its own technical standards (led by the UKDCA) – self regulation will promote innovation much more effectively than onerous regulation. These measures will help to make the UK a global hub for digital currencies and maintain its position at the forefront of FinTech innovation.”
One of the best-funded startups in the space, Circle, which operates out of Boston and Dublin, also offers a bank-like service for bitcoin users, with an emphasis on insurance and security.
Chief Compliance Officer John Beccia praised the report for its “proactive” stance, which he says doesn’t overburden businesses:
“We appreciate that the report recognises the benefits of digital currency and acknowledge that the report appropriately identifies key areas of risk, such as money laundering and consumer protection concerns. We are encouraged that the UK regulators are focused on developing balanced regulations that not only mitigate these risks, but also do not place burdens on legitimate businesses.”
Adam Cleary, the founder of Bullion Bitcoin, a storage provider and gold-bitcoin exchange, also echoed this sentiment:
“We are very pleased by the government’s response. By providing regulatory clarity and legitimacy to digital currencies and related startup businesses, specifically around anti-money laundering requirements, the UK is reaffirming its position at the forefront of digital currency innovation. In particular we welcome the news that the FCA’s Project Innovate will work with HM Treasury and the Prudential Regulatory Authority to explore a regulatory ‘sandbox’ to allow innovative start-up companies to test ideas at an early stage without excessive regulation.”
The specifics of the Treasury’s plans will undergo a consultation process in the next government. Whether the UK will succeed in its ambition to create a world-leading bitcoin hub will become clearer in time. For now, the nation’s bitcoin ecosystem remains positive.
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