The British government has shown its intention to regulate bitcoin and other digital currencies, pulling them to the realm of financial regulation applied to banks and other financial services. But bitcoin is not a bank or a financial firm based in the City. How the rules would apply to something that is in the cloud?
George Osborne’s announcement in the pre-election budget contains three steps. First, apply anti-money laundering regulations for the exchange of digital currency, the formal consultation will start immediately after the election. Second, for the British Standards Institution and the digital currency industry to work together to develop voluntary standards for consumer protection. And third, £ 10m funding to the Research Council, Alan Turing Institute and Digital Catapult to partner with industry to research the opportunities and challenges posed by the digital currency.
Balancing innovation and regulation
The government faces the familiar problem needs to provide a suitable environment for innovation to flourish, whilst also ensuring that the companies working in the same industry performs the same function arranged in the same way. All this needs crypto live review to be done in a way as to protect the consumer and, in this case, perhaps the wider financial system itself. Heavy-handed regulation risks stifling innovation and driving away potential based digital currency business. After all, as the currency is truly global in the cloud, the physical location-based digital currency business is irrelevant.
Too little regulation can leave digital currency vulnerable to crime – and the effects of this crime on consumers and the economy. The digital currency industry is already facing problems that include theft of digital currency exchange, malware and attacks on third-party websites, as well as the potential for money laundering help. For example, within a week of the announcement of Osborne, another exchange bitcoin, Paybase, stop allowing withdrawal and its administrators disappeared.
Digital currency regulation is important in order to reduce the risk and prevent abuse of the trust Wrecking in system. This is important if the digital currency to develop a major role in the UK economy. But the nature of those prizes serious regulatory challenges: no central issuer, there is no control over the supply and demand and there is no central organization to impose regulatory requirements on.
It may suggest the idea of bringing them into the arms of the regulator is futile. However, aspects of digital currency that is accepted as payment for goods and services seems to point at which to implement the measures anti-financial crimes – for example, customer due diligence measures when high-value goods purchased using digital currencies. In this case they come under the umbrella of the same rules as cash, as defined in the Money Laundering Regulations, 2007.
Further approach favored by the government is to focus on digital exchange services – the site where a digital currency exchanged for real world dollars, pounds or euros. Two major anti-money laundering initiatives is the customer due diligence and suspicious activity reporting.
Customer due diligence – where the bank or financial services should ask for proof of identity of their customers – is one of the most significant aspects of anti-money laundering regulations. Without it there is no paper trail leading back to the crime, but this can not be applied in all cases as it would be too much of a burden. So it should be applied where there is most risk, an approach that reflects the different aspects that warrant regulation, but treats all companies in this sector is the same as creating a level playing field.