Bank of England, HMT, UK Gov & the Future of the Digital Currency Industry in Great Britain

While it seems from the outside looking in that the Bank of England, The United Kingdom Government and Her Majesty’s Treasury are pro digital currencies, just what direction are they really going in and at what cost will their final decisions have for the decentralized concept the protocol was designed for.

Bank of England, HMT, UK Gov & the Future of the Digital Currency Industry in Great Britain

While it seems from the outside looking in that the Bank of England, The United Kingdom Government and Her Majesty’s Treasury are pro digital currencies, just what direction are they really going in and at what cost will their final decisions have for the decentralised concept the protocol was designed for.

There were very positive signs appearing during mid-2014 with HMT launching a review into digital currencies and announcing turning the UK into the global centre for digital currency trade.

At the launch of Innovate Finance, a new industry body established to promote the interests of the UK’s rapidly growing FinTech sector in 2014 the Chancellor George Osborne said:

“It’s only by harnessing innovations in finance, alongside our existing world class knowledge and skills in financial services, that we’ll ensure Britain’s financial sector continues to meet the diverse needs of businesses and consumers, here and around the globe, and create the jobs and growth we all want to see in the future.”

“Key to the government’s long term economic plan is cementing Britain’s position as the centre of global finance.”

At the same time the chief executive and director of Innovate Finance Claire Cockerton stated:

“The time has come for radical transformation of the financial services industry. Whether you are a consumer, banker or young entrepreneur – we all see enormous potential for innovation and growth in the financial services sector.

“While London and the UK provide the right talent, expertise, and market conditions, we believe our collective entrepreneurial spirit will lead us to compete and prosper on a global stage.”

Further acknowledgment of the UK government’s friendly attitude towards Bitcoin was publicised during the launch of Innovate Finance with the Chancellor posing for pictures of him buying £20 of the digital currency from an ATM.

In a pre-release article during Q3 of 2014 the Bank of England acknowledged they were intrigued by the Bitcoin Blockchain which they referred to it being the key innovation as the distributed ledger.

The article states that the key innovation of digital currencies is the ‘distributed ledger’ which allows a payment system to operate in an entirely decentralised way, without intermediaries such as banks.

This innovation draws on advances from a range of disciplines including cryptography (secure communication), game theory (strategic decision-making) and peer-to-peer networking (networks of connections formed without central co-ordination).

When payment systems were first computerised, the underlying processes were not significantly changed. Distributed ledger technology represents a fundamental change in how payment systems could work.

And in principle, this decentralised approach is not limited to payments. For instance, the majority of financial assets such as shares or bonds already exist only as digital records, stored on centralised databases.

Then in February of 2015 we had the release of the One Bank Research Agenda from the Bank of England which purpose was to kick-start a new style of banking thinking they focus on five themes, four of which reflects on what role the central bank should play.

In the fifth theme it quotes a fundamental change that Bitcoin and other digital currencies bring to the financial system:

“Digital currencies, potentially combined with mobile technology, may reshape the mechanisms for making secure payments, allowing transactions to be made directly between participants. This has potentially profound implications for a financial system whose payments mechanism depends on bank deposits that need to be created through credit.” 

The biggest sign of positivity came during the budget of March 2015 with £10 million being put into research of digital currencies and the HMT simultaneously releasing their research conclusions in the “Digital Currencies: response to the call for information” in  which it stated their next steps which were;

The government intends to apply anti-money laundering regulation to digital currency exchanges in the UK, to support innovation and prevent criminal use. The government will formally consult on the proposed regulatory approach early in the next Parliament.

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.

The government will work with BSI (British Standards Institution) and the digital currency industry to develop voluntary standards for consumer protection.

The government is launching a new research initiative which will bring together the Research Councils, Alan Turing Institute and Digital Catapult with the industry in order to address the research opportunities and challenges for digital currency technology, and will increase research funding in this area by £10 million to support this.

It is now June of 2015 we have the elections over and George Osborne is still the Chancellor of the Exchequer but how far down the road has been travelled so far and what direction does it look like it is all heading in?

The Liberal Democrats are gone from the coalition and the Conservatives have the majority in the House of Parliament and with this outcome has re-emerged the revival of the previously blocked “Snoopers Charter” or Draft Communications Data Bill allowing increased interception of communications by the security services and the police.

The proposed bill is expected to include a mandatory requirement to include cryptographic back-doors which can be accessed by government agencies, including MI5, MI6 and GCHQ. So any encryption that would be legally allowed to be used in the UK would have to compliant with law enforcement giving them the same access to our personal data that they already have whether encrypted or not.

This has led to the departure of one major UK based crypto company from the UK shores already called Eris Industries and I’m sure the further this bill goes into becoming law we will see a mass exodus of even more companies following their lead.

Preston Byrne, COO and general counsel of Eris Industries, says:

"Eris Industries business is industrial cryptography. This legislation, if passed, is likely to prevent our technology’s use in myriad industrial applications, including financial services, which need reliable, open-source cryptography desperately if they are to stay competitive in a digital age."

Adding that if passed:

"We are likely to see a mass exodus of tech companies and financial services firms alike from the United Kingdom, we are happy to lead by example."

This with the revelations obtained through a freedom of information request of documents by Coindesk dating back to December 2014 from a multinational management consulting company called Accenture.

In their response to the Treasury’s call for information on digital currencies they called on the government to apply the same regulation and identification requirements to bitcoin wallets as it does to bank accounts which is extremely worrying.

Bitcoin and the Blockchain are self-regulatory and don’t require any further regulations than are already in place for the traditional financial industry.

Especially when dealing with a concept and protocol that has caught the attention of so many in the FinTech industry globally because of its decentralised nature.

Any regulations that hinder this important element of the greatest innovation in financial history will only give us more of the same old system with a new lick of paint.