The BBA, the leading group representing the UK’s biggest banks, has issued a response to the government’s ‘Call for Information’ on digital currencies.

The request, issued in November last year, set out to provide the government with the necessary information to fully understand digital currencies.

The document consisted of 13 questions, ranging from the potential benefits of digital currencies, through to government involvement and new services facilitated by blockchain technology.

The request remained open for a month to allow individuals, businesses and other organisations to submit their comments on various issues. Its closure on 3rd December, was met with a flurry of debate.

The UK Digital Currency Agency Association and several other companies published their opinions of the request. Its 46-page response outlined the need for digital currencies to be considered ‘financial measure’ and thus regulated in the same way as the foreign exchange and gold. The UKDCA called for a light touch from regulators, arguing that over-regulation could potentially stifle innovation.

The BBA response, a joint collaboration with the Payments Council, began by welcoming the UK government’s request before going on to consider both the benefits and risks associated with digital currencies.

“It is clear that the use of digital currencies and in particular their underlying infrastructure and functionality is growing, and we support the approach of HM Treasury in issuing this Call for Information, as this provides a basis for further discussion on the UK position in respect of this emerging market.”

Anonymity and crime

The document identifies anonymity and crime as potential risks associated with cryptocurrencies, saying “digital currencies have a number of features which could easily be exploited by criminals, terrorists and states seeking to launder illicit funds and evade sanctions”.

It continues:

“Any intervention in digital currencies in the UK should seek to mitigate these risks to allow consumers and businesses to use digital currencies for legitimate purposes.”

The response argues that there are additional technologies available that can be used to provide greater levels of anonymity, notably The Onion Router and tumbling services, but these may prove too expensive for bitcoin startups.

Currently, payment service providers are required to prove that transactions are legitimate. At present, however, they are unclear on their responsibilities with regards to servicing those working with, paying or receiving digital currencies.

User anonymity, coupled with the transnational nature of digital currencies, creates significant difficulties in sanctions screening. The BBA and the Payments Council claim that “if these significant compliance risks are not addressed, it may hinder the ability for digital currencies to become mainstream”.

Monetary and financial stability

The financial system and the UK economy as a whole depend of the stability and integrity of the UK payments system.

“Regulation should attempt to limit unintended consequences,” the report concludes.

Despite the fact that digital currencies are often issued uncontrollably, the document says that the impact that can have on monetary and financial stability is “limited”, given the size of the digital currency market; global bitcoin transactions are currently estimated at 60,000 per day, 300 of which occur in the UK.

It does point out, however, that if convertible digital currencies were to reach mass adoption in the UK, it’s possible this may have an increasing effect on sterling.

Potential benefits

The document states that digital currencies may offer a number of potential benefits to legitimate users, including “reduced transaction costs, faster transaction speeds, financial inclusion, competition and innovation”.

Although the statement notes that the UK’s Faster Payments offers many of the same benefits as digital currencies, the latter may provide lower costs and benefits to customers when it comes to cross-border payments.

Refering to the advantages of digital currencies, UK Chancellor of the Exchequer George Osborne said in his Innovate Finance speech:

“These alternative payment systems are popular as they are quick, cheap and convenient […] I want to see if we can make more use of them for the benefit of the UK economy.”

If the identified risks are addressed, then both organisations agree that potential benefits for the wider UK economy might include positioning the UK as the centre for digital currency expertise and introducing an additional channel of tax revenue and investment.

The recording of transactions and their subsequent public audit trail could support financial crime control with effective international cooperation. It would also mean fewer barriers to cross-border trade, faster settlement time for payments, lower transmission charges and lower charges for cross-border e-commerce and money remittance as well as the enhanced ability to carry out micropayments.

The response touches on the innovative use of distributed ledgers that support decentralised payments.

It notes:

“The ledger technology offers potential opportunities to fundamentally change the way many value transactions both within and outside the payments system, including the distribution and communication of assets, company shares, and securities.”

It finishes saying that distributed ledger technology is open source and in its early days, and it may therefore be reasonable for any ‘intervention’ on the core technology to be light touch, “so as to support continuing innovation in a positive way”.

Call for regulation overseas

The document explains that the existing regulatory framework for the payments system means that consumers are able to enjoy a high level of confidence and basic protection whilst completing a transaction. However, it points out that such a level of protection is not currently being offered to digital currency users.

To address the issue, the collaborative report reads:

“It is essential that support for the introduction of digital currencies is subject to ensuring the same standards of consumer protection and confidence are maintained.”

The joint response comes amid international efforts calling for further regulation. Union Progreso y Democracia (UPyD), a Spanish political party, submitted a proposal to the country’s Congress explaining why it believes bitcoin regulation is necessary last week.

The Spanish proposal followed the New York Department of Financial Services proposed BitLicense regulatory framework for digital businesses in July last year. This included compliance and capital requirements, customer protection, anti-money laundering and cyber security, reporting and financial disclosures.