Potential cryptocurrency regulation
March 2015 | FEATURE | BANKING & FINANCE
Financier Worldwide Magazine
2014 was a rough year for cyptocurrencies. Bitcoin in particular, the alternative currency poster-child, endured an annus horribilis. Last year saw the collapse of notable bitcoin exchange Mt. Gox, the arrest of Bitcoin Foundation board member Charlie Shrem on alleged money laundering charges, a number of thefts and hacking scandals, and finally a large drop in the currency’s value. Across the 12 months of 2014, the value of a single bitcoin fell from over $900 to just over $300. The devaluation of the bitcoin, which lost 52 percent of its investment value between January 2014 and January 2015, was worse than the Russian rouble which at one point had lost 51 percent of its value. Indeed, for some commentators, bitcoin was the worst investment of 2014, as well as the worst currency of the year. For an alternative currency which has been heralded in some quarters as the future of banking, last year really couldn’t have been much worse.
But despite the trials and tribulations of the last 12 months, there are hopes within the alternative currency community that 2015 may offer more encouragement. Some signs indicate that cryptocurrencies may finally shrug off their niche ‘techy’ beginnings and start to push through to the mainstream. In December 2014, computing giant Microsoft Corp announced that it would accept bitcoins as a legitimate payment option for apps, games and digital content across a number of platforms. The adoption of the currency by a company of Microsoft’s size and global standing may be a crucial step on the road toward mass consumer take up. However, Microsoft is not the first major firm to open its doors to bitcoin; other corporates and charities to put their faith in the system include Time Inc, Dell, Expedia, PayPal, Warner Brothers, Save the Children, the American Red Cross and Greenpeace.
However, as bitcoin and other cryptocurrencies become more common, there is a need to protect consumers and local businesses from financial harm. There are increasing calls for the adoption of widespread and suitable regulation. A number of bodies worldwide, including the Securities and Exchange Commission, the Commodities Futures Trading Commission, the Consumer Financial Protection Bureau and the Financial Conduct Authority, have all thrown their considerable weight behind claims that regulation may be needed to protect consumers and the wider financial system.
There have also been calls for regulatory action on a local level. In January, Spanish social liberal party Unión Progreso y Democracia (UPyD) called on the country’s Congress to consider implementing stricter control measures on cryptocurrencies in a bid to “improve security and prevent fraudulent and criminal activity”. According to UPyD, bitcoin and other cryptocurrencies should not “remain in a legal vacuum, without the appropriate supervision”. UPyD felt emboldened to demand greater oversight after El Ministerio de Hacienda y Administraciones Publicas, the Spanish government agency that deals with matters of finance and taxation, issued a ruling in September which stated that bitcoin should be treated as a legitimate electronic payment system. According to the ministry, bitcoin-based online gambling companies in Spain must now apply for licences in order to continue to operate.
In the US, regulators in New York have been particularly forthright about their desire to see regulation in the virtual currency space in the coming year. The New York State Department of Financial Services has released its draft framework and proposed a number of new rules to govern the burgeoning virtual currency business. This ‘BitLicense’ plan, should it win approval, would apply to all companies that store, control, buy, sell, transfer, or exchange bitcoins or other cryptocurrencies. The licence scheme would require digital currency companies to record the identity of their customers, including their name and physical address. All bitcoin transactions would be recorded, and companies would be required to inform regulators if they observe any activity involving bitcoins worth $10,000 or more.
In late 2014, however, a bill was submitted to the US Congress proposing a five year cessation on all cryptocurrency regulation after 15 June 2015. The draft law also calls for virtual currencies to be classified as traditional currencies under US tax regulations.
The BBA, a leading trade association in the UK, joined calls for further regulation in the space, noting the risks associated with virtual or cryptocurrencies. The BBA argues that the current regulatory framework benefits consumers and it expanded to include cryptocurrencies so “the same standards of consumer protection and confidence are maintained”. The European Banking Authority (EBA) also supports regulation in the cryptocurrency space. Though the EBA is generally positive about cryptocurrencies, it acknowledges the potential dangers of the sector remaining unregulated.
It appears that regulation is on the cards for bitcoin and other cyrptocurrencies. However, regulators will need to keep sight of the potential benefits of digital currencies. The challenge will be to develop guidelines and regulations that protect consumers and prevent money laundering, while safeguarding innovation and managing disruption to existing banking systems.
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