Open Consultation Digital currencies: Call for Information

Open Consultation
Digital currencies: Call for Information
 
 

Contents

 
Question 1
1.1. What are the benefits of digital currencies?
1.2. How significant are these benefits? 
1.3. How do these benefits fall to different groups e.g. consumers, businesses, government, the wider economy?
1.4. How do these benefits vary according to different digital currencies?
 
Question 2
2.1. Should the government intervene to support the development and usage of digital currencies and related businesses and technologies in the UK, or maintain the status quo?
2.2. If the government were to intervene, what action should it take?
 
Question 3
3.1. If the government were to regulate digital currencies, which types of digital currency should be covered?
3.2. Should it create a bespoke regulatory regime, or regulate through an existing national, European or international regime?
3.3. For each option: what are the advantages and disadvantages?
3.4. What are the possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)?
 
Question 4 
4.1. Are there currently barriers to digital currency businesses setting up in the UK?
4.2. If so, what are they?
 
Question 5
5.1. What are the potential benefits of this distributed ledger technology?
5.2. How significant are these benefits?
 
Question 6
6.1. What risks do digital currencies pose to users?
6.2. How significant are these risks? 
6.3. How do these risks vary according to different digital currencies?
 
Question 7
7.1. Should the government intervene to address these risks, or maintain the status quo? 
7.2. What are the outcomes of taking no action? 
7.3. Would the market be able to address these risks itself?
 
Question 8
8.1. Should the government regulate digital currencies to protect users?
8.2. If so, should it create a bespoke regime, or regulate through an existing national, European or international regime?
8.3. For each option: what are the advantages and disadvantages?
8.4. What are possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)? 
8.5. What other means could the government use to mitigate user detriment apart from regulation?
 
Question 9
9.1. What are the crime risks associated with digital currencies?
9.2. How significant are these risks? 
9.3. How do these risks vary according to different digital currencies?
 
Question 10
10.1. Should the government intervene to address these risks, or maintain the status quo?
10.2 What are the outcomes of taking no action?
 
Question 11
11.1. If the government were to take action to address the risks of financial crime, should it introduce regulation, or use other powers?
11.2. If the government were to introduce regulation, should it create a bespoke regime, or regulate through an existing national, European or international regime? 
11.3. For each option: what are the advantages and disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)?
11.4. What has been the impact of FinCEN’s decision in the USA on digital currencies?
 
Question 12
12.1. What difficulties could occur with digital currencies and financial sanctions?
 
Question 13
13.1. What risks do digital currencies pose to monetary and financial stability? 
13.2. How significant are these risks?
 
 

Question 1

1.1. What are the benefits of digital currencies?

 

  1. A trustless method for transferring asset control that requires minimal regulation as it is self-regulated by block chain technology, no centralised counterparty or third party trust is required.

 

  1. A programmable type of money, meaning that it can be integrated to a much greater extent than the traditional system. This could result in economic growth and new business types.

 

  1. New types of games and entertainment systems will be able to integrate bitcoin or a specifically designed digital currency into their systems.

 

  1. Government facilities and public services will be able to integrate the technology directly into their systems, enabling a faster, more secure, more transparent and reliable way to transact.

 

  1. A permanent, viewable, cryptographic record, for all, All transactions are recorded publically forever in the distributed ledger.

 

  1. Non-discriminatory account issuance, where all businesses/individuals have the same rights regardless of size, nation, race, gender, religion, etc.

 

  1. A push payment system. Unlike traditional debit/credit/direct debit payment mechanisms, the customer pushes the payment to the business. This eliminates potential for fraud and ID theft.

 

  1. A method of wealth creation that cannot be abused by arbitrarily changing the goal posts, due to the decentralised majority agreement nature.

 

  1. A way for governments (or third parties) to not be subservient to issuers and creators of wealth.

 

  1. A method to create wealth (through a nationalized coin) that can be used to invigorate the economy and push it back towards recovery.

 

  1. Digital currencies can be implemented on Multisignature platforms. 

 

  1. Using alternative coins (e.g. a national coin), identification tags on email, phone or government card on the coin address will help identify the use nationally and internationally with regards to corporations.

 

1.2. How significant are these benefits?

 

  1. Fewer costs for regulatory governance due to lack of need to create extensive regulations since the system regulates itself.

 

  1. Enables new types of businesses. Miners*, games, automated taxis, DACs,  

 

  1. New digital currency integrated entertainment systems will provide a richer culture and economic growth in jobs and industry.

 

  1. Emerging businesses are funding themselves using the system, not by the public or private sector, injecting wealth and growth into the local system.

 

  1. Optimization of existing businesses where chargeback/transaction fees equate to large percentages of the overall cost, such as gambling, software, small online merchants.

 

  1. The potential different usage is uncharted. For example, Facebook was not realised until after 1995. Some of the early potentials are being realised in the form of multisignature platforms, (coloured coins?)

 

  1. This removes the burden of PCI security, and it is impossible for a ‘card data leak’ which puts the finance, credit score and quality of life of both individuals and businesses at risk.

 

  1. Bitcoin, or a specifically created national coin, is (or can be) minted to certain specification. Hence, with a predictable monetary base, businesses can know with greater certainty some future conditions of the market. This enables them to better economise and efficiently allocate resources they control.  

 

  1. No entity is responsible for issuance, this allows for far less regulatory oversight, meaning far less expenditure for governments to work in such an environment.

 

  1. Governments can back a national coin by providing a strong infrastructure into creating a ‘mining’ network for their specified coin. This would also provide said government with two forms of income. The automated generated wealth from the system, and the potential to allow others to invest into the national ‘mining network’. Those contributing to their national network would also be rewarded with this wealth generation which can be used for economic growth and would give them a commitment to their nation state (see Hullcoin).

 

  1. Multisignature allows users, individuals and businesses, to do away with a lot of extra traditional security requirements. It also allows for far less regulatory requirements (and expenditure) due to the self regulating nature of the technology. 

 

  1. Governments may be able to collect taxes and dues directly from the transaction in decentralised systems with a transparent ledger, even apply specific rules on a nationally created coin. Bitcoin is a pseudonymous system, requiring the user to put in extra technical effort to become anonymous whilst using it.  However, as use of such systems increase, and permeate the primary economic systems (that is, the largely unregulated, or SystemD economies), the efficiency of legal efforts to force compliance with respect to taxation systems (or systems of identity) may decline.  Such developments are actually a positive force social and economic development.

 
In like manner, traditional governmental systems (based upon the corporation-state model) will find more transparent and cost effective use that will increase public trust and involvement due to their inclusivity, availability, and open nature (concurrent with developing abilities of users to exchange currency units without the involvement of a third party).  
 
Competition between decentralised systems which function both as a method of speech and for the purpose of transmittal of currency-related information will result in part from a race to develop systems that can:

  1. readily be exchanged for goods, services, or other decentralised currency units,
  2. be interchangeable with traditional currencies (fiat) where necessary, 
  1. gain broad adoption and use on mobile devices,
  2. be utilized via systems such as SMS or TV signals that do not rely on the internet, and
  3. provide inherent privacy or anonymity. 

Creation of such a coin can be based upon the pre-existing bitcoin network, or created as a complementary currency.
 
Each of these provides jobs and businesses, some of which are funded by the digital currency in question, bearing no strain on the traditional, but acting as additional growth alongside it.
 

1.3. How do these benefits fall to different groups e.g. consumers, businesses, government, the wider economy?

 
They will enable further growth in businesses and jobs. Hence, injecting newly created wealth into the economy. It is still very largely unrealised wealth as people innovate and develop new applications.
 
Growth in this area will also attract similar high end tech businesses which will in their turn attract other related types of businesses.
 

1.4. How do these benefits vary according to different digital currencies?

 
Understanding of alternative digital currencies is still very under developed. Many ideas are as yet unthought of, and others are quietly being worked on. 
 
Some implementations may include integration into energy producing infrastructure, such as solar panel roads for a wealth to energy transfer, as an alternative for clean energy.
 
Or an RFID chip, enabling a way for an individual to literally carry his wealth (or a percentage of it) within his body, and using the technology to interact with digital currency friendly environments. This provides the most secure method against theft (as theft would require grievous bodily harm/mutilation, which is less likely than theft of a wallet/purse/phone).
 
Or as a supplement to Departments of Work and Pensions. Wealth generation as discussed above and current benefits supplemented in such a fashion could relieve government of vast expenditure.
 
Alternative coins or those embedded in the Bitcoin block chain can implement smart contracts, assist with legal systems (just as jury duty or legal aid), or be used to prove ownership of securities. Used in any of these fashions can relieve the government of vast expenditure and stimulate growth.
 
As a further example, if an application of block chain technology is used for securities then it is far more traceable and accountable than the current system. Therefore it would require less expenditure on management and regulation.
 

Question 2

2.1. Should the government intervene to support the development and usage of digital currencies and related businesses and technologies in the UK, or maintain the status quo?

 
Yes, the government should intervene to support the development and usage.  However, this intervention should not involve the development and promulgation of new regulations or laws, but rather, should focus on incentivisation for use of various currency systems while removing legal and other barriers to their adoption.
 

2.2. If the government were to intervene, what action should it take?

 
The government should encourage banks to allow digital currency based businesses to gain access to business bank accounts. There is no justification for current exclusion, it is keeping business and jobs away from the UK.
 
The first bank that adopts would gain benefits, an increase in customers and increasing their capital as funds flowed towards them.
 
We are losing a net amount of trade from the economy every day due to the lack of UK bank interaction, and the amount lost will only increase exponentially year on year. The wealth generation lost could be used to help rebuild our economy.
 
Financial support could be given to local government digital currency projects (such as Hullcoin). Such projects could be used to enable councils to inject wealth back into their local communities.
 

Question 3

3.1. If the government were to regulate digital currencies, which types of digital currency should be covered?

 
Due to the distributed open source nature of digital currency networks, it is not possible to directly regulate digital currencies, nor would it be necessary. However, you can regulate the businesses involved. The types of businesses involved are already covered by many regulations (ICO, Companies House, HMRC, Gambling Compliance, Trading Standards).
It is notable that continued attempts to regulate decentralized projects themselves will only result in an acceleration of the rate at which people depart from centralized systems that can be effectively regulated.  A market which relies largely upon institutional intermediaries, and / or relies upon servers managed by private service providers, will ultimately be subjected to censorship (including seizure of resources by a variety of corporation-state actors claiming to exercise legal authority).  On the other hand, markets which are truly peer-to-peer cannot be effectively regulated, and indeed, even prior to the advent of the internet, such systems (which did not rely upon institutional intermediaries) in most developing countries far and away exceeded the economic activity of regulated markets.  
 
To the extent that regulation results in capture and logging (financial surveillance) of people’s identities and that regulation or new laws result in corporation-state mandates for capture (forced seizure through taxation) of personal resources. This has led to economic stagnation and people will increasingly seek out nations and use financial systems that offer as much of the free market as possible.
 

3.2. Should it create a bespoke regulatory regime, or regulate through an existing national, European or international regime?

 
If regulatory ends are sought, there should be custom made regulations. This is because the system governs itself for the most part, and an overly heavy handed approach would inhibit innovation and exclude the burgeoning growth of a new economy.  Notably, any regulatory regimes will be circumvented by development and evolution of decentralised systems which are rapidly and dynamically changing. Facebook started from a shared apartment, many projects have started from an individual’s shed or similar. If we regulate we exclude, minimal regulation is advised as mentioned, the system regulates itself.
 
The technology gives rise to alternative digital age verification systems for individuals. This opens up international trade to a much larger audience, and growth of national and international trade equals jobs and economic growth.
 
We cannot take an over arching approach as different nations have adopted different approaches towards Cryptocurrency. Some have taken a passively inclusive approach (the UK), whilst others have taken an actively exclusive approach, forcing businesses to close or seek other nations to establish themselves in (the US, in particular, New York (Bitlicense).
 
The UK should take an active inclusive approach, other nations will eventually adopt an actively inclusive approach and the UK will lose the chance at being the global leader in adoption in this emerging financial sector.
 

3.3. For each option: what are the advantages and disadvantages?

 
The advantages of creating a specific regulatory framework for Cryptocurrency businesses are minimal at best and not worthwhile. Attracting specialised skilled workers, business opportunities and new businesses, the UK would likely adopt a substantial reduction in regulation and related costs, including regulations associated with taxation, and replacement of such systems with voluntary (opt-in / opt-out) systems which will inspire growth through competition and the need to inspire confidence from the public.
 
Operating under a European or International regime would confuse businesses and individuals alike, as different areas have taken a different approach, some very heavy handed, excluded businesses and forcing this emerging technology out of their locality.
 
The European regulatory regime, if minimal and tailored to specifically reduce or remove regulatory obstacles currently in place, would be beneficial in the sense that there would be one set of rules for the entire continent – unlike a confused set of a rules as seen in the US.
The UK can capitalise on this by creating an ideal (slowly developed) framework, that grows alongside the burgeoning industry to compliment it and promote a sustainable and positive growth.
 
Regulation would also entail costs to the government, for creation, management and upkeep. Increases in regulation would be as unenforceable as regulation of bittorrents, and probably more ineffective as time goes on.
 

3.4. What are the possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)?

 
Any regulation will create a barrier, the more regulatory criteria there are, the more the barriers will impede growth and attractiveness for the UK. To the point of forcing individuals and business to take their wealth and business to other countries or systems.
 
However, the benefits of minimizing or removing regulation will encourage banks to provide business accounts to Cryptocurrency related businesses.
 
Creation of regulation will also entail costs to the government, and maintenance costs to enforce such regulation.
 

Question 4 

4.1. Are there currently barriers to digital currency businesses setting up in the UK?

 
Yes.
 

4.2. If so, what are they?

 
It is impossible for any bitcoin related business to get a UK business bank account. This makes it nearly impossible for businesses to seek out funding, as most funding methods require the business to have a bank account to deposit said funds.
This has led to people trading with their personal bank accounts, and in some cases using their personal account for their business venture.
 
This has culminated with banks closing numerous bank accounts over the years, stating that personal accounts are not to be used for business purposes. Whilst refusing to give the same legitimate people business accounts.
 
The most common statement from banks for refusal of a business account, regardless of fulfilling all their other criteria, is that “bitcoin is high risk”.
 
No other definition or clarification is given.
 
This has also made funding very difficult for digital currency related businesses, for in the traditional system such businesses require a business bank account to receive funding (from government or private investors). And they can not acquire a bank account, thus making it very difficult for these business ventures to grow.
 
The recent £100 million from the government for FinTech businesses has been given to Santander to manage. Santander also refuse any bitcoin related businesses a business bank account.
 
The government can sidestep this issue by directly providing businesses in this sector with digital currency funding. Alleviating sizable management costs and thereby making sure that the funds do go to those that need them to help restore the economy by growing and developing FinTech businesses and providing jobs.
 

Question 5

5.1. What are the potential benefits of this distributed ledger technology?

 
The full potentials are as yet unrealised. 
 
Blockchain technology allows for trust-less exchange of digital contracts, of which digital assets are a form. In other words, they allow individuals to conduct trade and commerce with reduced counterparty risk and, in most cases, without requiring a trusted third party.
 
Some of the current realised potentials include, smart contracts, shares, automated systems, automated cars, verification systems, identification, faster transactions , including more of the world’s population in global trade, inheritance systems, more inclusive political systems (resulting in reverse apathy for the political class, political interest will grow in a more transparent system).
 
Accountability is one of the foundations to building a strong democracy, but systems of accountability should not be left in the hands of corporation-states. Such things have traditionally left to regulatory bodies and humans prone to error or self interest (as can be attested by the 2008 Libor scandals and the recent ongoing ForEx manipulations). We have the potential with block chain technology to create a truly inclusive democratic nation.
 

5.2. How significant are these benefits?

 
Inclusion of billions of the world’s unbanked population into a global financial market would create unfathomable global wealth, similar to the emergence of the industrial era and computer technology that allowed for a wider and larger audience.
 
The industrial era and emergence of computer technology allowed for the inclusion of millions and hundreds of millions respectively. Inclusion into the digital financial era will allow for the additional participation of billions.
 
Cheaper financial transaction will give individuals and business more wealth which will in turn create business and economic growth, jobs and potential for new innovation from this wealth.
 
The inclusion of billions into the global financial market will allow artists, farmers, businesses, and more, to trade with a wider audience than has ever been known.
 
The cultural implications can also not be understated. As with the emergence of global trading violent conflicts became less due to the importance of open trade. An increase in such trade and cultural transference leads to a growth of mutual understanding and importance being placed upon trade for the benefit of all. 
 
This leads to more diplomatic measures being employed in times of turmoil, instead of war.
 
Predictable monetary systems can also not be understated. An open public ledger is a dream for accountancy departments and a predictable supply can be used to create supportive currencies for governmental departments or nation states. Such predictable monetary systems allow economic calculations to be performed with much greater efficiency. 
 

Question 6

6.1. What risks do digital currencies pose to users?

 
Alternative currencies that are created for the purpose of enacting a ‘pump & dump’ scheme (see 6.3).
 
No method for coins to be returned unless the receiver sends the funds back (similar cases of money loss occur in traditional banking). Escrow services, multisignature and contracts should be employed where dispute mediation could be required in a transaction.
 

6.2. How significant are these risks? 

 
The risks are almost identical to any other business or institution. 
 
As with any scheme, regardless of denomination, individuals and businesses should always do their due diligence. The significance of losses depends upon how much time, energy, and funds, individuals place in an alternative digital currency or business.
 
However, funds can very easily be obscured and hidden in the traditional banking system, but due to the open nature of block chain ledgers there is less risk than the traditional system.
 
Even if digital currency funds are not able to be retrieved, the amount lost can easily be seen by all and equivalent assets can be seized in a criminal situation to remedy those who lost.
 

6.3. How do these risks vary according to different digital currencies?

 
There are numerous alternative digital currencies coming into existence, some with merit, others created with intentional ‘pump & dump’ mentality. Meaning that they hype the alternative coin through social media (often exaggerating the qualities of the alternative coin), then sell off their own holdings for a profit to the detriment of the people buying the coin.
 

Question 7

 

7.1. Should the government intervene to address these risks, or maintain the status quo? 

 
The corporation-states (otherwise known as ‘governments’) should formulate a response to assist with the development and growth of this emerging industry, it should not intervene with additional regulation.
 
Government can provide an internal department that can assist with inquiries from the public with regards to businesses or digital currencies.
 
Self regulating bodies can be encouraged to be created by providing incentives to the creation such organisations.
 
Government department (as mentioned) can then signpost public inquiries to specific self regulating digital currency bodies when more advice is required.
 
Providing a business standard and government accreditation to achieving this standard could be supplied. And such individual or business standards can be provided by self regulating bodies.
 

7.2. What are the outcomes of taking no action? 

 
Less public interest in the emerging digital sector, which leaves the general public at higher risk of continued fraud, criminal activity and black market funding conducted through the traditional banking system. Which is far higher and far easier through the traditional (more anonymous) system.
 
A lack of interest in supporting any national digital currency which could be used to strengthen a localised or national economy.
 

7.3. Would the market be able to address these risks itself?

 
Yes, by providing self regulating bodies of experts that have the experience and know the sector. Such bodies can construct ‘best practice’ models that businesses and individuals can adhere themselves to, and numerous self regulating bodies can emerge in this fashion, with the best and most trusted (those that are adopted by the most trustworthy businesses) will provide the safest measure and standards.
 
Businesses and individuals will adhere to such practices. Though it should be noted that not all businesses and individuals will, but even though some will not, they will still adopt what they see as the best practices of such businesses and adopt selected philosophies and standards into their practices, thereby providing consumer protection themselves, at no cost to government.
 

Question 8

 

8.1. Should the government regulate digital currencies to protect users?

 
No. Digital currency is just the first application of blockchain technology, you cannot regulate digital currency without regulating blockchain technology, and regulating blockchain technology would create large barriers to innovation, development, businesses, jobs, economic growth.
 

8.2. If so, should it create a bespoke regime, or regulate through an existing national, European or international regime?

 
Digital currencies should not be regulated. Moreover they cannot be regulated.
 

8.3. For each option: what are the advantages and disadvantages?

 
There are no advantages to regulating innovation.
 
If the creation and development of digital currencies is regulated, then this will create barriers to innovation and creativity, exactly the opposite of an inclusive friendly FinTech environment. And it would place barriers to the development of further applications of block chain technology.
 

8.4. What are possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)? 

 
Attempting to regulate digital currencies would destroy the innovation and drive Cryptocurrencies and development underground and to other countries. Effectively forcing the UK out of the future of finance.
 

8.5. What other means could the government use to mitigate user detriment apart from regulation?

 
The government could create an internal body that the public and businesses can bring related issues to. Such an internal body could then seek remedies to said problems via already existing methods, such as contacting the relevant local authority with regards to the issue.
 
Standards should not be created for digital currency creation, as this would destroy potential beneficial applications.
 

Question 9

9.1. What are the crime risks associated with digital currencies?

 
The same criminal activities that can attributed to any other item in the money sector, such as fiat currency, gold, precious metals. Most of these risks are far less likely with digital currency, due to the open nature of the public blockchain.
 
The crime risks are associated with this type of money are such things as fraud, money laundering, theft and similar (though on a lesser scale due to the transparent traceable nature of block chain technology, see 9.2).
 
Some alternative digital currencies are being created that do not give any utility to the users, they act as ‘pump and dump’ schemes, where through excess publicity and advertisement users are convinced of the alternative currencies merit, only to find the market value of that currency drop in value shortly after initial ‘IPO’s and launches. 
 
Some of these currencies may have very valid and potential use, but are as yet remain unrealized in this very early market.
 
It is far easier for a criminal to acquire someones credit/debit or bank details and then steal (pull) money from the related account. This simply can not be done with digital currency (due to the push mechanism).
 
If a nation state adopted digital currency, it would see far less criminal activities that are heavily, or solely, associated with fiat currencies. Such savings from reduced financial crime and taxation of large corporations that practice tax avoidance can be used to further reduce risks.
 

9.2. How significant are these risks? 

 
Due to the open nature of blockchain technology and cryptocurrency, the risks are far less significant than anyone operating similar criminal methods within the fiat sector. This is due to the nature of all fiat currencies and the inaccessibility for nation states to follow the trail on fiat through multiple associated banks. 
 
This often leads to such things as massive tax avoidance (in the fiat world) by huge corporations or very wealthy individuals. It is estimated that up to £1 trillion is lost due to big business tax avoidance, this is far more than all the individuals taxes combined. Such funds could be put towards promotion of digital currencies and thereby claiming even more funds from big business to help regrow the economy.
 
Instances such as fraud, theft and similar, can and already are governed by existing national and international law. But they would be harder to commit due to the ‘push’ nature of digital currencies.
 
The traditional system uses the ‘pull’ method for transactions. Meaning that individuals and businesses ‘pull’ money from peoples accounts with their information. This leads to massive fraud, theft and funding of criminal activities (such as terrorism). Without access to ‘pull’ (traditional) accounts criminal activities (such as terrorist funding) will be far lower.
 
Digital currencies use the ‘push’ method for transactions. Meaning that individuals and businesses accounts are protected to a far higher degree. It becomes impossible for someone of criminal intent to ‘pull’ money from a digital currency ‘account’.
 
Centralised traditional accounts are high targets for terrorist organisations and other similar criminal activities. Stolen credit card and bank details seem to be a regular occurrence these days, such things do not exist within the digital currency sector.
 
Mass adoption of digital currency will reduce criminal funding, money laundering and terrorism by drastically huge degrees.
 

9.3. How do these risks vary according to different digital currencies?

 
Power of the network varies from digital currency to digital currency, though some ‘alternative coins’ being implemented use the power of the existing bitcoin network. This can be leveraged to build new digital currencies and other applications upon an already existing strong network.
 
No digital currency will ever be as anonymous as fiat currency. Fiat currencies and traditional banking systems will always be the number one choice for criminals.
 
Different digital currencies may act more anonymous by nature, but are still subject to the basic necessities of electronics (power supply, network). In the most remote regions of criminal activity, such infrastructure is not readily available. Hence why the USD and other related fiat currencies will be used instead. Primarily the USD as it stands as the worlds reserve currency for all that entails.
 

Question 10

10.1. Should the government intervene to address these risks, or maintain the status quo?

 
Yes. The government should intervene by actively encouraging digital currency inclusion, not passively as it is currently doing.
 
Passive acknowledgment such as providing £100 million to a bank that refuses digital currency related businesses and promising to provide another £100 million (which will unfortunately likely go to a similar ‘provider’) will do nothing for welcoming industry, providing jobs and growing the economy. 
 

10.2 What are the outcomes of taking no action?

 
If the UK government continues to act passively then other countries that take pro-active action for digital currency inclusion will reap the benefits of experts and businesses moving to their nations. 
 
Innovation and development will happen elsewhere, and the system remaining within the banking system will find that experts, businesses, venture capitalists and other related funding for a nations development will migrate elsewhere.
 
And it will allow criminals and bad actors to continue to divert large amounts of monies towards criminal activities (fraud, money laundering, terrorism) through the traditional system. As operating within the traditional system is a far larger source of finance for such actors.
 

Question 11

11.1. If the government were to take action to address the risks of financial crime, should it introduce regulation, or use other powers?

 
Regulation would strangle the baby in the crib and force innovation, experts and businesses away from the UK. Current statutes cover financial crime, they are suitable to address any bad actors in the sector.
 

11.2. If the government were to introduce regulation, should it create a bespoke regime, or regulate through an existing national, European or international regime? 

 
If the purpose of introducing regulation is to reduce financial crimes such as fraud, anonymous extortion, money laundering and terrorist financing; then the regulations should be guiding people out of the traditional system into the far more transparent self regulated system of digital currencies.  The best course will be to remove regulatory barriers to decentralised, distributed-digital currency development — not to create new regulatory barriers.
 
The criminal actions mentioned are not only far more prevalent in the traditional sector, they are far harder to commit and easier to detect in the digital sector.
 
If the purpose is to catch bad actors, the same stands true. It is far easier to trace and observe those conducting money laundering, financing terrorism, and similar through blockchain technologies which involve an open and public ledger, where transactions are linkable.  
 
In the years to come fewer people will stick to using only fiat and more people will use a variety (a basket) of currencies or currency systems.  In the past, only people with specialised knowledge and licenses were able to effectively manage and use a ‘basket of currency’ approach, but as time goes on, more and more people will be able to rapidly manage and exchange one currency unit for another without the involvement of any business organization (indeed, without any intermediary at all).
 
Some might surmise that the need for so much extensive regulation in the current traditional system has come about because the ability to fraud, disrupt, abuse and rob the system, and that has become the heritage of each generation. As recently made public by David Cameron during the G20, the financial future for the globe and the UK looks bleak, this has been known for a while to those interested in the sector. These problems can be solved without corporation-state regulation in the context of use of decentralised, distributed-digital currency systems.
 

11.3. For each option: what are the advantages and disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)? 

 
Such heavily regulation is understandable in a system that is often abuse and fraught with fraud, theft and criminal abuse. Similar extensive regulation is not needed within a self-regulating system. Not only does the system regulate itself, but the people, the users, have a strong self interest to assist and regulate itself.
 
In a digital currency, the users have direct access and responsibility to regulate. An abusive digital currency will see users migrate away from it, weakening the network and destroying the value. This is self regulation of the market and ignores and forces out bad actors.
 
A national coin acting in the best interest of its people can stand to become a pillar of respect and emerging wealth. A persons work is transferred into a unit of wealth which is often portrayed as their respective national fiat denomination. 
 
Recognizing an individual’s work and giving it true value will allow that person to feed this wealth back into the economy, giving value to their work and their time, and strengthening the economy.
 
There is already precedence of manipulation within the fiat sector (recent ongoing Forex investigations) and the 2008 libor scandals, as well as the aforementioned continued tax avoidance by big business. Such actions have dire consequences for the global economy and only lead to a detriment of growth and widening disparity of the equality gap. 
 
Another advantage of a transparent decentralised self regulating system is the reduced occurrence of such issues, because of the accountability and less chance that a bad actor would participate in such endeavors, this results from transparency.
 
Transparency and decentralisation means that if a digital currency is abused the users of such a currency would quickly stop using it and it would lose its value. So the actors that seek to gain from such manipulation would soon find that their actions have been far more costly than the gains.
 
Such manipulations and distortions in a sector as important as money leads to civil unrest and cases such as the 2013 Cyprus runs and the recent Greece government debt crisis.
 

11.4. What has been the impact of FinCEN’s decision in the USA on digital currencies?

 
They have forced businesses to close, increased job losses when there could have been a net job increase, closed the door on innovation, and pushed all of this to other countries.
 
Potentially they have, or will (see Bitlicense), force the emergence of new wealth outside of their country, as viable block chain technologies create sustainable wealth structures, injecting said wealth into the accepting economy.
 
Countries such as China, that has barred traditional financial systems from interacting with digital currency, to the point of only allowing businesses bank accounts, have taken what may be necessary steps to avoid manipulation of the emerging markets.
 
However, as the similar case in China, banks in the UK need to be encouraged to allow digital currency related businesses to open business accounts.
 

Question 12

12.1. What difficulties could occur with digital currencies and financial sanctions?

 
Financial sanctions are a very bad way to conduct reprimands against a country. The end results are that the civilians suffer, it rarely affects anyone with the wealth and power to sidestep such sanctions, and the ones it hardly affects are the ones that it is supposed to target. Financial sanctions only act as a pretense to action against the ones who are truly in power.
 
The nature of a decentralised currency means that any bad actors within a sector might face users moving away from their currency. This movement away from a currency is a true act of democratic financial sanctions. Such similar cases have occurred throughout the brief history of bitcoin. Such as when a mining company gets close to 51% of the hashing power users move away from the company, resulting in far less hashing power and what can be a significant drop in funding for the bad actor.
 
This is the result of democratic financial sanctions, and this can occur for a variety of reasons, not just because of a rise in hashing power. Similar situations would arise if the entity in question was found to be doing things that its users were not happy with.
 
These types of financial sanctions are far more effective and employed far quicker than current traditional sanctions, which as mentioned, rarely affect the ones intended and tend to leave the civilian population as the ones that suffer.
 

Question 13

13.1. What risks do digital currencies pose to monetary and financial stability? 

 
Digital currencies are subject to relative volatility. The more liquid the market (the more fiat/capital flows into it) then the less volatile it will become.
 
In a more liquid (higher capital) market digital currencies would provide more stability than current economic and traditional systems. Of which these systems have led to a continued decline in global economic growth and instability which has bled into all sectors. 
 
As David Cameron recently stated and as has been discussed within the recent Parliamentary debate (Money Creation and Society), the current method of the ‘trickle down’ theory implementation has not worked and we are now facing what may be the worst economic recession we have ever faced.
 
In a programmable monetary system with a known rate of supply and total units, new economic formulae can potentially be created to shape stability through predictability. This is an unknown economic science, but with programmable predictive money such experimentations become possible. Never before in our known history have we had programmable money that can be designed and guided before release.
 
And though detractors may opine the limited supply as a cause for future monetary concerns, this premise would be misleading as being able to design an economic foundation with a definitive supply may prove very beneficial. But it is early days yet, and the science of this has yet to be studied properly.
 
Digital currency, such as bitcoin is potentially infinite without causing (supply) inflation when the supply has ended. When extra currency is required the system can simply allow for more decimal places, this does not lower the value of the supply in the sector, it merely divides the units further. For example, imagine a penny that was divisible to infinity.
 
Our current financial system slowly excludes lower denominations, ever building towards an increase in costs and expenditures. Digital currency slowly includes the lower ‘denominations’ (increasing value to the right of the decimal). This allows an increase in monetary supply without the need to create excessive amounts of currency.
 
Fiat currencies generally do not do this, when monetary supply is inflated, current denominations are used, the traditional system does not create smaller denominations such as halfpennies, or quarter pennies, or smaller, to increase supply. 
 
“By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.” ~ Bank of England
 
The advent of quantitative easing for the purposes of asset purchasing has led to the increase of expenditure for the average household as energy and basic needs suppliers partly base their fees on inflation. 
 
Even before quantitative easing began, we lived in an era of chronic monetary inflation, unprecedented in the industrial age. Between 1991 and 2009, the money supply increased fourfold. It tripled between 1997 and 2010, from £700 billion to £2.2 trillion, and that accelerated into the crisis.” ~ Steven Baker (MP, Wycombe).
 
The global phenomenon of quantitative easing can lead banks to investing in the forex market for their own purposes (see forex recent bank issues). Or that fiat forgery can be used for foreign market manipulation or for criminal abuse. Both these cases can lead to instability within the financial market.
 
Counterfeiting fiat currencies is a known tactic in times of war, and is used by criminal minds. Such forgeries can have an affect on stability, and are very likely to be used for money laundering, terrorism and other similar criminal activities.
 
Nation states may one day trade national digital currencies with each other in the open market, but all of these digital currencies will be visible for all, manipulation will be extremely difficult, if not impossible. On-chain digital currencies cannot be forged, only through a central platform do they have the possibility of being mimicked, and these entities can be held accountable through the transparent nature of the block chain (only on the digital currency side).
 
To achieve a level of control (though it is inadvisable), it is possible that a nation state might conceive of a national digital currency and invest in ‘mining’ hardware to a point that they have more direct control over their particular national currency.  
 
However, this state funded network would be competing (if trying to keep central control) or strengthened (if following the decentralised ethos) by individuals and businesses that also back the national currency. Possibly because of national pride or some sort of tax or financial incentives.
 

13.2. How significant are these risks?

 
The risks of continued use of fiat currencies compared to using digital currencies is significant. Forgeries replicating fiat denominations are becoming more proficient as technology advances. This is a problem that is likely to only increase and the difference between forgeries and legitimate become harder to detect, especially more so as a majority of money creation (Quantitative Easing) is now done by entering the numerical amounts on a computer.
 
As mentioned above, economic wars with forgeries is known, on-chain digital currencies can not be forged.
 
The only possibility would be to spend excessive amounts of funds to build towards a 51% attack. The attackers would only have one shot and would only be able to reverse their own transaction or block others. After this initial attack the users of the digital currency could easily fork the network rendering the attackers hardware (and associated expenditure and gains) useless and/or migrate to a similar alternative digital currency.
 
There’s only a couple things someone with 51% of the network hashrate could do. They could prevent transactions of their choosing from gaining any confirmations, thus making them invalid, potentially preventing people from sending Bitcoins between addresses. They could also reverse transactions they send during the time they are in control (allowing double spend transactions), and they could potentially prevent other miners from finding any blocks for a short period of time … They couldn’t reverse transactions from long ago, create new coins out of thin air (besides through regular mining), or steal coins from other people’s wallets. ” ~ Learn Cryptography.
 
  

Summary

 
We do not propose any immediate or short term move to a national digital currency, but suggest that economic digital currency science might look at the possibility of a complementary national digital currency in years to come when this sector has developed further.
 
We propose that digital currency does not require as extensive regulation as the traditional system. As though regulation may be required for the traditional sector (and possibly more so as discussed in Parliament on the 20th November), digital currency self regulates and is far more transparent. 
 
Minimization (reduction or removal) of regulation is a sensible legislative or regulatory course as it regulates itself in the free market, removal of such barriers as acquiring a bank account for businesses and funding via these accounts or directly from government as digital currency (bypassing the barrier) is essential if the UK wishes to stay the global financial leader.
 
That most financial and criminal risks are negligible relative to the traditional sector.
 
Banks continue to refuse digital currency related businesses. Not just lending, but even the basic facilities of allowing business accounts to work from.
 
Government should find a way to encourage banks to allow bitcoin related businesses to operate without prejudice, or should fund emerging FinTech and related startups and young businesses through digital currency itself.
 
We are in the digital age now, we must allow innovation, businesses, jobs, growth, and move forward, or we will be stuck in the past. The countries around the globe are all moving towards digital currency, whichever nation takes the first necessary steps will very likely be the next financial leader.
 

Sources

 
Bank of England (2012) The Distributional Effects of Asset Purchases. Available from: http://www.bankofengland.co.uk/publications/Documents/news/2012/nr073.pdf. [Accessed: 17th November 2014]
 
Bank of England (2014) What is Quantitative Easing. Available from: http://www.bankofengland.co.uk/monetarypolicy/pages/qe/default.aspx. [Accessed: 17th November 2014]
 
BBC NEWS (2014) Hullcoin launched as ‘local digital currency’. [Online] Available from: http://www.bbc.co.uk/news/uk-england-humber-26841238 [Accessed: 21 November 2014]
 
House of Commons (2014) Money Creation and Society. Available from:
http://www.publications.parliament.uk/pa/cm201415/cmhansrd/cm141120/debtext/141120-0001.htm#14112048000001 [Accessed: 22nd November 2014].
 
International Business Times (2014) Man Stores Bitcoin on Chip Embedded Under His Skin. Available from: http://www.ibtimes.co.uk/man-stores-bitcoin-chip-embedded-under-his-skin-1474276  [Accessed: 18th November 2014]
 
Learn Cryptography (2014) 51% Attack. Available from: http://learncryptography.com/51-attack/. [Accessed: 18th November 2014]
 
Nakamoto, S. (2009) Bitcoin: A Peer-to-Peer Electronic Cash System. Available from: https://bitcoin.org/bitcoin.pdf. [Accessed: 18th November 2014]
 
New York State, Department of Financial Services (2014) Regulations of the Superintendent of Financial Services, Virtual CUrrencies. Available from: http://www.dfs.ny.gov/about/press2014/pr1407171-vc.pdf. [Accessed: 19th November 2014]
 
Solar Roadways (2014) Solar Roadways: A Real Solution. Available from: http://www.solarroadways.com/intro.shtml [Accessed: 16th November 2014]
 
Treanor, J. (2014) Bank of England’s chief currency trader dismissed amid forex-rigging scandal. The Guardian. 12th November. Available from: http://www.theguardian.com/business/2014/nov/12/bank-england-fires-chief-currency-dealer-amid-forex-rigging-scandal [Accessed: 19th November 2014]
 
 

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