Regulating Bitcoin & FinTech in the UK – what needs to change?

In the wake of the recently announced consultation by the UK Treasury on Digital Currencies, and given the recent developments in this space directly concerning regulation, let’s take a look at what has changed, what needs to change, and what we hope the future will look like for those involved in the crypto-currency economy.
It was only a couple of months ago that George Osborne (for any international readers, he is the UK Chancellor of the Exchequer) stated that he wanted the UK, and London in particular, to be the global centre for Fintech (the recently coined term for Financial Technology/innovation) and recognised that Bitcoin and other crypto-currencies played a part in that sector. Only a few weeks later, the economy was hit with the final ‘banking blow’: the last remaining payment services provider (PSP) had withdrawn banking services from Bitcoin businesses. For those who may be wondering – this was Capital CTS, a PSP based in the Isle of Man.
Let me provide a little more background. I was personally in the Isle of Man only weeks before this announcement, sitting down with several executives in Capital CTS, where they confidently re-assured members of the Bitcoin community – ourselves included – that they would be around for a long time, and they saw Bitcoin becoming an increasingly larger part of their PSP business. They boasted how many exchanges and related businesses had come on board. But most importantly, they echoed the general sentiment in the Isle of Man: they already had sufficient regulation that Bitcoin could fall in to, that they didn’t see the need for further regulation, and the island would therefore continue to embrace and support businesses in this space.
So what happened? Only a couple of days before the IOM Bitcoin conference where our aforementioned PSP was presenting, every Bitcoin related business received their long-feared phone call: their banking services were being withdrawn (read more about it here). Why? Because the clearing banks had refused to process transactions related to Bitcoin businesses.
Let me state the obvious – companies cannot continue to operate in this space, sustainably, without banking support. At least not in the short or medium term. Having been intrigued personally, I have contacted virtually every high street, private, and commercial bank operating in the UK – the sentiment is unanimous. Even recently CityAM ran a feature on the increasing competition in the banking sector which really makes you wonder – why does no bank take the plunge and support Bitcoin businesses? The answer is simple. Their hands are completely tied as a result of the large clearing banks (the big four) not allowing them to. So where is the competition I hear you asking? I, too, would love to know.
So what are the regulatory considerations? Generally speaking, there are three: consumer protection, anti-money laundering (AML) and taxation (or classification). I’ll tackle the last first.

Taxation

If we look back around a year, Bitcoins were originally a ‘VAT’ incurring product (in one form or another – going through several stages in the eyes of HMRC, including being classified as a ‘single-purpose face-value voucher’), requiring that any Bitcoin sales (by exchanges for instance) add on the value of VAT. It doesn’t take long to see that this makes selling Bitcoins almost impossible for any business in the UK – let alone competitive compared to global alternatives. Thankfully, this issue was quickly addressed and it now has a more reasonable classification more akin to that of a currency. No VAT needs to be charged by those selling Bitcoins, and any balances held in BTC for businesses can simply be valued at the market rate in order to be included in annual accounts and balance sheets. Additionally, any individuals receiving Bitcoins as income simply pay Tax on the ‘real’ value of that income, whereas any realised appreciation is simply subject to capital gains tax (CGT). So far so good – it seems at least in one area the UK has given Bitcoin the necessary breathing room and support to prosper!

Consumer Protection

Now things get more interesting. Usually, companies scramble for ways to avoid regulation and the potential limitations it may impose on their business. In the Bitcoin world, you can flip this right on its head. Bitcoin businesses have been arguing and fighting for the ‘right’ to be regulated! Why? Because it would provide clarity and enable them to position themselves correctly, and – possibly most important of all – it would give them an irrefutable argument against banks that refuse to on-board them as customers. Personally, having spoken to several businesses in this space, I think we should all admire the length to which many companies have gone to be pre-emptively compliant, and even seeking regulation. Despite the extreme negativity and bad press surrounding Bitcoin recently, this shows that there really are many people out there who see the opportunity and want support in running a genuine business.

Anti Money Laundering

Once again, this ties in closely with Consumer Protection. Most businesses are already undertaking extremely diligent Anti Money Laundering checks, even though ‘technically’ they aren’t obligated to do so. The consensus within the community seems to be that the best way to shift the perception that all Bitcoins are used for illicit transactions, is to enforce the same currency controls as you would when dealing with fiat. There isn’t much more to say on this one really, other than well done for taking initiative!
With the launch of the ‘Innovate Finance’ trade body, George Osborne recently said (you can read the whole speech here):

[…] the exciting thing about combining new technology and a free market is that no one […] – certainly not me – can predict exactly how these new forms of banking will develop. What we can do and I can do, is create the best environment in which this financial innovation can flourish. […] I want the UK to lead the world in developing Fin Tech.

That’s a powerful statement, and one that I personally know most will endorse. The FCA has also spoken out on their stance, and how they want to support businesses, by recently saying:

[…] the FCA has committed to open its doors to financial service firms who are developing new approaches, to help them navigate the regulatory system and identify areas where the regulatory system needs to adapt to new technology.

So it seems that all the right steps are being taken to really give Bitcoin and other digital currencies (and innovations more generally) the foundation they needs to thrive. However, in order for us to succeed in making “the UK the destination of choice for setting up a FinTech company” and encouraging “companies around the world to come here as the springboard for internationalising their FinTech business” we need to address the elephant in the room – give businesses access to banking. No one is talking about this enough. It is a critical problem that needs to be solved. Coinbase recently launched their UK operations, and with a valuation of over $400m they still cannot secure domestic banking facilities. It doesn’t make sense, and it directly contradicts the governments’ intention and ambition.
Let’s take the final step to building a great foundation for UK FinTech businesses. Bitcoin is not the first ‘type’ of business to suffer from this – equity crowdfunding only recently managed to overcome the traditional banking hurdle. Of all the challenges in setting up a new business, and transforming a dated and slow industry, this shouldn’t be one of them.
Let’s make the UK the place for FinTech businesses to truly grow!