The UK Economic Secretary to the Treasury, Harriett Baldwin, recently reiterated that the government will invest £10 Million to research distributed ledger technology, during her speech at the Alan Turing Institute for Data Science yesterday.
“The government has launched a research initiative which will bring together the Research Councils, Alan Turing Institute and Digital Catapult with industry, in order to address the research opportunities and challenges for distributed ledger technology.”
- Harriett Baldwin MP, UK Economic Secretary to the Treasury
This initiative started when Chancellor of the Exchequer and First Secretary of State, the Rt Hon George Osborne, made a landmark announcement launching a new trade body for FinTech, called 'Innovate Finance,' in August 2014.
“Recognising that the world of finance as we know it is changing in front of our eyes, I can today announce that the Government will start a major programme of work exploring the potential of virtual currencies and digital money.”
- George Osborne MP, Chancellor of the Exchequer and First Secretary of State
Osborne recognized the popularity of alternative payment systems, they are quick, cheap, and convenient. While upbeat about how they can be used to benefit the UK economy and British consumers, he also wanted to investigate the risks that accompany any new technology.
Following his announcement the Minister of State, Andrea Leadsom, joined Osborne in spearheading a call for information on digital currencies.
"A key part of our long term economic plan is to cement Britain’s position as the centre of global finance... So it is right that we are properly consider the potential benefits, as well as the risks, that digital currencies could bring to Britain’s economy, businesses and customers."
- Andrea Leadsom MP, Minister of State
Her Majesty’s Treasury issued the Call for Information in November 2014. The consultation tapped into public expertise, determining the benefits and risks, so that government could make a decision on whether it needed to intervene in the digital currency market. “Government interventions could take the form of regulation, for example, to curb financial crime risks or to create a more stable market,” the report says.
“The fact that digital currencies revolve around a decentralised payment system with no intermediaries has also been highlighted as benefit, as it means that they are removed from bank failure. Digital currency users have also commented that the currency cannot be forged, and is easier to trace than physical cash due to the ‘distributed ledger’ technology it employs. Another potential benefit is that digital currencies could offer more security and privacy.”
- HM Treasury report
The UK government received over 120 responses from digital currency users, developers, businesses, banks, academics and government agencies. While there were both positive and negative viewpoints, the government has now committed £10 Million for research.
“The government considers that while there are clear barriers to digital currencies achieving widespread use in their current form, the ‘distributed ledger’ technology that underpins digital currencies has significant future promise as an innovation in payments technology. The government wishes to foster a supportive environment for the development of legitimate businesses in the digital currency sector so that the UK can see some of the benefits of digital currencies, while also creating a hostile environment for illegal activity.”
- HM Treasury report
Baldwin maintained that distributed ledger technology has many potential benefits which need to be explored. For example, it could facilitate the fast, efficient, and secure transfer of digital asset ownership, including shares and bonds, as well as help securely maintain records by means of digital signing and timestamping. “It’s all about making processes simpler and life easier,” added Baldwin.
Digital currency and distributed ledger research is a big part of the government's effort to become a leader in the FinTech sector, which has driven £42 million in investment over the past five years. Baldwin explained that the FinTech sector activities cover a lot of areas, but ultimately, “FinTech is simply a means of providing financial services in a new way.”
After a few examples aimed at convincing the audience, Baldwin reiterated “we are already a major player in financial technology; our ambition is now to be the major player – the leading FinTech centre in the world. It’s a sector where we are already doing well.”
The UK has greatly benefited from the growth in their local FinTech sector, which employs 135,000 people and generated £20 billion in revenue last year. Claiming that the UK is one of the fastest growing regions in the world for FinTech, Baldwin stated that an astounding 42% of all European FinTech investment was in the UK and Ireland, preceded by 136% growth in 2014, reaching £410 million.
“I hope I have made it clear that FinTech is something this government will continue to help go from strength to strength.”
According to a manifesto from Innovate Finance, an independent industry advisory organisation, investment in the UK FinTech sector reached US$623 million in 2014, more than double the previous years US$264 million. By comparison, Silicon Valley remains strongly dominant for now, attracting FinTech investment of more than US$2 billion, exceeding the entire FinTech investment in Europe, US$1.48 billion.
“This government wants the UK to be the leading FinTech centre in the world, that’s why, at the Summer Budget, we appointed a special envoy for this fast growing sector. I’m pleased that Innovate Finance’s manifesto has set such ambitious goals including the creation of 100,000 jobs. This will ensure we are a world leader in the development of financial services technologies.”
- The Rt. Honourable David Cameron MP, Prime Minister, Minister for the Civil Service and First Lord of the Treasury
While Baldwin stated that the government will continue working hard to attract innovative companies, it will also continue an extremely close working relationship with the Financial Conduct Authority (FCA), to ensure a ‘spot-on statutory framework’ for the FinTech sector. The FCA, an independent financial regulatory body, regulates UK financial firms.
This framework specifically relates to The Innovation Hub, the government's joint effort with the FCA, which went live in October 2014. The hub has already helped over 100 innovative businesses, Baldwin claimed.
While the UK government is committed to regulate digital currency exchanges, Baldwin indicated that fostering the right environment is more important if the UK is to become the FinTech center of the world, attracting more companies along the way.
“Among other things it will look into whether regulation of the sector is required, so that virtual currency business can continue to set up in the UK, and for people and businesses to use them safely.”
In the US, the Financial Crimes Enforcement Network (FinCEN) has applied rules relating to Anti-Money Laundering (AML) directly to administrators and exchangers of digital currencies, leading to laws like New York’s BitLicense. Meanwhile, the European Commission is considering regulating digital currencies via their own Anti-Money Laundering Directive.
“The fact that we have committed to bring digital currency exchanges into regulation has been welcomed by industry, and it’s already resulted in digital currency businesses relocating to the UK. We’re working hard to create the right regime for digital currencies – one which is right for digital currency businesses, attracting overseas investors to the UK and users.”
There is already a good example from the bitcoin services company Circle, who announced plans to open a London office. Baldwin stated that the company chose the location, to coordinate its European expansion, “because of our positive attitude to FinTech and to digital currencies.”
The UK's Special Envoy, Burbridge, also suggested treading lightly while regulating digital currencies. She recently told Financial News that she did not “see regulator attention or focus as a necessarily bad thing or something to avoid.”
“I think the blockchain and bitcoin companies within the UK would benefit from light-touch regulation of their sector to legitimise what they're doing in the eyes of banks and other service providers. Similarly, the progressive regulation which the UK has bestowed upon crowdfunding has been hugely positive.”
- Eileen Burbidge
Ultimately, the government's goal is to attract more FinTech companies and expand the sector, creating jobs and increasing the country's GDP. Various members of parliament independently agreed that digital currencies have the potential to benefit the people and companies in Great Britain, and that they should ensure that all regulations reflect so.
“It is worth reflecting on digital technology as an important driver of productivity. It can reduce costs, and create efficiencies. But it can also radically change the way we do things and create new opportunities – from driverless cars, to block chain technology, to the exciting possibilities of quantum computing.”
- Ed Vaizey MP, Minister of State for Culture and the Digital Economy