UK Treasury Requests Info On Bitcoin: PwC Replies

PricewaterhouseCooper – A top multinational advisory firm based in the UK responded to a Call for Information regarding Bitcoin and digital currencies by Her Majesty’s Treasury. The detailed response by PwC is part of an ongoing development initiated by HM treasury during August 2014. More commonly known as ‘the Treasury’ in the UK, the government department is responsible for developing and executing Britain’s public finance and economic policy.

The United Kingdom has shown a keen interest in Bitcoin ever since the digital currency rose to popularity. In November 2014 members of the UK government reached out to the Bitcoin community explaining the intentions of regulators in England, and the key areas they would like to focus on. Chancellor of the Treasury, George Osborne explains:

“The information gained through this Call for Information will be used to ensure the UK government’s own position on digital currencies is properly informed and in the best interests of UK consumers and businesses.”

While the BitLicense from New York will clarify  the regulatory landscape within the  United States, the importance of London as a financial hub in Europe must not be forgotten., The feedback provided by PwC  will serve as a great resource for HM Treasury.

By adopting a neutral stance, PwC was able to respond to some of the questions in an impartial manner. They also made suggestions and recommendations to the HM treasury where it was necessary. For instance:

"Decentralisation is one of the main tenets of Bitcoin, and other digital currencies based on its software, to attempt to regulate it at this level would likely result in negative sentiment towards HM Treasury from the global Bitcoin community."

The areas where regulators should intervene was a recurring question throughout the document. It was noted that rather than regulating Bitcoin in its entirety, the government should regulate certain key people and entities, like the a creator of any new digital currency. Due to the open source nature of Bitcoin, it has become very easy for anyone to create a digital currency. PwC adds that there should be certain safeguards to protect consumers from new digital currencies that may be fraudulent. Although, they are not sure what form those safeguards should take and have left this topic open for interpretation.

In addition, due to their significance in the ecosystem, there also must be appropriate laws for mining pools or entities involved in the mining business. Once again, PwC feels that they don’t have the expertise to comment on the necessary measures that should be taken to protect customers.

Moving on, an area where government should be more careful with their regulations would be service providers. As most start ups entrepreneurs will try to innovate within this category, it is crucial not to stifle progress. PwC advises the UK government to “create bespoke regulation” for new services and products that are being developed specifically for digital currency users.

Finally, in order to prevent money laundering and fraud through the use of digital currencies in the UK, it was suggested that the government focuses on businesses involved in the Bitcoin exchange industry. PwC reports that it is important to bring exchanges under a regulatory regime.

"These entities could be treated as Money Service Businesses (MSBs), in the UK this would require them to be registered with [Her Majesty’s Revenue and Customs] HMRC or supervised by the Financial Conduct Authority (FCA) and be subject to money laundering regulations."

Consumer protection is a high priority for the Treasury. Apart from the external threat of cyber-criminals looking into this space, there’s a concern about the possible risks that digital currencies pose to users.

Among the eight highlighted characteristics of risks, three of them are labeled as ‘High’, according to the table shown above. Two out of these three high risks are attributed to Bitcoin being unregulated and its infrastructure being immature. The possible outcome of these risks are: Consumers can lose money due to extreme price volatility or market manipulation. Third party wallet providers can be attacked using well-known hacking methods.

The third high risk is about the possibility of attack on the Bitcoin network if 51% of computational power is controlled by an individual or a group ‘then fraudulent transactions could occur and ultimately the entire bitcoin network could collapse’. Not surprisingly, the way only to mitigate these risks would be through tough regulation.

Besides answering questions about regulation, the report also provides an insight to the current barriers of entry to the digital currency businesses in the UK. They highlight that without the cooperation of banks, emerging digital currency business will not be able to flourish in the UK. PwC comments on the possibility of a change in this development:

"Appropriate regulation and guidance from the government would have a positive signalling effect."

The last section of the document moved the focus away from consumers to the concerns of the state. One question asked, "What risks do digital currencies pose to monetary and financial stability? How significant are these risks?" The response to this question was a straightforward one. Monetary and financial stability is unlikely to be threatened by a technology that is still in its infancy. "The value (in fiat currency) of all digital currencies that have been created to date is still very small on a national or global basis and adoption rates are also still low."

See the original document, with the full set of questions and detailed responses here.