A “light-touch regime” could also be a problem in and of itself. “Light touch” still has unfortunate undertones when heard by the British tin ear; and, if anything goes wrong, consumers will be scandalised by how little the government and its regulators did to protect them, especially when the EBA has so clearly identified so many risks, and invited them to act.
So: will the UK and Europe begin to regulate virtual currencies in a substantial way in 2015? The answer in each case is “almost certainly not”.
While the UK regulatory instinct is likely to be to regulate if it can, regulation will be difficult to justify at this stage.
First, on cost benefit grounds. The Bank of England believes that Bitcoin is the most popular virtual currency in the UK, by far.
Even so, there are only £60m worth of Bitcoins circulating in the UK economy at present (this represents less than 0.1 per cent of the Sterling notes and coins in issue, and less than 0.003 per cent of so-called broad money); only 20,000 individuals / companies are using Bitcoin at present, and only 300 Bitcoin transactions occur each day.
Then, regulation could easily undermine the Treasury’s very determined FinTech innovation agenda. What this means, then, is that the UK is unlikely to want to begin to regulate virtual currencies in a material way in 2015.
Even so, we should probably expect some tinkering around the edges.
The regulators may want look for a way to apply the UK’s anti-money laundering rules to virtual currency exchanges (if they can do it without distorting the market).
The FCA may also want to look at the application of its client money rules. Neither the European Banking Authority nor the Bank of England regards virtual currencies as “money” today.
There is therefore some significant doubt about whether the FCA’s client money rules apply or not. That is a gap the FCA could easily close in the near-term, if it thought it was appropriate to do so. At some stage, the FCA may also want to consider whether virtual currencies should be covered by the Financial Services Compensation Scheme – although that may be a step too far for now.
Chris Finney is a partner at Cooley LLP.
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