As a stateless, borderless and decentralised cryptocurrency, Bitcoin has drawn the attention of regulators from different countries as they grapple to define a new paradigm in money. At stake is not just the ability to block the financing of illegal activity (in real terms that is a small part of the matter) but also the fostering of innovation and business.
For a long time the focus of regulators, lawyers, economists and others has been on specifying exactly how cryptocurrency (blockchain-secured tokens of value) is treated within the current context of finance and law. Is Bitcoin money, a commodity or a financial instrument of some kind? Can cryptocurrency even fit into existing legal frameworks?
More recently, as Bitcoin and digital currencies have proved their resilience and with the arrival of ambitious blockchain projects such as Ethereum, there has been a noticeable shift in focus in discussions about digital currency legislation by diverse regulatory and governmental organisations. As the novelty of Bitcoin and cryptocurrency dies away there is a growing realisation that blockchain technology is poised to have a powerfully transformative effect on finance, commerce and many fields of business. There is concern that innovation may be stifled through over-regulation.
Over the last couple of years all eyes have been on the traditional financial hubs of the world to provide guidance. Hopes that the New York Department of Financial Services would go for “light-touch” regulation of cryptocurrencies were dashed when “BitLicense” regulation came into effect in June 2015. Nevertheless some entrepreneurs and their businesses (such as the Winklevoss brothers and Gemini) see the new regulations as a positive thing, providing desperately needed clarity.
And yet, as well as driving away some of the foremost companies in the digital currency space (GoCoin, ShapeShift, etc.), a major backlog of applications has built up following the departure from the DFS of the department’s head Benjamin Lawsky and several of his key assistants – specialists who helped to draft the BitLicense regulations.
Only two BitLicenses have since been issued and fifteen applications are waiting to be processed, with a further eight applications withdrawn or denied.
London and Brexit
Licensing requirements in the United States are prone to being particularly burdensome. A BitLicense application costs $5,000 and the initial documents required run to hundreds of pages, and this is only for an application made in New York: separate licensing requirements are in place for each and every state in the U.S., meaning that an individual application (each with its own particular requirements) must be made in every state. The E.U. has a different, much less cumbersome system: a licence obtained for financial services in one country can be “passported” to other countries in the Union.
Alongside New York, London is one of the most important financial centres of the world. The UK’s financial regulator the FCA (Financial Conduct Authority) is highly respected in Europe. As part of the British system, the regulator works in coordination with government departments such as HM Treasury. Reddheads.com reported in the summer on a series of roundtable events in Brussels that brought together EU Commission officials, MEPs, regulators and industry stakeholders, at which HM Treasury was represented by the Head of Payment Systems and Services, Edward Corcoran. The general position held by the UK was clear, and is reflected in the opening paragraph of HM Treasury’s Consultation Paper on Draft Innovation for Financial Services (22 April 2016), which states that the aim of the UK government is:
“To ensure the UK is supporting the development of new business models and disruptive technologies, breaking down barriers to entry and boosting productivity. To do this the UK’s regulation and enforcement frameworks must be agile enough to respond flexibly to continuing developments in new technologies and disruptive business models.”
Given the UK’s proactive approach, respected regulator and the ability to passport licences to other E.U. Countries, until now there have been good reasons to think that London may become a hub for digital currency – the de facto crypto-capital of the world. Then came Brexit.
Some initial speculation takes the line that Brexit will be a positive thing for the UK’s nascent cryptocurrency industry. Earlier in October Coindesk reported that the “European Central Bank pushes for tighter digital currency control”, and therefore one line of thought is that Brexit will free the UK from obligations to tougher E.U. legislation. It should be noted however that despite Coindesk’s article and similar pieces published on Cointelegraph and other crypto news sites, the moderate position of Europe’s legislators remains essentially the same as it was earlier in the year, when on 5 July the European Commission adopted proposals for legislation following a report published by the Committee on Economic and Monetary Affairs.
Requiring more significant consideration are the possible ramifications of Brexit on the ability of UK companies to function in Europe. One of the things that could happen when Great Britain leaves Europe in two years, is that the ability to passport licences issued in the UK to European countries is revoked. Clearly this is a worry for companies such as Circle, which in the spring of 2016 obtained a UK e-money licence and thus became registered with the FCA. Part of the appeal of this licence is the ability to passport to Europe.
Since Brexit, Circle has commented that given the two years that it will take for the UK to leave Europe, its strategy is aggressively to expand into Europe now, as companies that make business inroads into E.U. countries through passporting will not find their activities in these particular countries blocked even if passporting is revoked following Brexit. Given that it is certainly possible that this European system will become inaccessible to UK businesses following Brexit, the pressure is on for digital currency companies to develop and execute strategies that take such an eventuality into consideration.
Luxembourg, Zurich… or Japan?
With a long and respected history in the banking industry, with a financial sector that is the largest contributor to its economy, and known for having flexible regulators and for being open to fintech, Luxembourg looks attractive as a long-term option for digital currency startups and companies looking to avoid possible Brexit repercussions. The country has also already given out financial licenses to Bitcoin companies.
Another possible contender for crypto-capital of the world might be Zurich. Switzerland is another country well-known for its financial services and the country hosts notable digital currency startups such as the Ethereum Foundation and Shapeshift. The recent news that Switzerland’s national railway service the SBB will allow customers to buy Bitcoins from over 1000 ticket machines in a pilot being launched in November, indicates a willingness to experiment with cutting-edge fintech and reflects an unobstructive regulatory environment.
Perhaps the crypto-capital will develop in Asia. Reports this year that Japan is moving to clarify moderate-to-light cryptocurrency regulations have been accompanied by the news of a bank-backed digital currency exchange (SBI Virtual Currencies Co., Ltd.) set to launch in the near future. The firm behind the new exchange, SBI Holdings, has also been involved in major funding rounds for digital currency startups Ripple and bitFlyer.
As the digital currency economy flourishes and regulations crystallise it can be difficult to ascertain where the future geographical hubs for this activity will be located. Changing regulatory environments and international political events such as Brexit show how tough it is for companies to make the right decisions when it comes to developing strategies for long-term success. As individual governments continue to work on traditional regulations for traditional companies, perhaps the emergence of fully-decentralised organisations and services – DAOs, decentralised exchanges such as Bitsquare, etc. – will reach a tipping point.
This is an interesting space to watch.