The Development and Usage of Bitcoin in the UK
The advent of financial technology has revolutionised many industries, prompting Central Banks to research, develop and field their own versions to keep abreast of financial developments. One such revolutionary tech is Bitcoin (cryptocurrency), and recently, the Bank of England published a document assessing the implications of a Central Bank Issued Digital Currency (CBDC). This push is accompanied by questions of regulation, with Dr Cathy Mulligan, co-director of Imperial College London’s Centre for Cryptocurrency Research and Engineering, questioning whether poor UK policy engagement is hurting UK start-ups who depend on blockchain and crypto-currency like platforms.
The UK public is certainly interested in using cryptocurrency, with real-world organisations including a meet-up and a Bitcoin foundation as well as being home to popular Bitcoin services. However, even with the rise of popularity, the UK is relatively silent on cryptocurrencies as a whole.
After an initial knee-jerk reaction to levy VAT against all cryptocurrency activity, the UK then adopted a better regime and currently, whilst still unregulated, Bitcoin is likened to a ‘foreign currency’ for most purposes, including VAT. Further, Bitcoin miners are not subject to VAT as the act of mining is not classed as an economic activity, nor will VAT be added to Bitcoin when it is used as currency for goods or services. VAT is due in the normal way for any goods or services sold in exchange for Bitcoin or other similar cryptocurrencies, with the value being taken from Sterling at the time of the transaction. Simply put, Bitcoin is legal although unregulated.
Certainly, governments must take action to prevent a capacity for a currency to be used to facilitate crime, and the UK’s Financial Conduct Authority is the body for protecting consumers in these instances. However, the FCA has remained silent on Bitcoin regulation, taking the position that the body does not regulate cryptocurrencies at this moment, leaving businesses in the shadow about how to proceed with integrating cryptocurrency into their business models.
Crime Does Pay
is now done through cryptocurrencies
Another side to the regulatory battle is the call from UK authorities, including the Police, to deem cryptocurrency as cash in certain instances to help with seizures of items used to carry out criminal activities. A new report, published by the N8 Policing Research Partnership, details the issues that law enforcement agents face when tackling cyber crime – the report states, ‘Cryptocurrencies have increasingly become a common method of value exchange in a number of types of criminal activity,’ citing the WannaCry ransomware attack as proof. Problems are exacerbated by the lack of regulation for Bitcoin ATMs and the report continues to list several other hurdles, aside from regulation, that services face, from a lack of experience in dealing with cryptocurrencies to identity issues associated with cryptocurrencies. Categorising Bitcoin as cash for the purpose of seizure legislation could help stem crime, as according to Europol, 3% of all money laundering globally is now done through cryptocurrencies, but UK police face issues with legal grey areas over how to handle cryptocurrency related offences. Empowering authorities with knowledge of cryptocurrencies can help deter usage or lead to better crime control.
Moreover, a further niche difficulty is added when one considers the ‘extra-territorial’ scope of certain US laws that catch foreign businesses conducting or producing services for US citizens. The silence from the UK worsens this position, as US regulations take a stronger foothold over how UK businesses can use currency, from stronger anti-money laundering provisions that require positive acts in regards to stopping the activity to due diligence obligations and registration requirements for the location of their services. Without a clearly defined legal landscape, UK businesses are left to fend for themselves.
Dr Swarup, author of Money Mania and a principal at Camdor Global Advisors, opines that Brexit could allow the UK to become a hub for cryptocurrencies. Using strong policy engagement with London’s continued economic prowess, this could allow the UK to take strides in the right direction and foster an environment that is not only conducive to start-ups but also to cryptocurrency adoption. Of course, Bitcoin and like-currencies are stronger in emerging economies, due to the legitimacy and stability (in-comparison to the native currency) that Bitcoin offers.
Central Bank Issued Digital Currency
As noted by the Bank of England, currently individuals can only hold central bank money in physical form – as bank notes. Adopting a digital currency system has wide-ranging implications for policy and stability.
The BoE’s 2016 research questions on Digital Currencies the expected wide-ranging effects, from Macroeconomic disturbance including impacting factors such as volatility to how the stages of introduction could change economic growth, leading to further questions of how a CBDC would interact with monetary policy or even how it would be technologically possible. Undoubtedly, a CBDC would increase certain risks, for example, it might speed up the change in bank rates but this could cost some financial stability by increasing interest rates across the economy.
A CBDC could lead the way for the replacement of cash in the future, increasing the efficiency of design, production, distribution and destruction of bank notes.
Aside from a CBDC being classed as legal tender, a further prominent issue is competing with decentralised currencies. The development of Bitcoin was in part, fuelled by a will for freedom from central authorities – the idea of blockchain is that you do not need to trust the other side in a transaction. Bitcoin also has the advantage that it cannot be manipulated in terms of supply versus time, due to the already-published cap on issuance, meaning that the price cannot be manipulated to deflate, for example.
Additionally, Central Banks lack the technical expertise to conduct such ventures and again, would be competing with the private sector for talent. A lack of technical expertise could harm implementation, or reach further back with a lack of experience stifling innovation for CBDCs. A broken system would be worse than no system.
Moreover, legislators would have to keep pace with the changing landscape. An issue for CBDCs is upgrading the technology, for example with Bitcoin, a segment of members forged the new Bitcoin Cash, and with a second fork possibly approaching, such developments causes issues for the speed at which CBDCs can react. An advantage that CBDCs clearly have over Bitcoin and other coins is in terms of identity verification. Whilst not entirely anonymous, Bitcoin certainly makes capital controls difficult to enforce. The ledger is completely public but the identities are anonymized, thus with a little digging one can uncover the identity of another user. The issue is, one user can have several accounts, each with different aliases. Under a CBDC, identities are tied to your legal name. This also brings an interesting question about the amount of information authorities should have readily available on people and their transactions in the fight against crime.
Fundamentally, the CBDC would not be traded the same way Bitcoin would be traded. A CBDC would use the domestic currency as a unit of account, reflecting the movement within the domestic economy. Their shared similarities is what is causing concern: if a CBDC is issued but pales in comparison to the ease of use and prowess of Bitcoin, then the value in using it would be diminished. With that said, the legal status of a CBDC as tender would require vendors to digitise and accept it as legal tender, whereas Bitcoin would be left to the intent of the individual. Both CBDC and Bitcoin would exist in the same ecosystem, but they would perform two entirely different roles.
Bitcoin and altcoins, especially Ethereum, are renowned for their adoption by start-ups and progress in innovation. Tech companies have sought to launch their own currencies in ICOs to raise capital and get around lengthy and technical financing legislation. On the other hand, a CBDC would be weighed down by all the regulations that a normal currency experiences. Further, implementing a CBDC raises several obstacles, the creation of the framework, altering of policies, enhancing adoption, legal requirements etc.
Too much regulation mitigates advancement, stifles innovation and ruins progress. Too little dampens the petri-dish effect and blinds entrepreneurs. The UK has remained silent in a ‘sit and wait’ mode, passing tax guidance on Bitcoin but nothing more. Perhaps the UK should adopt similar stances deployed by Japan to facilitate crypto-growth, making London attractive to start-ups post-Brexit. Certainly, a CBDC could eventually rival Bitcoin, but the reform such a new currency would bring with it should be welcomed, so long as it facilitates growth and instils fair rules for ICOs, adoption and planned use.
Two New Blockchain ETFs, So What?
With the recent failure to get cryptocurrency Exchange-Traded Funds (ETFs) up and trading, the Nasdaq has listed ETFs this week by two companies that have shifted their focus to building portfolios of publicly listed companies with their hands in blockchain technology.
On its face, this might seem like exciting news for blockchain and crypto enthusiasts looking to get some investment exposure in the technology. However, anyone reading the headlines should temper their expectations upon a deeper look.
What are They?
BLOK is an actively managed portfolio run by the company Amplify ETFs. Under Amplify’s original registration statement prospectus with the Securities and Exchange Commision (SEC), the ETF was originally going to be called Amplify Blockchain Leaders ETF.
However, with good reason, the SEC was cautious to allow the fund to be listed with blockchain in its name over fear of having its stock price increase exponentially. Thus, Amplify settled on the name “Amplify Transformational Data Sharing ETF.” Since BLOK is actively managed, as opposed to its counterpart BLCN, the fund claims that this style of management will allow the fund to actively respond in real-time to blockchain related events and news such as IPOs, acquisitions, partnerships and strategic announcements, which could have an impact on the valuations of companies in the blockchain space. Amplify defines BLOK as a portfolio of “publicly-traded global equities actively involved in blockchain technology via investment, research or revenue creation.”
So, what are you buying if you decide to invest in the BLOK ETF? Well, many brand name tech companies that aren’t necessarily directly impacted all that much by blockchain technology. BLOK’s top holdings consist of giant tech companies such as IBM, Microsoft, Intel and NVIDIA, the e-commerce site Overstock.com, a payment processor Square, and the banking conglomerates Citigroup and Goldman Sachs.
Of those listed, only a few actually have heavy investments in blockchain. The two leaders being IBM, which has a department of 1,500 employees dedicated to blockchain technology, and Overstock.com, which is quickly transitioning from an e-commerce to a blockchain Bitcoin company. That is not to say that these companies can’t indirectly benefit from the developments of blockchain and the growing popularity of cryptocurrencies.
For example, NVIDIA’s stock price has increased by over 400% in the last 2 years because of the strong demand for its graphics processor units (GPUs). NVIDIA’s GPUs are among the most popular computer chips used by cryptocurrency miners who are looking to get rich and act as nodes for blockchain networks such as bitcoin. In fact, all of the holdings of BLOK do in some capacity have exposure to blockchain – although some are slight. However, any investor wanting to gain real exposure to the technology should look elsewhere, because the ETF resembles something more of a tech ETF, with some random payment processors and banks thrown in the mix, than an actual blockchain ETF.
Unfortunately, BLCN hasn’t distinguished itself from BLOK and a real blockchain ETF. BLCN is a passively managed ETF from the company Reality Shares ETF. Reality ran into similar trouble with the word blockchain being in its original name, Reality Shares NASDAQ Economy ETF, in its registration statement prospectus with the SEC. Reality settled on the name “Reality Shares Nasdaq NextGen Economy ETF.” Unlike its counterpart BLOK, BLCN is a passive index tracked ETF that will track an index, similar to the S&P 500, on the NASDAQ and will not be actively managed. The holdings in the index are very similar to the current holdings of BLOK, and features names such as IBM, Overstock.com, Intel, Microsoft, and NVIDIA. This leaves investors without real hard blockchain exposure.
Even though the two new ETFs aren’t exactly what blockchain enthusiasts were hoping for in terms of gaining easy access and a more diversified exposure to companies that are specifically focused on blockchain tech, it is a good start for those looking to perhaps dip their toes in the water of the blockchain world. However, it still remains that, outside of investing in the Bitcoin Investment Trust from Grayscale traded under the ticker GBTC, purchasing bitcoin and other cryptocurrencies outright on Coinbase or a purely crypto exchange like Bittrex or Binance is the only way to get a true exposure to blockchain and the crypto economic world.
Cryptos Rally Slightly
Following one of the worst crypto crashes since 2015, cryptocurrencies posted moderate recoveries.
Editor’s Remarks: Bitcoin dipped into four-figure territory at the nadir of the short-lived crash that many touted as the “end of cryptocurrencies”. However, most major currencies were up yesterday as they commenced a recovery. Ripple, which fell as low as $0.90, was up to $1.40 by midday, while NEO resumed its upward trend. Bitcoin’s recovery has been notably weaker than its smaller cousins, some of whom are up 60% in the last 24 hours against bitcoin. Ethereum gained back some of the ground it lost too and is settling in once more above the $1,000 mark.
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Crypto Carnage: Blood on the Dance Floor
It is said that ‘Blue Monday’, typically the third Monday of January, is the most depressing day of the year. This has, undoubtedly, been the case for cryptocurrency owners worldwide; from Monday onwards, almost all of the world’s major cryptocurrencies have seen a drastic slump in their prices.
Having reached the $14,000 mark last week, Monday onwards marked a severe fall in Bitcoin’s value. On Wednesday, the dubbed ‘king of cryptocurrencies’ dropped to below $10,000 for the first time since the end of November, before making a small recovery on Thursday. It stands at $11,500 at the time of writing, but the day is still young.
And Bitcoin has only been leading the way. At this point last week, the price of Ethereum, the second most valuable cryptocurrency, was approximately $1,200; a slump on Monday saw it fall to a low of $800 on Wednesday before pushing through the $1,000 threshold again, and reaching $1,030 a day later.
Ripple’s XRP also followed suit; the cryptocurrency has almost halved in value over the past week – from around the $2 mark to a low of $1.20 on Tuesday. Since then, it has marginally recovered in price, to $1.48 at the time of writing.
Monero, IOTA and Cardano were also impacted – since Monday, they have declined in price by 35%, 22% and 21%, respectively. Litecoin now sits at $195, down from $240 at the beginning of the week.
The crash occurred at a time of optimism and hope for cryptocurrency owners. Just earlier this week, US money transfer company MoneyGram announced a partnership with Ripple in the aim of streamlining money transfers. Yesterday also marked the expiration of the first Bitcoin futures contract that had been listed by the CBOE.
Still, China’s offensive rhetoric against Bitcoin and other cryptocurrencies in the last seven days is likely to have stoked fears amongst investors, causing a major sell-off. The country confirmed earlier this week that it was seeking to further clamp down on its restrictions against virtual currencies by eliminating cryptocurrency trading.
It has also recently announced plans to further restrict Bitcoin mining within the country. Recent statements coming from Chinese governmental circles could go as far as to suggest that China wants to eliminate cryptocurrencies outright: the People’s Bank of China (PBoC) vice governor, Pan Gongsheng, purportedly encouraged the state to introduce a total ban on cryptocurrencies.
China is by no means the only country to have espoused hostility toward cryptocurrencies. Russia also partially echoed China’s scepticism – President Vladimir Putin noted this week that “in broad terms, legislative regulation will be definitely required in future”.
South Korea’s unreceptive stance toward digital coins – it was reported earlier this week that its finance minister, Kim Dong-yeon, had stated that the government would be introducing measures to clamp down on the “irrational” cryptocurrency investment rage – may have also played a part in driving prices down.
Still, for every bear, there seems to be a bull. Time shall tell whether increasing restrictions on cryptocurrencies from different governments will further impinge on their price, or if they will find a way to adapt to the new obstacles and prove all those championing them (and making millions in the process) right.
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