The government's announcement came within hours of bitcoin hitting a new all-time high.
The UK Treasury’s move to regulate bitcoin will ultimately encourage institutional investment and inflate its price, a leading crypto-currency lawyer has said.
A day after bitcoin rebounded from a 20 per cent plunge last week to hit an all-time high of $11,773.83, the UK government said it would launch an inquiry into the crypto-currency next year, part of plans to “bring virtual currency exchange platforms into anti-money laundering and counter-terrorist financing regulation”.
Following the announcement, Richard Howlett, a founding partner at Selcahii LLP, spoke to this publication about the impact UK regulation could have on bitcoin and other crypto-currencies.
“I am of the opinion regulation will ultimately increase the value of crypto[-currencies] as it will be opened up to wider audience, the risk will be mitigated and investors will be able to bring crypto[-currencies] into their portfolios, therefore increasing demand,” he told WealthBriefing. “Institutional investors have to work within parameters and rules. As of yet, there are little to no rules for crypto[-currencies], which leaves it outside of the acceptable investments an institutional investor can consider. Regulation will bring crypto[-currencies] into the sights of investors who will be keen to have some of their portfolios crypto based.”
Concern is growing among the UK and other governments that bitcoin and other crypto-currencies are being used by criminals to wash dirty cash and evade taxes as current rules allow traders to purchase them without disclosing their identity.
But under the EU-wide plan, expected to enter into force next year, online crypto-currency exchanges will be required to carry out due diligence on customers and report suspicious transactions, much like banks are today.
However, policy-makers must err on the side of caution when approaching bitcoin with regulatory red tape, as rules that seek to “control” crypto-currencies risk stifling growth, Selachii’s Howlett has warned.
“Regulation is completely different to control,” he stressed. “Whilst regulation is healthy for the general wide adoption of crypto[-currencies], I would say that any regulation that seeks to control crypto[-currencies] would be a bad thing. Yes, people have to pay due taxes and, yes, exchanges need to ensure they are not assisting… money laundering.”
Taking the highs with the lows
Bitcoin’s value has surged nearly 1000 per cent since the start of this year, outperforming any other asset class. Since its inception in 2009, the original crypto-currency has rocketed nearly 20,000 per cent.
Its staggering highs do not come without the lows, however, and it has suffered pullbacks of more than 50 per cent eight times since 2011. Its price swings, which often span thousands of dollars daily, have garnered the attention of hedge funds. There are now said to be over 100 hedge funds dedicated entirely to trading bitcoin.
But many consider bitcoin’s extreme volatility its main downfall, prompting questions over whether it is a true store of value that can be used to transact or merely a speculative “commodity” toyed with by day traders. Last week, CME Group, announced its plans for bitcoin futures trading had been given the green light by regulators and would launch on 18 December.
But will Wall Street be betting big on bitcoin?
JP Morgan chief executive Jamie Dimon slammed bitcoin earlier this year, touting it as a “fraud” that would “likely blow up”. Larry Fink, CEO of BlackRock, the world’s largest asset manager, called bitcoin “an index for money laundering”. Credit Suisse’s head Tidjane Thiam has said “most banks in the current state of regulation have little or no appetite to get involved in a currency which has such anti-money laundering challenges”.
Yet some companies and economies have embraced bitcoin.
Last week, professional services behemoth PricewaterhouseCoopers announced it had taken a payment in bitcoin for its advisory services, its first in a crypto-currency.
Japan, for example, has embraced bitcoin and recognises it as a valid payment method, creating regulations to legitimise its trading. Switzerland is generally bullish on bitcoin, and certain towns and cities in the Alpine State allow their citizens to pay portions of their tax bills using the crypto-currency. Some countries have mused about creating their own crypto-currencies, as have banks in order to streamline and cut costs surrounding inter-bank payments. Many of the world’s big banks, governments and financial regulators have collaborated on projects studying blockchain, the technology underpinning crypto-currency transactions.
In order to flourish as an asset class, bitcoin requires more regulation, Howlett said.
“Crypto-[currency] is out of infancy and requires regulation now to take it onwards and upwards,” he said. “The previous benefits of this being unregulated are now far outweighed by the arguments in favour of regulation.”
Still, there are unanswered questions over if and how taxes should be levied on gains made through crypto-currency trading.
Labour MP John Mann, a member of the House of Commons Treasury select committee, has suggested the matter will be looked into in the UK next year.
“These new forms of exchange are expanding rapidly and we’ve got to make sure we don’t get left behind – that’s particularly important in terms of money laundering, terrorism or pure theft,” he told the Daily Telegraph. “It would be timely to have a proper look at what this means. It may be that we want speed up our use of these kinds of thing in this country, but that makes it all the more important that we don’t have a regulatory lag."