Bitcoin Gains Legitimacy in The UK
To Bitcoin purists, this must feel all wrong: this week George Osborne announced a review into uses for the cryptocurrency as part of plans to make the UK a world capital for financial technology (‘fintech’ to its friends).
Given Bitcoin was founded on the principles of transcending national boundaries – and with it, governments – it’s a strange direction for the currency to take.
But Osborne sees this as the obvious way to bring together two of his favourite things: technology and the financial sector.
‘Key to the government’s long-term economic plan is cementing Britain’s position as the centre of global finance,’ he said.
Ours isn’t the only government to have started taking notice of Bitcoin. Last month, the New York Department of Financial Services published its first draft BitLicenses, new rules governing how digital currencies are traded in the state.
Under the rules, any Bitcoin-based business will be required to maintain records of their customers’ names and addresses. They’ll have to hold Bitcoin reserves of 100% of the amount they hold (pretty harsh, considering US banks’ capital requirements are about 5% of deposits), and they’ll have to publish a DFS-approved consumer complaint policy. They’ll also be subject to security audits.
Why now? In its early years, Bitcoin had two main uses: funding criminal activities, and as an investment. But over the past few months, it has become less useful for both. Instead, the right conditions have emerged for it to be seen as something new: a legitimate currency.
It began with the closure of online drugs marketplace Silk Road, which traded using Bitcoin, in October last year. In a dramatic raid on a San Francisco library, founder ‘The Dread Pirate Roberts’ – 29-year-old Ross Ulbricht to his mum – was arrested, which pretty much put an end to using Bitcoin to pay for illegal activities.
Shortly afterwards, the currency peaked at $1,144 and began to fall, dropping to a low of $360, then rising to the $600 mark, where it’s hovered for almost three months. In February, Mt Gox, one of the first Bitcoin exchanges, filed for bankruptcy protection.
All fairly calamitous events, if you think about it. Imagine if the pound collapsed as a major currency exchange toppled in the UK: those in charge would face serious questioning.
But as it was Bitcoin, and thus most people involved knew the risks from the outset, instead it set the stage for conversations among leaders about how the currency could be brought out of the underworld and into the mainstream. The result is governments looking into the idea of regulating it, with the eventual goal that consumers might begin to see Bitcoin as less of a risk.
Now the currency has stabilised, even retailers are being turned on to the idea of using it. The number of well-known brands accepting it as payment is expanding fast: Asos, WordPress, Soundcloud, Airbnb – the list goes on. Alright, so you can’t go down Tesco’s and pay for your Big Shop with it – but it’s only a matter of time.
Charlotte Bowyer, head of digital policy at think tank the Adam Smith Institute, says the signs are there that the Bitcoin community is beginning to get serious about professionalising the currency: not least because arch-nerds are making up a smaller and smaller percentage of the Bitcoin crowd.
‘I went to a Bitcoin conference last November – it was loads of guys in anoraks, there were no signs and it was chaos. Then I went to a Bitcoin Foundation (more on which later) conference a couple of months ago, and it was just so professional and sleek and put together, there were venture capitalists and investors there, and people were doing business.
‘The transformation in six months has been ridiculous. It’s really pulled itself together. It’s clear people are professionalising Bitcoin.’
Now it’s no longer rocketing in value, the currency’s main potential lies in its ability to lower transaction costs. Want to move cash abroad? It’s cheap to convert into Bitcoin – and once you’ve done that, you can move it anywhere you want with minimal costs.
‘You’re getting smart people, people who are on the ball and venture capitalists, who’ve realised the potential to make billions of pounds. And that’s interesting,’ says Bowyer.
With those kinds of savings in mind, a new wave of entrepreneurs – many of whom use profits from their original Bitcoin investments as seed capital – has launched businesses aimed at taking it legit. Businesses such as Vaurum, a ‘robust’ Bitcoin exchange aimed at financial institutions, are trying to get ordinarily risk-averse industries – banks, pension funds, etc – interested.
That means, despite Bitcoin’s beginnings as a currency designed to transcend national boundaries, it could be about to find itself counted among the assets of some of the world’s major financial institutions. Not, perhaps, what its creator had in mind – but for the rest of us, that has huge potential.
‘You’ve [now] got people in these big institutions which are actually recognising that they’ve got a lot to gain from working with the technology. And I think that’s something that definitely wouldn’t have happened a year ago.’
But what of the Bitcoin industry’s own attempts at self-regulation? In September 2012, some of Bitcoin’s best-known figureheads – including Gavin Andresen, Bitcoin’s lead developer – got together to create the Bitcoin Foundation, a lobby group with a mission to ‘standardise’, ‘protect’ and ‘promote’ the currency.
‘It’s a less formal [style of] regulation,’ says Josh Blatchford, the founder of Bitcoin marketing agency Bitnewt. The idea of the Foundation is that ‘you can’t have decentralised everything – some people have to do the decision making process and make changes themselves.’
But all is not well at Bitcoin HQ. There have been reports of in-fighting between the Foundation’s founders. In May, 10 of its members quit when Brock Pierce, a former Disney child star, was elected as a new director.
‘It’s hard to say whether the Foundation will continue and be successful,’ says Blatchford. ‘At the moment it doesn’t have a very good reputation among the community. It’s perceived as just a collection of wealthy individuals who claim ownership of something they don’t really own. It’s a bit of a land grab.’
So although it began as a way to bring down governments, the likelihood is it’ll be down to international leaders to find a way to regulate the unregulatable.
‘The UK’s got one of the best approaches,’ says Bowyer. ‘It’s been slightly more proactive than others, it obviously recognises this is a good thing and is trying to tie it to the whole Silicon Roundabout vibe.’ No pressure on Osborne, then…