Bitcoins fall outside the scope of UK regulation, but there are benefits to be gained in using them.
You’d be hard pressed to find anyone who hasn’t heard of a bitcoin, but how many understand where it sits within the UK regulatory remit?
A bitcoin is a unique serial number generated through complex mathematical algorithms. The algorithm is designed to release a finite number of bitcoins – 21 million by 2140 – and a bitcoin’s value is dictated by demand. A ‘blockchain’ ledger stored across a peer-to-peer network on the internet records every transaction and is a permanent record of ownership.
You own a bitcoin when you hold the public and private key pair and a change in ownership is effected when more than 50 per cent of the network accepts that a new public key controls the bitcoin. You can use bitcoins with any merchant who accepts them and exchange bitcoins for national currency through online exchanges.
At the monent, bitcoins are not regulated in the UK. The Financial Conduct Authority (FCA) says a bitcoin is neither currency nor money so falls outside the scope of the UK financial services regulatory framework. This means they are not subject to the requirements that apply to cash, e-money or investments such as shares, options and futures.
Bitcoins are not ‘e-money’ as defined in the Electronic Money Regulations 2011, as it is not issued by an issuing authority on the receipt of funds. Bitcoins are also not ‘funds’ for the purposes of the Payment Services Regulations 2009, as they are not banknotes, coins, e-money or scriptural money.
Bitcoins also fall outside the Money Laundering Regulations 2007, which impose a requirement to verify a customer’s identity.
But as the use of bitcoins grows, expect the regulatory framework to adapt and draw bitcoins into scope.
- Security: theft of the private key is a risk. While the blockchain itself has so far proven resilient to hacking attempts, digital wallets and online exchanges storing individual reserves of bitcoin have been hit.
- Loss: if your unregulated and unregistered bitcoin exchange goes bust, you have no entitlement to compensation under any government-backed scheme.
- Value: bitcoins have a history of fluctuating value; they are not pegged to an exchange rate and are sensitive to speculation.
While there are risks inherent to owning bitcoins, their use marks a shift away from our centralised banking system and represents innovation in payments and technology. The value of a bitcoin is dependent on the trust we place in it, so it may be no bad thing if it is drawn into the regulatory remit.
Miah Ramanathan is an associate Osborne Clarke