On Her Majesty’s Secret Service: The Silent Rise Of Cryptocurrencies In Britain

Executive Brief

The UK may not seem the most likely candidate for a potential cryptocurrency growth market, but prudent regulation on the part of Britain’s government and regulatory bodies and strong forecasts for economic growth present a serious opportunity for digital currency investors and businesses. But the future is not entirely bright: the threat of an increasingly left-wing opposition, an increasingly fragmented Britain, and a strained relationship between the UK and her EU partners, all provide cause for concern. Nevertheless, in the short-term at least, Britain has been silently increasing her attractiveness to cryptocurrency businesses – and, with indications that the UK’s positive attitude to digital money innovation will become a permanent feature of government policy and regulatory thinking, there is a fair chance that Britain will become, as her finance minister hopes, a hub for the development of digital currency business.

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If most people were asked to predict the growth markets for cryptocurrencies over the next decade, the answers seem obvious: the mushrooming economies of China, India and the Middle East, or established technology hubs like Japan and the USA. But while the UK might not jump immediately to mind, it has been recognised by established Bitcoin magazine CoinCenter as one of the most promising cryptocurrency markets. This is mostly thanks to Britain’s careful and diligent regulatory instinct and increasing tech investment. It seems that Chancellor of the Exchequer George Osborne’s ambition for a British cryptocurrency hub may be more than a pipedream. But while digital currency investors may feel optimistic about the future of cryptocurrencies in the UK, there remain a few obstacles on the horizon.

The British Government has approached the regulation of cryptocurrency business cautiously. This circumspect attitude has been encouraged by the governor of the Bank of England, Mark Carney. The Bank has been making positive noises about cryptocurrencies: Dr. Carney’s attitude appears to be that, until cryptocurrency businesses represent a significant proportion of British economic output, substantial regulation would hinder more than help. Britain’s tax authority, HM Revenue and Customs (HMRC), has been similarly forward-thinking in its approach, excluding cryptocurrency mining from the 20% VAT tax. By specifically declaring cryptocurrency mining tax-free, HMRC has legitimized the activity of miners who elsewhere operate in a dubious legal gray-area.

When Prime Minister David Cameron was re-elected in May 2015 on a center-right platform of low taxes and cutting red tape, this prudent approach seems certain to continue for the next half-decade. The new government’s first budget tackled cryptocurrency regulation for the first time, including digital money transactions in anti-money laundering legislation, and indicated that research into cryptocurrencies would continue. Mr. Osborne has gone so far as to earmark £10 million ($16 million) to promote cryptocurrency innovation. For investors and businesses, this degree of certainty seems positive, but there are threats to Britain’s future as a digital currency hub.

The most immediate concerns for the future of cryptocurrencies in Britain are political. The future of digital money may be bound up with that of the UK’s opposition Labour Party: left-winger Jeremy Corbyn, whose manifesto implied a high-regulation approach to cryptocurrencies, has just won the party’s leadership election. Were Mr. Corbyn to go on to win a general election in five years’ time, the prospects for a low-regulation, high-growth UK cryptocurrency sector decrease. Similar attitudes have been expressed by the increasingly influential Scottish National Party (SNP). Likely to win 2016’s Scottish Parliament Elections by a landslide, the SNP are yet to clarify their position on digital money. If the SNP achieve their goal of convincing Mr. Cameron to devolve further taxation and regulatory powers to the Scottish Parliament, this – or the feared ‘neverendum’, where the SNP continue to push for independence despite 2014’s ‘No’ vote – could create a disconnect between financial centers in London and Edinburgh and stunt the regional growth of digital currency.

This kind of disconnect already exists between the UK and its EU neighbors. More disposed towards tight regulation, major EU economies such as Germany, France and Spain have already indicated their discomfort about cryptocurrency business. But in the present scenario, this works in Britain’s favor: the UK may be seen as a low-regulation entry-point into the EU common market. This increases Britain’s attractiveness to cryptocurrency investors.

Mr. Cameron is currently seeking to renegotiate Britain’s place in the EU, to further protect the UK from the bloc’s meddlesome regulatory instinct. He will then present Britain’s renegotiated position to the public for an In-Out referendum in 2017. For cryptocurrency investors, this presents a simultaneous risk and opportunity. Should Britain leave the trade bloc, her economic recovery – the fastest in the developed world in 2014 – would probably stall, but Britain could then opt out of any European regulations on cryptocurrency businesses which would likely be harsher than the UK government’s stance.

However, regardless of these risks, Britain remains – at least in the short-term – one of the most favorable jurisdictions in the world for cryptocurrency investors and businesses, and retains its potential as a center for cryptocurrency growth and development. British regulation of cryptocurrencies has been broadly welcomed in the industry, with the UK Digital Currency Association going so far as to dub Britain’s approach ‘a million times better’ than US attempts to regulate cryptocurrency businesses. The British approach should stand as a model for other jurisdictions worldwide which seek to encourage growth in cryptocurrency industries: with the UK’s leading position in international groupings such as the EU, Commonwealth and the International Monetary Fund, this example could disseminate widely. It might even be hoped that, given London’s pivotal role in the financial services sector, greater adoption and legitimization of cryptocurrencies in the UK could lead to wider acceptance worldwide.

The views expressed by the authors on this site do not necessarily represent the views of DCEBrief or the management team.

Author: Chris Cooper

Chris Cooper is a doctoral researcher in ancient economic history at Merton College in the University of Oxford. His AHRC-funded research examines transaction costs in the ancient world, and the impact of the invention of money. But while Chris specializes in the cultures that created money in the first place, he is equally interested in digital currencies and their impact on modern societies, cultures, trade-flows and laws.

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