UK regulators target bitcoin anonymity – but why now?
If you bought bitcoins this time five years ago – and still have them – you may already be planning for early retirement.
In December 2012, the cryptocurrency cost around £10 each, meaning a hundred bitcoins would have set you back approximately £1,000. Today, those same bitcoins would be worth over £1 million.
The virtual currency has experienced phenomenal growth in the tail end of 2017, jumping from £700 each at the beginning of the year to more than £10,000 now.
But bitcoin’s meteoric rise in recent months has caught the attention of regulators, with the UK and EU announcing plans to crack down on the cryptocurrency’s links to money laundering, terrorism funding and theft.
Before we explore the proposals in more depth, let’s briefly summarise the benefits of bitcoin and why regulators are keen to enforce new rules on digital currencies.
What is bitcoin?
As mentioned, bitcoins are a cryptocurrency, which means they are digital assets that can be exchanged for goods and services. However, unlike traditional currencies, bitcoins don’t have a central authority – such as a bank or other institution – that records transactions and account balances.
Instead, cryptocurrencies rely on a decentralised network of peer-to-peer machines that must all retain an identical list of transactions.
The system fails without universal consensus across all peers, and bitcoin uses blockchain technology to achieve this verification. Click here for more information on how blockchain works.
Public awareness of bitcoin has come a long way in the last couple of years. In 2015, PwC found 83 per cent of people were only slightly familiar or not at all familiar with cryptocurrencies.
Just one year later, according to Statistica data, 43 per cent of Brits knew what bitcoin was or had used it. Only 22 per cent of people had never heard of the virtual currency.
What are the benefits of bitcoin?
Advocates of cryptocurrencies highlight various advantages of bitcoin, which include:
Decentralised: Banks and governments have the power to seize money and assets held within customer accounts in order to shore up failing institutions in emergencies. Cryptocurrencies are decentralised and therefore immune from this intervention.
Reduced fees: Foreign currency exchange and wire transactions typically involve fees. Bitcoins have fewer intermediaries or third parties involved between buyers and sellers, meaning there are minimal fees, although some cryptocurrency wallet firms and exchange platforms do charge for services.
Fraud and identity theft prevention: Bitcoins are a digital currency, so they cannot be physical forged, plus transactions cannot be arbitrarily returned to the sender. Cryptocurrencies also leverage a mechanism that minimises the amount of information sent to recipients, mitigating identity fraud risks.
Anonymity: The features that allow bitcoin to prevent identity fraud also enable users to remain anonymous. Transactions are recorded, but they are only linked to an electronic address rather than personal information that is easily identifiable.
It is this anonymity that regulators intend to address, as officials fear cryptocurrencies provide the ideal environment for untraceable criminal transactions to take place.
What are regulators planning?
The UK Treasury announced earlier this month that it wished to regulate bitcoin and other cryptocurrencies so they comply with anti-money laundering and tax evasion legislation.
Stephen Barclay, economic secretary to the Treasury, confirmed the government’s strategy in an answer to a written parliamentary question in October.
He said amendments would be made to the 4th Anti-Money Laundering Directive. Under the proposals, traders would be required to disclose their identities, ending the anonymity that bitcoin owners currently enjoy.
Currency exchange platforms and bitcoin wallet firms will be expected to perform due diligence on customers and report suspicious transactions. Regulators are negotiating the amendments, which will be implemented EU-wide, with the changes expected to come into force early next year.
Labour MP John Mann, a member of the House of Commons Treasury select committee, said regulation of cryptocurrencies is becoming more important as their popularity increases.
“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.
Unexpected community support
While many members of the cryptocurrency won’t welcome more stringent regulation, some experts believe numerous supporters will favour the changes.
Nicholas Gregory, CEO of CommerceBlock, told Business Insider UK that regulatory scrutiny is a “stamp of approval” for digital currencies.
“Industry players want the same thing as politicians – cryptocurrencies that offer cheap, frictionless, international transactions used for legal purposes,” he explained.
“If anything, regulation will only increase bitcoin’s rate of growth as regulation lends credibility and engenders trust.”
We won’t know the full impact of the changes on institutions that handle bitcoins until the regulatory amendments are enforced.
However, complying with new rules is likely to add an extra burden for various firms in an area that is still experiencing rapid and erratic growth.
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