The Treasury said it would consult on the plans “early in the next parliament” in an effort to ensure people cannot use digital currency exchanges to conceal criminal behaviour.
“The government intends to apply anti-money laundering regulation to digital currency exchanges in the UK, to support innovation and prevent criminal use,” the Treasury said. “The government will formally consult on the proposed regulatory approach early in the next parliament.”
Financial services litigation and compliance expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said: “The government has clearly identified money laundering and criminal activity as key risks related to digital currencies. The new measures it is proposing will go some way to address these risks but it will be for digital currency issuers and dealers to take appropriate steps to build a reputation of complying with relevant legislation and any regulatory requirements.”
“Compliance with money laundering requirements will introduce significant resource and compliance burdens which may well reduce the number of issuers down to those who have the financial backing to satisfy these requirements. However, only time will tell if the implementation of anti-money laundering systems and controls has such an impact that it negates the key benefits of digital currency, in particular those of speed and efficient cross border transactions.”
The Treasury’s digital currency plans (28-page / 439KB PDF) were outlined in a document which also summarised the 120 responses it received to its earlier call for information on digital currencies. In the report it said that it plans to review whether the police are equipped with “effective skills, tools and legislation to identify and prosecute criminal activity relating to digital currencies”.
Work to develop new voluntary standards for consumer protection in the area of digital currencies will also be undertaken by the government in collaboration with the British Standards Institution and the digital currency industry, it said.
“The government notes the nascent state of the technology and the surrounding industry, and recognises that users of digital currencies are potentially exposed to a number of risks,” the Treasury said. “In response, the government considers that a framework for best practice standards for consumer protection is the right step to take at this stage, in order to address the risks identified but without imposing a disproportionate regulatory burden on the industry.”
An additional £10 million of funding has also been earmarked for new research into the “opportunities and challenges for digital currency technology”, it said.
In recent months financial services regulators have taken an increasing interest in digital currencies because of the growing popularity of ‘bitcoin’.
The Treasury said that it could see potential in the underlying technology that supports digital currencies.
“The government considers that while there are clear barriers to digital currencies achieving widespread use in their current form, the ‘distributed ledger’ technology that underpins digital currencies has significant future promise as an innovation in payments technology,” the Treasury said. “The government wishes to foster a supportive environment for the development of legitimate businesses in the digital currency sector so that the UK can see some of the benefits of digital currencies, while also creating a hostile environment for illegal activity.”
Earlier this year, the Bank of England raised the question of whether a central bank like it should issue a digital currency. Like the Treasury, it said there is “considerable promise” in the “distributed ledger technology” that supports existing digital currency transactions, even though those assets “have economic flaws which make them volatile”. It said there would be “economic, technological and regulatory challenges” to overcome if it decided to issue a digital currency.