The government has released a Call for Information to invite views on the benefits and risks of digital currencies. It hopes to learn more about the new currencies available to manage the future developments of payments.
Once the government is fully aware of the benefits and risks, it will then decide whether to intervene in the digital currency market. This intervention could take the form of regulation to create a more stable market.
One of the risks the government is concerned about is hacking and fraudulent activities in digital wallets which store the currency online, because of the lack of consumer protection currently in place.
The government states it would like to hear from those with an interest in digital currencies, including digital currency developers, digital currency exchanges, digital currency users, investors, academics, think tanks, other government departments, international counterparts, banks, building societies and other payment service providers, payment scheme companies and e-money providers.
The Call for Information noted a number of potential benefits to digital currencies, such as the digital transfer of money which is cheaper, faster and safer than traditional payment systems
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“In discussions with industry to date, low transaction costs and faster processing times have been highlighted as a particular advantage, with users being able to make cheaper and quicker domestic and international payments. Added to this is the user convenience of being able to make payments from any location via a digital wallet on a mobile phone or other device,” said the document.
Digital currencies offer more security because they can’t be forged or linked to customer bank accounts like debit cards.
But the document stated the reasons why benefits of digital currencies are limited could be due to the fluctuating price, meaning they are not a stable store of value, as well the fact digital currencies are accepted by a very limited number of merchants.
“There is also very limited buyer protection – when goods are bought using a digital currency and the merchant doesn’t send the promised goods, no action can be taken to reverse the transaction,” according to the document.
Also considered was the fact digital currently could post a financial stability risk if used widely as an alternative to pound sterling, which would in turn weaken monetary policy making.
But in September 2014, the Bank of England (BoE) stated digital currencies, such as bitcoin, do not currently pose a material risk to monetary or financial stability in the UK.
A report concluded digital currencies wouldn’t post a threat unless sterling was abandoned in favour of an alternative currency, which was deemed extremely unlikely.
The BoE said most risks could be addressed through regulatory supervision.
Bitcoin, which is the best-known digital currency, has come under the spotlight in recent months due to cyber attacks on bitcoin exchanges and the collapse of the largest exchange, MtGox.
Despite this, bitcoin remains popular in the US and China, and it is often championed as a replacement for existing payment systems, according to The Guardian.
Europe is also seen as a market ripe for change, the paper said, with the US bitcoin service firm Coinbase recently announcing plans to launch a consumer service across a large part of the Eurozone.
Coinbase claims to have found a way to link a bitcoin wallet service to the euro-payments system, making it possible for users to send money to and from their bitcoin account.
The questions government wants answered:
Question 1: What are the benefits of digital currencies? How significant are these benefits? How do these benefits fall into different groups – consumers, businesses, government and the wider economy, for example? How do these benefits vary according to different digital currencies?
Question 2: Should the government intervene to support the development and usage of digital currencies and related businesses and technologies in the UK, or maintain the status quo? If the government were to intervene, what action should it take?
Question 3: If the government were to regulate digital currencies, which types of digital currency should be covered? Should it create a bespoke regulatory regime, or regulate through an existing national, European or international regime? For each option, what are the advantages and disadvantages? What are the possible unintended consequences – creating a barrier to entry due to compliance costs, for instance?
Question 4: Are there currently barriers to digital currency businesses setting up in the UK? If so, what are they?
Question 5: What are the potential benefits of this distributed ledger technology? How significant are these benefits?
Question 6: What risks do digital currencies pose to users? How significant are these risks? How do these risks vary according to different digital currencies?
Question 7: Should the government intervene to address these risks, or maintain the status quo? What are the outcomes of taking no action? Would the market be able to address these risks itself?
Question 8: Should the government regulate digital currencies to protect users? If so, should it create a bespoke regime, or regulate through an existing national, European or international regime? For each option, what are the advantages and disadvantages? What are possible unintended consequences – creating a barrier to entry due to compliance costs, for instance? What other means could the government use to mitigate user detriment apart from regulation?
Question 9: What are the crime risks associated with digital currencies? How significant are these risks? How do these risks vary according to different digital currencies?
Question 10: Should the government intervene to address these risks, or maintain the status quo? What are the outcomes of taking no action?
Question 11: If the government were to take action to address the risks of financial crime, should it introduce regulation, or use other powers? If the government were to introduce regulation, should it create a bespoke regime, or regulate through an existing national, European or international regime? For each option, what are the advantages and disadvantages? What are possible unintended consequences – creating a barrier to entry due to compliance costs, for istance? What has been the impact of the Financial Crimes Enforcement Network's (FinCEN’s) decision in the USA on digital currencies?
Question 12: What difficulties could occur with digital currencies and financial sanctions?
Question 13: What risks do digital currencies pose to monetary and financial stability? How significant are these risks?