UK inquiry a chance to consider digital currency positives, says fintech lawyer

Out-Law News | 22 Feb 2018 | 4:35 pm | 2 min. read

A new inquiry opened by a UK parliamentary committee presents an opportunity to ensure the potential benefits of cryptocurrencies are better recognised, a specialist in financial services and technology law has said.

Luke Scanlon of Pinsent Masons, the law firm behind Out-Law.com, said that he was encouraged by the terms of reference of the Treasury Select Committee's digital currencies inquiry, announced on Thursday.

The inquiry has been opened at a time when there is significant public attention on digital currencies, such as bitcoin. In recent months the value of bitcoin has risen sharply and then retreated in a sign of its price volatility, while there has been growing appetite among some businesses to engage in 'initial coin offerings' (ICOs) as a way to attract investment. Those and other developments have attracted increasing scrutiny from policy makers and regulators around the world.

"It is positive to see that the scope of the inquiry includes a consideration of how regulation in this area could be framed in order not to stifle innovation," Scanlon said. "As lawmakers and regulators across the world look into the current issues surrounding the use of cryptocurrencies, there is a danger that the positive innovative potential which some of them have could be overlooked, and not balanced against the need to consider the obvious concerns about their impact on financial stability, market infrastructure, anti-money laundering and the need for investor protection."

"It is also encouraging to see that the inquiry will extend beyond simply focusing on the use of digital currencies as substitutes for the pound, and include a consideration of how regulation could benefit digital currencies start-ups. Given the number of initial coin offerings (ICOs) currently being promoted and the rising need to clarify the extent to which digital currencies and tokens can form the basis of donation-based crowdfunding and other forms of raising capital, a balanced look at how new ways to create and encourage access to finance is also to be welcomed," he said.

The Treasury Select Committee said that among the "key questions" it would consider as part of its inquiry is whether digital currencies are "capable of replacing traditional means of payment".

In a recent speech, president of Germany's central bank, Jens Weidmann, said that "cash still has an important role to play in today's payments landscape" despite the increasing prominence of digital currencies. He said that the volatility of the price of bitcoin "naturally makes it less than ideal as a means of payment".

"If you've got a payment instrument that's soaring in value, you'll want to keep it for yourself, and if its value is plummeting, you'll be hard pressed to find any takers," Weidmann said.

Nicky Morgan, chair of the Treasury Select Committee, said the committee would "look at the potential risks that digital currencies could generate for consumers, businesses, and Governments, including those relating to volatility, money laundering, and cyber-crime". She also said that the inquiry would look into the potential of blockchain, the technology that underpins bitcoin transactions.

"The distributed ledger technology that supports digital currencies is said to have significant transformative potential, not least within the financial services sector," Morgan said. "Striking the right balance between regulating digital currencies to provide adequate protection for consumers and businesses, whilst not stifling innovation, is crucial. As part of the inquiry, we will explore how this can be achieved."

European Commission vice-president Valdis Dombrovskis said on Tuesday that EU officials will meet with central banks and "market players" next week to discuss virtual currencies, including whether "current regulation is fit for purpose".