Virtual Currencies Part 3 - VCs & regulation: what will the future hold for VC’s?

Wednesday, 08 October 2014 00:00

The question of an exact definition for VC's leads to a whole series of subsequent questions, namely whether VCs should be regulated, and if so, how and by whom? What will the future hold for VC's?


This article is the third of 3 Payments Advisory Group articles on the subject of Virtual Currencies:

1. Introduction to Virtual Currencies: the advantages & disadvantages

2. Virtual currencies and the impact on banks’ role in payments 

3. Virtual Currencies & regulation; what will the future hold for VC’s?


 Increased scrutiny from regulators

As VCs – and especially Bitcoin – become more popular, regulators around the globe view them with suspicion and have started taking a close look. They are concerned that the relative anonymity of VCs and the absence of a central control body are conducive to criminal activity and fraud. But for regulators, the review of VCs starts with a tricky question, i.e. the exact definition of a VC. Are VCs legal currency? Are they an “asset”, a “property”, a “financial unit”? The question of an exact definition for VC's leads to a whole series of subsequent questions, namely whether VCs should be regulated, and if so, how and by whom? 

Unfortunately the absence of a pan-regional legal and regulatory approach has led to fragmentation. In Europe, there is no pan-EU law on VCs in place yet, only white papers and analyses on a country-by-country basis. Consequently, several countries have not indicated yet whether they plan to regulate VCs and which authority or agency will be responsible for doing so. In some – primarily Asian countries – Bitcoin usage and trading has been strictly prohibited altogether. In the United States, multiple regulators have voiced (sometimes contradictory) opinions on how to deal with VCs.

An unclear future – for banks and VCs alike

The regulatory fragmentation and uncertainty places banks in an uncomfortable and uncertain position. Some have been willing to embrace what they see as payments “innovation” by offering bank account relationships to VC providers.  But in some countries regulators have pressured banks close Bitcoin-related accounts again because of concerns that banks cannot perform AML and KYC obligations on Bitcoin providers. This is a difficult position for banks which are operating in several jurisdictions. Not surprisingly, many banks stay away from the topic completely.

But where does all this leave the banks?

It seems uncertain that banks will lose their dominant payments position in the foreseeable future. Despite public dissatisfaction with banks and their perceived negative role in the financial crisis, banks still do enjoy a rather larger amount of trust. The bank account is seen as reliable and secure. Moreover, upcoming regulation (example: the Basic Bank Account Directive which will force banks to offer basic bank accounts to all legal residents of the EU) will enforce the strong position of the bank account and its main function of enabling payments to and from the account.

In terms of VCs, regulators will continue to monitor them and analyse their impact on banking and the economy at large. It is likely that we will see more restrictions, license requirements, consumer protection regulations and tax rules coming down the line, perhaps on a national rather than on a pan-regional basis. In fact, regulators may help banks retain their dominant payments position if they disincentivise use of VCs and impose strict regulation.

Should banks therefore adopt a complacent “danger over, return to normal” position? Definitely not. Banks should take consumers´ dissatisfaction with slow, inefficient and costly (cross-border) payments to heart. They need to work on improvements in payments, in order to adopt rather than counter the benefits of VCs such as speed, low cost, absence of FX and increased use of the internet.

In fact, one global bank has already started to explore mimicking the benefits of VCs by filing a  US patent application for a computerised payment system that resembles some aspects of Bitcoin. The proposed system would allow people to make anonymous, electronic payments over the internet, without having to reveal their name or account numbers or pay a fee, according to the patent application. This application highlights the competitive battle which is emerging between big banks, credit card operators and companies such as Google, Apple and PayPal. All these providers are eager to win market share in the rapidly expanding internet payments market. Perhaps this is where the future lies for banks in the payments space?


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