Anarchy in the UK is just a song your parents used to listen to. Unlikely as it sounds, the Bank of England Governor Mark Carney referenced the iconic punk era song in a speech that set out his thinking on the rise of virtual currencies. The good news is that Carney does not see cryptocurrencies, such as Bitcoin, as a threat to the stability of the UK economy. But the governor does perceive a potential risk to investors and an opportunity for criminals to carry out under-the-radar transactions, including money laundering. As Britain’s central bank sees it, more regulation is required to prevent anarchy and protect consumers.
Mark Carney signalled his belief that virtual currencies should be subject to much tighter regulation when speaking at the Scottish Economics Conference, hosted by Edinburgh University. The theme of the speech as a whole was ‘the future of money’ but the focus was very much on digital currencies and their shortcomings.
The Bitcoin Lottery
The Bank of England – along with other central banks around the world – has been taking a close interest in the increasing popularity of virtual currencies and the ‘blockchain’ technologies on which they are built. And while there is some excitement about the role that ‘blockchain’ can play in the future, Carney said Bitcoin and its many rival currencies could not, as things stand, be considered as efficient substitutes for traditional money.
But more importantly, Carney warned that virtual currencies were “inherently risky,” not least for those who bought the coins as an investment or simply as a means to store their wealth. Pointing to market fluctuations which saw Bitcoin values soar to above $20,000 in December before falling back to $6,000 in February, he warned:
“Cryptocurrencies are proving poor short-term stores of value. Over the past five years, the daily standard deviation of Bitcoin was ten times that of sterling. Consider that if you had taken out a £1,000 student loan in Bitcoin in last December to pay your sterling living costs for next year, you’d be short about £500 right now. If you’d done the same last September, you’d be ahead by £2,000. That’s quite a lottery. “
Carney was equally scathing about the ability of virtual currencies to act as an efficient way to carry out transactions or buy and sell goods. Or in his words. to act as a medium of exchange.
“The most fundamental reason to be sceptical about the long-term value of cryptocurrencies is that it is not clear the extent to which they will ever become effective media of exchange,” he said.
“ Currently, no major high street or online retailer accepts Bitcoin as payment in the UK, and only a handful of the top 500 US online retailers do. For those who can find someone willing to accept payment for goods and services in cryptocurrencies, the speed and cost of the transaction vary but it is generally slower and more expensive than payments in sterling.”
Credit cards, he argued were much cheaper and faster.
The Need For Regulation
As an asset that is currently for the few rather than the many, Carney acknowledged that virtual currencies posed very little threat to the global financial system, but, pointing to the potential for illegality associated with transactions in which identities can be hidden, he said that regulation was necessary.
“One of the main reasons for their (virtual currencies) use is to shield illicit activities.This cannot be condoned,” he said. “ Anarchy may reign on the dark web, but in the UK it’s just a song that your parents used to listen to.”
The governor was equally concerned about the safety of virtual currency investments in a marketplace where Bitcoins and their ilk are bought and traded through largely unregulated markets. There was, he said, a real and present risk of “price fluctuations and market manipulation. “
Pressure for Regulation
All of which suggests that the Old Lady of Threadneedle Street – a.k.a. The Bank – looking closely at regulation. As the Governor noted, policymakers can control virtual currencies by cutting them off from their main financial systems or – as China has done – ban them outright.
“A better path would be to regulate elements of the crypto-asset ecosystem to combat illicit activities, promote market integrity, and protect the safety and soundness of the financial system,” he said.
And that would potentially be a good thing for those who are attempting to bring virtual currencies into the mainstream. For instance, Baroness Michelle Mone is the co-founder of Equi, a venture capital fund that invites investors to back fast-growth companies by exchanging cash for blockchain tokens rather than shares. As things stand, because of the lack of regulation, such investment opportunities are open only to wealthy “sophisticated” investors,” who understand the risks. Commenting on the Governor’s speech, Baroness Mone said regulation would bring stability.
“Mark Carney raises a very important point, that of regulation. The simple fact is we need it. Everybody who believes in cryptocurrencies agrees that we need regulation to move forwards, nobody wants this to be the wild west anymore. With regulation comes stability,” she said.
But Carney’s views were not universally endorsed by those who work in the virtual currency arena. David Merry is chairman of financial performance marketing company Investoo Group. As he sees it, the governor overstated the risks associated with virtual currencies. Citing a Government report which played down links between cryptocurrencies and criminal activity, he said:
“It’s confusing that he appeared to link cryptocurrency to money laundering and terrorism when the Treasury’s report appeared to be in stark contravention of these claims,”
And unlike the Governor, Merry saw a growing role for Bitcoin as mainstream money.
“I agree that cryptocurrencies pose no risk to the financial stability of the United Kingdom, however, I think that over time as retailers look to adopt them for purchases they will become more prominent,” he added.
The shape of virtual currency regulation remains unclear, but it seems unlikely that the UK will take action to stifle activity. Blockchain, as the Governor said, is an area that is full of “exciting” possibilities.”