UK lawmakers' inquiry into digital currency seeks balance between protecting consumers and stifling innovation

On 22 February 2018, the UK House of Common’s Treasury Committee launched an inquiry into digital currencies and blockchain, the distributed ledger technology which underpins them.

The Committee is chaired by Nicky Morgan MP, who said “People are becoming increasingly aware of cryptocurrencies such as Bitcoin, but they may not be aware that they are currently unregulated in the UK, and that there is no protection for individual investors.” Alison McGovern MP, Member of the Committee, added “It is time that Whitehall and Westminster understood cryptocurrency better, and thought more clearly about the policy environment for blockchain technology.”

If you need a quick primer on the definitions and technology, see our blockchain page and introduction to the legal issues.

In particular the inquiry will look at the risks around volatility, money laundering and cyber-crime presented by digital currencies. The FCA has already published warnings to consumers on the risk of investing in digital currencies and a feedback paper on distributed ledger technology, in which it promises to work collaboratively with industry, HM Treasury, the Bank of England, the Information Commissioner’s Office and other UK bodies to ensure a co-ordinated approach towards blockchain in the UK.

Focus of the inquiry

The inquiry will have a broad remit, examining the potential impact of blockchain on financial institutions, and the opportunities and risks presented by the technology for consumers, business and the government. The inquiry will also scrutinise the regulatory response from the government, the FCA and the Bank of England, with the aim of striking a balance between adequate protection for consumers and businesses, without stifling innovation.

In particular the inquiry will look at the risks around volatility, money laundering and cyber-crime presented by digital currencies. The FCA has already published warnings to consumers on the risk of investing in digital currencies and a feedback paper on distributed ledger technology, in which it promises to work collaboratively with industry, HM Treasury, the Bank of England, the Information Commissioner’s Office and other UK bodies to ensure a co-ordinated approach towards blockchain in the UK.

In addition, the new inquiry will look further into how blockchain may be applied in the financial services sector now and in the future. The Bank of England is already researching digital currencies, with its fintech accelerator investigating the use of blockchain for real-time gross settlement systems last year. The FCA’s regulatory sandbox, which allows businesses to test their products in the open market, featured blockchain-based payments, remittance and insurance companies in its most recent cohort. We would expect cohort 4 to include further novel uses of blockchain technology.

Some of the key questions to be considered by the inquiry include whether digital currencies could ultimately replace traditional means of payment, how the government’s processes should adapt if digital currencies become more widespread, for example to deal with tax collection, and whether regulation would improve consumer trust in digital currency start-ups.

As yet there are no timelines or estimates of when we can expect to see reports from the inquiry but submissions can be made online now.

How Osborne Clarke can help

We have experience advising a range of companies using and investing in blockchain technology, from digital currency exchanges and venture capital funds to Initial Coin Offerings. See our blockchain page for more insights.