What do Gibraltar and Japan have in common? They are both countries where UK cryptocurrency firms have been forced to bank. Shunned by UK institutions, companies based in London, the financial capital of the world, are having to look abroad for alternatives. This unofficial blanket ban is not merely having a negative effect on the digital currencies market; it risks jeopardising London's global financial supremacy.
Already, cryptocurrencies are too big to ignore. Worth over half a trillion dollars, the market equates to around 10 percent of the $5 trillion in circulation across the globe. Regulation legitimises technologies, products and services, which means there is then room to innovate and evolve. This makes the UK's silence on crypto particularly strange: it specialises in smart, light-touch regulation that enhances cooperation and competition - which is exactly what the crypto industry needs. Moreover, the City wants to grow as financial and fintech leader, and continue to do so in the face of Brexit. It is clear what happens to jurisdictions that do not act: they miss out, with businesses moving and ecosystems growing elsewhere. Cryptocurrencies present an opportunity, not a problem, and it is imperative that the UK moves now to regulate, or risk losing business and stature fast.
The digital currencies sector has generated billions in income and created thousands of jobs around the world. Countries that have already regulated it are reaping the benefits. Last year, while its neighbours China and South Korea cracked down on cryptocurrency exchanges and initial coin offerings (ICOs), Japan amended its Payment Services Act to allow digital currencies as a legal form of payment. Regulators then approved 11 existing exchanges and 17 currencies that can be traded on those exchanges. The result was that the turnover of bitcoins that originate in Japan can be as high as 60 percent of global volumes, and banks, even telecoms firms, have started using crypto, and engaging with ICOs. Before Christmas, three of Japan's big credit card firms announced they had begun using Ripple technology. Regulation enables sectors to mature, identifying and creating legitimate market players. This makes life far easier for incumbents providing services to those businesses, and engenders further activity.
What is more, those of us providing services in the sector are already seeing a tale of two realities, with business caught between steering clear of an unregulated sector, while also understandably keen to participate in its success. When I'm presenting at conferences, the official line from financial institutions is "woah, it's too early to take crypto seriously". Afterwards, senior bankers crowd around you saying "we're already doing so; how can we work with you?". My company, Coinfirm, helps companies safely and compliantly adopt blockchain solutions, the technology that powers cryptocurrencies. Banks need to stop seeing this sector as inherently risky, and instead start work on the premise of risk management. But they can only do so if the regulatory environment does not prevent them from assessing potential clients. And it is not just financial institutions to which this applies. Those using blockchain to streamline financial processes, accepting cryptocurrency payments, and working on smart contracts are also desperate for regulatory progression.
Given London's track record of flexible regulation, creating a framework for cryptocurrencies need not be too tasking. For many companies operating in the space, a green light from the regulator that acknowledges their similarity to payment processors would be an enormous improvement. Cryptocurrency exchanges and other projects like blockchain lotteries are already choosing to comply with anti-money laundering and customer protection rules, with high levels of due diligence being achieved. And the EU's fifth Anti-Money Laundering Directive will mandate firms to comply with the same stringent standards as the gambling industry. A next step would be to provide licensing requirements for companies creating products and services in the sector. This would enable them to bank with UK banks, opening accounts and being treated as slightly higher risk, but not left unserved.
Evidently a level of bespoke regulation is needed. But the UK, with London the undisputed best place in the world for financial regulation, is up to the task in terms of skills and capabilities. The concern is that, particularly in the face of Brexit, focus and momentum will be lost. This is where the industry itself comes in. We are ready, willing and able to help. There are already initiatives within the sector which could provide the framework for discussion with the regulator. Numerous companies are already working to improve compliance, due diligence and best practice. At Coinfirm, for instance, we drafted guidance for our corporate clients on how to manage the anti-money laundering risk in digital currencies, making reference to existing regulations. This has become the de facto industry standard, but we now need to see the appetite and will from policymakers and regulators to take things further.
There is only one alternative to being proactive and preventative: waiting until something goes wrong. Given the size of today's crypto market, I think we all know that that is no longer an option.
Pawel Kuskowski is the CEO of Coinfirm, and former Head of Global AML Function at RBS