During Wednesday's budget announcement, the government unveiled plans to support the legitimate use and growth of digital currencies in the UK.
Bitcoin, the world's most popular digital currency, has experienced extreme fluctuations in value since its creation in 2009. With its volatile price, secure transfer and independence from a central financial institution, Bitcoin has become an attractive alternative investment for businesses and individuals alike.
The deregulated nature of digital currencies like Bitcoin and its availability for use on 'Dark Net' markets supplying weapons, drugs and counterfeit goods, has also led to its widespread use by criminal organisations. Currently digital currencies like Bitcoin can be 'tumbled' through specific currency laundering applications designed to render the owner completely anonymous and ensure that the transaction is untraceable.
To support growth in legitimate use of digital currencies and to help prevent criminal activity within the sphere, the government has announced plans to apply anti-money laundering regulation to the digital currency exchanges in the UK and to formally consult on the proposed regulatory approach soon after the next election.
The government has said that it will work with leading organisations in the digital currency industry, as well as organisations like the British Standards Institution (BSI), to develop voluntary standards that will protect consumers and allow legitimate use of digital currencies to prosper.
The government has set aside £10 million in research funding to support the initiative, which is part of a wider government programme aimed at supporting growth within the UK financial technology industry. It is also hoped that the increased focus and additional investment will stimulate competition within the financial services and banking sector as a whole.
The government's proposal follows an announcement by the Bank of England that it will also be embarking on a research program investigating the feasibility of a centralised digital currency issued by the bank. While the decentralised nature of virtual currencies like Bitcoin is one of the primary attractions for investors and traders, there is huge potential for cross-functional application of the fundamental technology underpinning the currency in the financial sector and other industries.
With so many applications for both digital currencies and the technology behind them, the government's recognition and support of its legitimate growth is a solid foundation for continued innovation in the area. Money laundering and concerns about other criminal activity are the primary barriers to widespread adoption of both the currencies and the pure technology underpinning them.
The technology therefore represents a valuable opportunity for both the UK technology and financial sectors. Effective regulation however, beyond the Money Laundering Regulations 2007, is vital if continued innovation is to be supported and persistent money laundering and other organised criminal activity is to be obstructed indefinitely.
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