I spotted a blog entry by Tom Gullen this week regarding the challenges of being a Bitcoin company in the UK. It is interesting, as I have heard the same issues with several other Bitcoin companies in Britain so I asked Tom if he'd mind me reproducing his blog entry here. He said it's ok, so here's his story and something for all of us to bear in mind when we trade in Bitcoins ...
Bitcoins could be a technological revolution. Technological revolutions generally move fast. The countries that could benefit the most from these fast moving technologies are the ones that position themselves early on to benefit from the progression these technologies offer.
Germany has taken an admirable lead rethinking it's position on digital currencies and recognising them as "units of account". Canada seems to be an ideal place for launching new Bitcoin related technologies such as the Bitcoin ATM.
Governments moving towards regulation of Bitcoin seem to have a dichotomising effect on the Bitcoin community. One side wishing to see governments embrace Bitcoin, regulate and support it. The other side viewing Bitcoin as an opportunity to totally separate money from government.
Convincing one side to consider the other sides point of view is difficult, there isn't much middle ground to edge into and these opinions generally stem from deep rooted basal life philosophies. All each side can do is pursue their beliefs by doing what they think is right and progressive which is why I decided to attempt to encourage progressive government interest in Bitcoin.
The Worst Outcome
One outcome both sides can agree on is that a government that views Bitcoin negatively and takes steps to outlaw its usage or possession would hurt everyone (in the short term at least). Not just people who hold Bitcoins, but wider society. Putting the boot on Bitcoin and trying to drown it chokes development of exciting opportunities and keeps it penned in as a fringe and obscure technology, furthering its inaccessibility to the general public.
What exciting and revolutionary developments exactly would be choked is impossible to say. When the Internet was first developed I'm not sure anyone could have predicted the numerous monumental benefits it offers society today.
UK Banking
As anyone in the UK who has attempted to open a bank account to run a Bitcoin business knows, as it stands your chances are slim to none. My credit history was checked and passed (phew!), I had a decent size of starting capital, my business plan had no borrowing or lending requirements and I had evidence from HMRC to show that the business did not come under the scope of Money Laundering Regulations. All that was needed for me to operate my humble Bitcoin selling business in the UK was a simple bank account.
Their refusal for opening the account was shrouded in mystery. I spent a few hours with our current banking providers talking to various people trying to simply get an explanation, and no one would give me one. Eventually they wrote to me and told me they refuse to give me a reason as it would "divulge trade secrets". This secrecy is a defensive tactic to protect them from claims of anti-competitive behaviour. Resigning information you are not required to divulge can rarely work in your favour.
Banks have deeply entrenched themselves into society. We've reached a stage now where banks act as gatekeepers for new startups in the UK, without their authorisation good luck on running a business. There is a severe conflict of interest here especially when you consider Bitcoins potential to take large bites out of their most profitable operations; for example the remittance industry.
But more on the banks later...
Step in the OFT
The first thing I did was complain to the Office of Fair Trading. Their reply was:
"When considering which issues to examine further we take into account that the OFT has finite resources and must prioritise its work. We assess complaints we receive by reference to our published principles. The OFT considers a range of factors, including impact on consumers, strategic significance, risk and resources. In the case of your complaint, it appears that the benefit for consumers of investigating your complaint is likely to be limited in comparison with other markets that we could study."
It's a total catch-22. The banks are suppressing the UK Bitcoin economy keeps it small enough so that the OFT don't consider the market big enough to investigate.
It doesn't matter anyway
Even if you are able to obtain a bank account, the simple act of selling Bitcoins is an entirely unviable business in the UK. HMRC (the UK tax agency) have clumsily labelled Bitcoins as 'Single Purpose Vouchers'. This means that VAT is due on them.
If you're intending to sell Bitcoins past ~£77,000 revenue you'll need to register for VAT. Once registered for VAT, you'll need to add 10% - 20% (depending on if you qualify for "Flat VAT") to each sale. If you're selling Bitcoins with a modest 5% markup to make the operation worthwhile, you're now going to have to mark them up as much as 25%. No one will buy them, they will go elsewhere. Also with a modest 5% markup, after £77k turnover you would expect to earn ~£3,500 in fees. Nowhere near enough to justify the overheads of running a business if you did decide to turn down business once the VAT threshold had been reached.
Foreign exchange transactions are normally exempt supplies. If the UK wants to see more UK Bitcoin business Bitcoin needs to share the same tax benefits as other currency.
This is why the UK is lacking any decent gateways into the Bitcoin world.
But can't you just do it anyway?
There are perhaps ways to structure Bitcoin businesses more creatively to at least give yourself a reasonable defence if the government does come knocking. For example acting as a medium for people to exchange Bitcoins could perhaps remove the VAT burden. However this isn't solving the problem, the buck is simply being passed to the end users who probably are not aware that they might be using these systems with this unfair tax burden.
VAT is a show stopper for the UK Bitcoin industry.
Going Further Up
I'm fortunate enough to have the Rt. Hon Dr Vince Cable as my local MP. Before approaching him I wanted to better understand what the UK government's position was on Bitcoin as this is a good foundation before trying to open up dialogue. I issued several "Freedom of Information" (FOI) requests to key departments. Below is a table showing the responses and the outcome:
| Department | FOI Request | Outcome |
| Bank of England | Link | Information not held |
| Dept. for Business, Innovation and Skills | Link | Information not held |
| HMRC | Link | Refused |
| Her Majesty's Treasury | Link | Refused |
| Home Office | Link | Refused |
| Financial Conduct Authority | Link | Refused |
Common reasons for refusal are FOI Act of 2000 section 35 which outlines formulation of government policy.
It's depressing that firstly key government departments have not apparently to the best of my knowledge even discussed this potentially revolutionary technology. It's even more depressing that in a democratic society, discussion of policy regarding this technology is conducted in secrecy. HMRC's VAT legislation is already outdated in many areas especially regarding online trade. My confidence that they will appear from behind these doors with legislation that is progressive based on a firm understanding of Bitcoin is low.
Some of these responses also indicate glaring misunderstandings of what Bitcoin is, hilariously the Bank of England wrote back to tell me "There have been no meetings held at the BoE attended by Bitcoin".
After being shown the stop sign by our government I decided to approach Dr Vince Cable about the issue, as I strongly feel it is important and worth of his attention in two key areas 1) anti-competitive nature of the banking industry and 2) allowing Bitcoin to share the same tax benefits as other currencies and services.
The Voice of British Banking
One of the first things Dr Cable did was contact the Chief Exec of the BBA. The full replycan be viewed here.
The BBA title themselves the "voice of banking & financial services" so it's interesting to hear what arguments the group who are probably most opposed to Bitcoin can offer. The BBA represent 170 banks.
The response made the points:
"You may be aware that there is considerable debate at present about the potential for virtual currencies to be used for financial crime purposes. Banks are highly committed to meeting their obligations to prevent financial crime"
This seemingly suggests that the BBA is engaged in debates about Bitcoin. This is bleak news as this debate is entirely inaccessible to the general public. Because Bitcoin is decentralised it doesn't lend itself well to establishing groups that are able to compete on the same level as the BBA. I have strong concerns that the financial sector is being vastly over represented in any of these debates. If true the likelihood of favourable outcome for Bitcoin in the UK is diminishing.
Secondly the point that banks are "highly comitted to meeting their obligations to prevent financial crime" should be subject to ridicule. The BBA represents HSBC, the bank that allegedly used "fake receipts to facilitate money laundering" as reported back in March 2013. In 2012, HSBC had to pay a £1.2bn fine as a settlement for their participation and profiting from money laundering. Not only is it likely the BBA are vastly over represented in this debate, in my opinion they should have lost the rights to participate in these debates.
"The anonymity that is associated with Bitcoins and the illegal purposes that the currency can therefore be used for are of course relevant"
"The banking industry has highlighted this issue through our contributions to current risk assessment of money laundering and terrorist financing being led by the Government"
More evidence that the BBA is being over represented in these debates. Terrorist financing is presented as a concern from them, even though there exists absolutely no evidence Bitcoin has been used for terrorist financing.
The insinuation that Bitcoin is anonymous exposes a lack of understanding of Bitcoin and is the basis for the BBA's claim that Bitcoin is a suitable tool for laundering money and financing terrorism. Back in 2012 the FBI commented:
"Although Bitcoin does not have a centralized authority, the FBI assesses with medium confidence that law enforcement can discover more information about, and in some cases identify, malicious actors, if the actors convert their Bitcoins into a fiat currency. Third-party Bitcoin services may require customers to submit valid identification or bank information to complete transactions. Furthermore, any third-party service that qualifies as a money transmitter, and therefore a MSB, must register with the FinCEN and implement an anti-money laundering program."
If terrorists are indeed receiving funding from Bitcoin or criminals are indeed using Bitcoin to launder, the FBI think they can in some instances identify these people. The FBI are more qualified to comment on this than banks who have a conflict of interest.
The future looks bleak
There is not attainable indication that the government understands Bitcoin correctly. There is a strong possibility that the banking and financial sector are being vastly over represented in this debate and their hollow arguments are being given more credence than they deserve.
The Treasury comments that they have "no plans to regulate the use and issuance of virtual currencies". Again, this reply indicate a gross misunderstanding of Bitcoin (the Treasury can't issue Bitcoins even if they wanted to). This naivety is a weakness that the banks who find themselves fortunate to somehow be involved sensibly in these debates can abuse.
Dr Vince Cable has told me he is now genuinely engaged with the subject. It's reassuring to know that there is someone in government that is giving the proper consideration to Bitcoin that it requires.
I do hope that fair and progressive outcomes do emerge here in the UK for Bitcoin in a reasonable timeframe. It doesn't appear likely. With Vince Cable telling me he's enaged with Bitcoin, I am more hopeful.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...
