Accenture - HMT Consultation on Digital Currencies
The document is a response to the Treasury’s call for information on digital currency. Accenture is a global management consulting, technology services and outsourcing company, with more than 305,000 peopleserving clients in more than 120 countries.
Content
Digital currencies: Call for Information
Accenture response
December 2014
Copyright © 2014 Accenture All rights reserved
Page 1
Contents
Page
Part 1 - Context
1. Introduction
3
2. Digital Currencies
4
3. Uses
6
4. Benefits
6
5. Creating a Safe, Legitimate Digital Currency Environment
7
6. Addressing Concerns with Digital Currencies
9
Part 2 – Answers to the consultation questions
11
About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with more than 305,000 people
serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all
industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates
with clients to help them become high-performance businesses and governments. The company generated net revenues of
US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com.
Accenture Payment Services
Accenture Payment Services offers banks various technical services intended to improve their business strategy, technology
and operational efficiency in five key areas: core payments, card payments, digital payments, transaction banking, and
compliance, risk, and operations. Accenture and its more than 1,500 professionals dedicated to payment engagements helps
banks simplify and integrate their payments systems and operations to reduce costs and improve productivity, meet new
regulatory requirements, enable new mobile and digital offerings, and maintain payments as a revenue generator. More than
50 clients worldwide have engaged Accenture Payment Services to help them turn their payment operations into highperforming businesses.
Copyright © 2014 Accenture All rights reserved
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Part 1 - Context
1. Introduction
1.1 This document outlines Accenture’s response to HM Treasury’s open consultation on “Digital currencies: Call
for Information” published on 3 November 2014.
1.2 Accenture provides a range of consulting, technology and outsourcing services supporting technical
infrastructure of payments and cards processes to various retailers, banks and payment processors. Through
this work, we have experience of the trends and hot topics in the payments industry, in the UK, in Europe and
globally, and their impact on organisations and consumers. Digital currencies are one such issue in the
payments industry and, as such, we welcome the opportunity to share our insights to HM Treasury’s timely
consultation.
1.3 Digital currencies are at an early stage of development and usage, but they are here to stay and the technology
has the potential to reinvent many aspects of financial services. However, some degree of government
intervention is needed to create a safe, legitimate environment for digital currencies to grow.
1.4 Our key theme is that regulation is appropriate for certain aspects of digital currency wallets1 (specifically
related to maintaining their legitimacy, safety and security) rather than for digital currencies per se. In the same
way that governments require identifiable bank accounts (through named accounts and know-your-customer
checks), a requirement for named, identifiable digital currency wallets would be a core component of a safe,
legitimate digital currency economy. A centralised authority may need to be established to supervise and
monitor the use of digital currency wallets.
1.5 Digital currencies, including crypto-currencies, use a distributed technology that allows digital data to be
uniquely and irrefutably identified – a technology that has huge potential to reinvent the way a wide range of
services operate, including financial services. Anything which requires evidence of ownership, transfer of
ownership, or evidence (signature) of authorisation and decisions can be reinvented using this technology - for
example, bonds, equities, land registry, contracts, and of course currency ownership and payments.
1.6 A key feature of this technology is that it works on a system of verification distributed throughout a network,
where consensus between nodes on the network, based on a set of mathematical rules confirms each
transaction irrevocably. There is no central processing and no central authority. This distributed verification is
the core strength of the technology, but it is the lack of a central authority that is cause for concern where the
technology is used to reinvent services that traditionally rely on central control and centralised processing.
1
For the purpose of this document, “digital currency wallet” means software and/or hardware that stores the private keys needed to
access a crypto-currency address e.g. a Bitcoin address, and transact in the crypto-currency on a distributed payment system. Our
references to “digital currency wallet” exclude any meaning related to more conventional digital wallets used to store and transact with
virtual credit, debit, charge or prepaid cards, or with account-to-account payment mechanisms using, for example, mobile phones.
Examples of these type of conventional digital wallets include Barclays Pingit, Paym, Zapp, RBS/Nat West Pay-Your-Contact, Visa V.me,
MasterCard Paypass, Apple Pay, Google Wallet, PayPal and Accenture’s own e/mWallet capability – to our knowledge, none of these
examples use crypto-currencies and none of the views expressed in this document are intended for these examples, nor generally for
digital wallets that do not use crypto-currencies.
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1.7 Therefore, the challenge for central authorities such as governments and regulators, who typically exercise
centralised control, is how they can achieve the same control outcomes when distributed technology is
deployed widely.
1.8 It is against this background that our response has been prepared. First, we outline the important features of
digital currencies, the benefits of using the technology, and how the issues and criticisms levelled at digital
currencies can be addressed. And with this context established we go on to provide answers to the specific
consultation question.
1.9 Throughout, we refer to Bitcoin (and its blockchain) as an example of distributed technology. Bitcoin, a cryptocurrency, is by far the most widely adopted digital currency technology, and our references to it apply generally
to digital currency technology, both proof-of-work currencies such as Bitcoin, and consensus digital currency
technology such as Ripple.
1.10 Our submission refers only to the use of digital currency technology for payments and the transfer of
monetary value. We have not considered the use of the technology for other purposes.
2. Digital Currencies
2.1 Digital currency technology works through the distributed nodes in a network achieving consensus. If a
payment is made from person A to person B in a digital currency, distributed nodes in the network agree that
according to the digital currency rules, person B’s digital currency wallet has received the payment from person
A’s digital currency wallet. In terms of Bitcoin, ownership of bitcoins sent from person A to person B are
registered on the distributed Bitcoin ledger known as the blockchain, and the nodes verifying the change in
ownership are known as miners.
2.2 Miners verify the change in ownership (by solving cryptographic algorithms) only because they are incentivised
to do so by, in Bitcoin’s case, getting paid in bitcoins. (Miners compete to solve the algorithms to verify
transactions and are rewarded if they are first to solve).
2.3 This incentive to verify transactions is the single most important feature that makes digital currency technology
a viable mechanism for payments, and has three significant implications:
1. The incentive mechanism creates a network effect, where the more people there are transacting in the
digital currency, the more valuable the digital currency becomes, leading to more transactions
2. If the reward for verifying transactions is made in the digital currency, the digital currency has to have
value2. Therefore in proof-of-work digital currencies such as Bitcoin it is not realistic to separate the
currency from the technology
3. In Bitcoin, as the reward is paid to the fastest solver, pools of Bitcoin miners have emerged to share
processing power and rewards in proportion to their processing power.
2
The incentive to operate a network “node” in a consensus-driven digital currency (for example, Ripple) is less dependent on the value of
the digital currency than in a proof-of-work digital currency (for example, Bitcoin); instead, the incentive in consensus-driven digital
currencies is to participate in a growing network and compete to provide services in it, for example currency conversion.
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2.4 Figure 1 illustrates this network for Bitcoin, where miners allow commerce through making bitcoins available
for payments. Because bitcoins have value and are available, merchants accept them. Because merchants
accept bitcoins, consumers will use bitcoins to make purchases. Because bitcoins are being used for purchases,
miners have the opportunity to profit by verifying the transactions. A virtuous circle then develops where the
more bitcoins are used for commerce, more merchants will accept them, more consumers will use them and
more commerce is conducted using bitcoins. The more bitcoins are used, the more valuable they become, and
the more incentivised miners are to compete to verify transactions and “mine” or create bitcoins.
Commerce with BTC
Merchants
Miners
Consumers
Figure 1 – Bitcoin Network Effects
2.5
There are 567 digital currencies listed on www.coinmarketcap.com (as of 18 November 2014), but only 16
have a market capitalisation greater than $1m and the largest, Bitcoin, has a market capitalisation ($5bn) 32 times
bigger than Ripple, the next largest. Therefore, although it is relatively easy to create a digital currency, only a small
number may achieve mass adoption. In the same way creating a social media website or a search engine is
relatively straightforward, achieving mass adoption is difficult. It is a feature of the internet that large companies
dominate e.g. Facebook (social media), Google (search), Amazon (ecommerce), eBay (auctions), and the same will
possibly be true for digital currencies i.e. only a small number of digital currencies may achieve mass usage and
adoption globally.
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3. Uses
3.1 There are two ways to use digital currencies for payments:
1. Goods are priced in digital currency and paid in the same digital currency
2. Goods are priced in another currency e.g. GBP but payment is made using digital currency.
3.2 In the first method, the sender needs a digital currency wallet containing the digital currency. To make
payment, the sender simply transfers the appropriate amount of digital currency to the receiver’s digital
currency wallet.
3.3 At the moment, the user experience with digital currency wallets and digital currencies is relatively unfriendly.
It requires registering for a digital currency wallet, buying (or being sent) digital currency, all done typically
using long character strings. This is not difficult, but is certainly not viable for mass consumer use. Improving
this consumer experience is a focus for many of the digital currency start-up companies, for example Circle3.
3.4 In the second method, a buyer of goods or services is unaware that digital currency is being used, and the buyer
and seller do not need to have their own digital currency wallet. They pay in their chosen currency e.g. GBP.
This is used to buy digital currency which is sent to the seller. The seller can choose to keep the digital currency,
or have it converted automatically into another currency of their choice e.g. USD. This method is user friendly
and is particularly suited for cross-border payments and purchases. Companies such as Coinbase4 and BitPay5
provide these types of services. The method is analogous to the long established foreign exchange practice
using a base currency e.g. the process of buying Nigerian Naira with Malaysian Ringgits typically involves buying
USD with Naira, then buying Ringgits with USD.
4. Benefits
4.1 The key benefit of using a digital currency for payments is to take friction out of the payment process, making it
easier, faster and more convenient for all parties to send and receive payments across the internet (regardless
of location), without significant charges for the sender or receiver. Areas where digital currencies reduce
friction include:
Transaction speed – typically between seconds (Ripple: 3 – 6 seconds) and minutes (Bitcoin: ~10 minutes)
compared to days for cross-border payments and for settlement of card transactions
3
https://www.circle.com/en_US.UTF-8/about “Circle is building a suite of consumer products aimed at enabling greater ease-of-use in
online and in-person payments, enhanced security and privacy for consumers, and the convenience of free, instant, global digital money
transfers”.
4
www.coinbase.com
5
www.bitpay.com
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Transaction cost – typically 0.04 USD for Bitcoin6, or 0.12 USD for Ripple7, compared to 1% - 2% for a card
transaction, 3% - 4% for a PayPal transaction8, and 8% or more for a cross-border remittance9
Borderless reach – digital currencies can be accepted anywhere in the world with access to the internet,
unlike fiat currencies
Open access (for merchants, payment institutions and electronic money institutions) – anyone or any
organisation can access digital currency payment mechanisms, such as the Bitcoin blockchain, unlike
centrally controlled payments systems such as Bacs, FPS and CHAPS
Transparency of payment information – transactions in digital currencies are available for everyone to see
and can be verified by anyone at anytime
Connectivity to a digital currency network is easy – all that is needed is an internet connection and a digital
currency wallet, compared to the gateways and technology needed to connect to interbank and card
payment networks
Transaction risks such as:
o centralised IT failure risk10 – unless the internet fails, this risk is confined to the IT used by the sender
and receiver of digital currency
o liquidity risk – in digital currency payments, ownership of the digital currency is transferred directly
from the sender to the receiver; there are no intermediaries such as banks or clearing systems
managing liquidity pools to enable payment transactions
o settlement risk – settlement is immediate with digital currency
o Herstatt risk11 – cross-border intermediaries are not necessary with digital currency transactions
Financial crime – the overhead to implement and maintain fraud, anti-money laundering (AML) and
sanctions controls. With digital currencies, the source and destination can be clearly identified, and each
transaction is permanent and public, making it easier to implement and maintain financial crime controls
(see next section).
5. Creating a Safe, Legitimate Digital Currency Economy – the Role of Governments and Banks
5.1 If digital currency wallets used in digital currency payments are held anonymously, then the payment
transactions between them are anonymous too. This is the root of much of the concern with digital currencies.
However, it can be addressed by creating an environment where digital currency wallets are properly
identifiable, through “Know Your Customer” (KYC) checks.
5.2 In the same way the banking system would attract money laundering and criminal activity if anonymous bank
accounts were allowed, the same is true when digital currency wallets for digital currencies are anonymous.
6
The amount varies depending on the transaction, but 0.0001 BTC is an example of a typical fee
20 XRP (source Ripple ripple_deep_dive_for_financial_professionals.pdf)
8
https://www.paypal.com/webapps/mpp/merchant-fees
9
The World Bank Migration and Development Brief 22 – April 11 2014
10
For example the Bank of England RTGS failure on 24 October 2014
11
Failure of a financial institution before settlement of a cross-border payment
7
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5.3 The solution for this is therefore to simply create an environment where digital currency wallets are
identifiable. Then transactions made with KYC digital currency wallets12 are identifiable as well. A properly
controlled, safe transacting environment can then be created through having identifiable digital currency
wallets with rules that they can send/receive payments only from other identifiable digital currency wallets.
5.4 Already, digital currency wallets that wish to connect to traditional bank accounts for cash-in and cash-out
transactions increasingly require proportional KYC for their use. With limited KYC credentials, limits are placed
on daily values of transactions and loading. With full KYC details registered, larger value transactions can be
executed making the digital currency wallet more functional and connected as a payment tool. This approach
encourages identification.
5.5 Individuals could still open and operate anonymous digital currency wallets, but they would not be able to
participate in the safe environment. This would result in the digital equivalent of a legitimate economy and a
black economy, as already exists with government issued currency. The difference is that there is a permanent
record of all transactions, on for example the Bitcoin blockchain, including those in the digital currency black
economy. Not only will this help with law enforcement and forensic analysis of anonymous transactions, it will
be difficult (if not impossible) for digital currency used in the digital currency black economy to be laundered
undetected back into the legitimate digital currency economy.
5.6 It is interesting to note that the US Government auctioned off 30,000 bitcoins in July 2014 13 confiscated from
the infamous Silk Road website which was shut down in October 2013 by the US authorities14. For the US
Government to do this, it must have had access to the digital currency wallets used, and thus it will be able to
see an audit trail of all the transactions made with those digital currency wallets on the blockchain, as well as
the digital currency wallets at the other end of the transactions. Even if the digital currency wallets used are
anonymous, and even if transactions have been through a “tumbler”15 this audit trail will be useful in forensic
analysis when combined with information from other sources.
5.7 In the same way UK/European regulation allows for Authorised Payment Institutions and Authorised Electronic
Money Institutions to operate as payments businesses, the concept of Authorised Digital Currency Wallet
Institutions could be introduced to enable and serve the digital currency economy. An Authorised Digital
Currency Wallet Institution could be a bank or other type of payment services provider (for example, payment
institutions, electronic money institutions, digital currency exchanges and digital currency wallet issuers), and
12
For example, in the UK, Bitbargain (https://bitbargain.co.uk/) and Bittylicious (https://bittylicious.com/ ) are two websites where
individuals with a UK bank account can buy and sell bitcoins (and additionally Litecoins on Bitbargain). Buyers/sellers need a digital
currency wallet (opened elsewhere), and need to register it with the website with proof of identity documents (utility bills, passport,
driving licence etc). Purchases can be made using internet bank transfer (Faster Payments), Barclays Pingit, RBS/Natwest Pay-Your-Contact
and Paym (and credit/debit cards for Bittylicious). When purchasing digital currency, buyers and sellers can see their counterparty’s details
– name, bank account, and, for mobile payment purchases, mobile phone number.
13
http://www.bloomberg.com/news/2014-07-01/bitcoin-auction-ends-single-bidder-wins-entire-cache.html
14
http://www.theguardian.com/technology/2013/oct/03/silk-road-underground-market-closed-bitcoin
15
A tumbler is an online service/software that can help disguise the origins of a digital currency transaction
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would be authorised and regulated by a central authority, for example by the FCA. The role of an Authorised
Digital Currency Wallet Institution could be to:
Issue digital currency wallets and identify the digital currency wallet owner through KYC checks
Maintain a compliance status of each digital currency wallet
Monitor digital currency wallet usage to check payments are between other identifiable digital currency
wallets
Monitor transactions for adherence to sanctions lists
Be able to freeze digital currency wallets where they are being used for suspicious activity.
5.8 We suggest that any digital currency regulation is confined to making Authorised Digital Currency Wallet
Institutions responsible for these limited safety/security functions, supervised by a centralised authority such as
the FCA.
6. Addressing Concerns with Digital Currencies
6.1 Digital currency technology has many strong features and capabilities that give it great potential to become
integral to payments, however we recognise of course that many concerns persist. These can be summarised
as:
Price volatility, making digital currencies risky for payment transactions
Use in criminal activity, including money laundering and payments for criminal activities
A risk of financial loss through unregulated digital currency trading e.g. exchanges such as Mt. Gox16
Restricted supply e.g. there will only ever be 21 million bitcoins, thus eliminating a monetary lever
traditionally used for economic stability.
6.2 Digital currencies are volatile because they are in their infancy and lack critical mass to be stable. Liquidity is
low, and they are susceptible to events such as the Mt Gox failure, and to actions such as the ban in China that
stops banks from handling bitcoins 17, as well as to speculation causing large price swings. They are also
susceptible to manipulators who can, for example, place large sell orders causing a drop in prices with the aim
of buying in even larger quantities at lower prices from panic sellers. As digital currencies grow in usage,
liquidity will increase, making them more stable – this is a feature of the virtuous circle described in section 2.4
(a network effect which could be assisted by regulation aimed at price manipulation). However, volatility is less
of an issue in the second of the two payment methods (section 3.1), where digital currency is held for only a
short time to make a payment, and is converted from and back into other currencies at the start and end of the
payment.
16
17
http://www.reuters.com/article/2014/02/28/us-bitcoin-mtgox-insight-idUSBREA1R06C20140228
http://www.bbc.co.uk/news/technology-25233224
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6.3 As described in section 5 digital currencies can help prevent financial crime if a safe, controlled environment –
the “legitimate digital currency economy” – is created, in which all digital currency wallets used are identifiable
and transactions to/from digital currency wallets outside that environment are prevented18. A “digital currency
black economy” with anonymous digital currency wallets will still occur, but this can be isolated from the
legitimate digital currency economy, and money laundering from it into the legitimate digital currency economy
can be prevented. Further, organisations supplying identifiable digital currency wallets could freeze digital
currency wallets where they are used for payments to/from identifiable digital currency wallets that appear on
sanctions lists.
6.4 Consumers can be protected from financial loss with digital currencies provided their digital currency wallets
are protected. There is an opportunity for organisations such as banks to provide this protection, and for
governments to introduce regulation to regulate digital currency wallet issuers (e.g. Authorised Digital Currency
Wallet Institutions introduced in section 5.7).
6.5 The concern around finite supply of digital currencies is an economic one and outside the scope of this
submission. However, we note that there is a finite supply of gold and the gold standard was used in the UK 19
successfully for over 200 years between 1717 and 1931. Additionally, in Bitcoin’s case, each bitcoin is divisible
to eight decimal places, so the true supply of bitcoins is 2.1x 1015 payment units, or over 290 thousand units for
every living person on the planet.
18
Transactions between digital currency wallets cannot be easily prevented (if at all – it would require a change to the digital currency
rules, or crypto-graphic algorithms), but they can be identified. With appropriate regulation and control over digital currency wallet
issuers, owners of identifiable digital currency wallets could be penalised, or prevented from accessing their digital currency wallet, if their
digital currency wallet is used for transactions outside the legitimate digital currency economy.
19
http://www.econlib.org/library/Enc/GoldStandard.html
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Part 2 – Consultation Questions
Question 1
What are the benefits of digital currencies? How significant are these benefits? How do these benefits fall to
different groups e.g. consumers, businesses, government, the wider economy? How do these benefits vary
according to different digital currencies?
The key benefit of digital currencies is to take friction out of payment systems. Friction exists in payments in
transaction costs, transaction traceability and transparency, speed, reach, fraud and other crime and various risks,
as described in section 4.1. As an example, looking at cost friction, a rough estimate for the cost of card payments
to merchants in the UK retail economy is £2bn - £3bn p.a.20 Digital currencies could reduce this cost significantly,
and do the same for cross-border payments. Taking friction out of payments would benefit consumers, merchants
and the economy as a whole. Governments also would benefit from a more efficient economy and potentially a
more effective environment for fighting financial crime.
Question 2
Should the government intervene to support the development and usage of digital currencies and related businesses
and technologies in the UK, or maintain the status quo? If the government were to intervene, what action should it
take?
Digital currencies will continue to develop with or without government intervention. However, a legitimate, safe
digital currency environment is needed for digital currencies to have widespread adoption, and for their potential
to be realised. It isn’t clear that this legitimate, safe digital currency economy will/can develop on its own, and
there is an opportunity for the Government to intervene and create a regulatory environment which makes it
legitimate and safe. It is also an opportunity to speed up payments innovation generally through digital currencies,
by creating greater certainty on the legitimacy of using digital currencies. We suggest only limited actions by the
Government, which could include:
Regulating so that digital currency wallets can be identified uniquely and recognised e.g. through KYC
checks
Recognising and authorising organisations (Authorised Digital Currency Wallet Institutions e.g. banks) that can provide identity checks and verification services to enable identifiable digital currency
wallets;
Providing a framework of clear rules and responsibilities for the participants of the digital currency wallet
market on how to place controls on the digital currency wallets to help prevent financial crimes (AML and
sanctions).
20
9bn debit card transactions x £0.09 +2.6bn credit card transactions x £0.41 = £1.9bn (sources: UK Payment Statistics 2014, Payments
Council and British Retail Consortium Retail Payments Survey 2013); Europe Economics estimates £3.2bn in its report, p.4 “The Economic
Impact of Interchange Fee Regulation in the UK. Final Report 28 June 2013”.
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Question 3
If the government were to regulate digital currencies, which types of digital currency should be covered? Should it
create a bespoke regulatory regime, or regulate through an existing national, European or international regime?
For each option: what are the advantages and disadvantages? What are the possible unintended consequences (for
instance, creating a barrier to entry due to compliance costs)?
Regulation should be limited to digital currency wallets, rather than be specific to digital currencies themselves.
Given the time required to regulate, it may be best to start off with a UK regime, before considering European or
international regimes. (Concerns that this approach may create unnecessary burden within the UK may be
balanced by the advantages created by regulatory intervention enabling a successful digital currency economy –
setting a standard for others to copy, as well as attracting innovators and investors.)
However, heavy regulation (or application of historical frameworks) could stifle innovation – to avoid this, an agile
regulatory regime should be set up to be flexible and develop specifically for digital currencies as the digital
currency economy grows. Regulation and rules need to be reasonable and proportionate, with a very clear
identification of the rules and responsibilities applicable to the participants of the digital currency wallet schemes.
Question 4
Are there currently barriers to digital currency businesses setting up in the UK? If so, what are they?
Digital currency businesses setting up in the UK need a bank account to operate as a business. UK banks are wary of
providing bank accounts to money service businesses (MSBs), and some21 are limiting their presence in this sector
(typically for AML and sanctions compliance reasons). Digital currency businesses are therefore likely to face
challenges opening a bank account, and without one they can’t operate. As an example, Coinfloor, a London based
digital currency exchange uses a Polish bank for its banking services22 citing “The [British] banks are very
conservative and are not very interested”23.Coinfloor has also recently stopped using the Faster Payments Service
for fund transfers for reasons that are not given.
Question 5
What are the potential benefits of this distributed ledger technology? How significant are these benefits?
See question 1 and section 4.
21
For example, Barclays and HSBC http://www.euromoney.com/Article/3220753/Money-service-businesses-seek-new-banking-suitors-asregulations-bite.html
22
https://coinfloor.co.uk/security
23
http://www.finextra.com/News/fullstory.aspx?newsitemid=26602&topic=payments
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Question 6
What risks do digital currencies pose to users? How significant are these risks? How do these risks vary according to
different digital currencies?
The key risk in using digital currency is to lose access to or control of a digital currency wallet e.g. through
forgetting a password, or through a fraudster gaining access to it. This is similar to the risk of losing access to an
internet bank account or a fraudster gaining access, for example through phishing. However, there is a difference in
that forgetting the password, or losing hardware storing a digital currency wallet means that the digital currency
access keys may be irretrievable (a unique characteristic of digital currencies is that the owner of digital currency is
the owner of the digital currency wallet giving access to the digital currency, unlike a bank where ownership of
funds in fiat currency is transferred by their owner to the bank).
Price fluctuation is also a risk to users. Prices should become more stable once a critical mass of usage and
transactions is reached, but until that point happens, holding large amounts of digital currency to make payments
is risky. This risk can be addressed by the second method of payment described in section 3.1 (temporary use of
digital currency in a payment), or by limiting the amount of digital currency held to just that needed for everyday
payment needs and topping up a digital currency wallet as required (similar to topping up an Oyster card).
The Call for Information mentions the lack of buyer protection with digital currencies as a concern, because
transactions are not reversible, which could be seen as a risk for buyers using digital currencies. However, this is no
different to paying by cash, cheque, Paym or Faster Payments. The risk is a commerce risk that can be addressed
through processes, such as chargebacks, built into digital commerce processes. Similarly, there is a risk of
erroneous or misdirected payments which cannot be reversed, a typical feature of payments with real-time finality.
This is best addressed through the user interface and payment initiation processes – both to help prevent users
sending payments in error, and to use the transparency of digital currency transactions to trace recipients and
recall payments if they do.
Businesses also face a serious risk of being ostracised and losing access to banking facilities if they are associated
with digital currencies, particularly Bitcoin. As described in Question 4, UK banks are wary of providing banking
services to money service businesses, and in particular digital currency businesses appear to find it difficult to get
banking services from UK banks. We have heard that some companies are cautious about Bitcoin and other digital
currencies as the risk of an adverse reaction from their banking partners is high.
Question 7
Should the government intervene to address these risks, or maintain the status quo? What are the outcomes of
taking no action? Would the market be able to address these risks itself?
Our answers to question 2 outline the actions the Government could take. Our recommendation is to regulate
digital currency wallets only to the extent of making them identifiable (as opposed to allowing them to be
anonymous) to prevent financial crimes. Government intervention is necessary to enable the development of the
safe, legitimate digital currency economy described in section 5. Without it, digital currencies will continue to be
Copyright © 2014 Accenture All rights reserved
Page 13
perceived to be part of the black economy, impeding the efforts of innovators and entrepreneurs to build
legitimate innovations and businesses using digital currencies.
As highlighted in section 5 if the Government allowed banks to provide anonymous bank accounts, their use in
fuelling the black economy would be pervasive; in the same way, Government intervention to require the
authorisation, use and regulation of identifiable digital currency wallets would catalyse the development of the
safe, legitimate digital currency economy.
Banks are critical to this legitimate digital currency economy, because even if they don’t participate with specific
digital currency services, they are needed to provide banking services to those who do. Entrepreneurs have
accused banks of obstructing the growth of fintech companies because they fear they will compete against them 24.
However, in our view, banks are very supportive of fintech start ups but are reluctant to be exposed to the big and
absolute fines for AML and sanctions breaches, not just from the UK but also overseas regulators, particularly the
USA. The potential upside from taking on start-ups as customers with possible AML exposures pales into
insignificance compared to the fines they risk (and is also the reason why UK banks are pulling back from even long
established money service businesses as described in Question 4).
Therefore, without Government intervention: UK banks are not likely to provide digital currency businesses with
support; payments innovation using digital currencies in the UK will be inhibited; and digital currency businesses
will migrate to other countries where banks are more supportive, such as Poland. The form of intervention needs
to go beyond encouragement – banks need to be able to apply to digital currency businesses the same KYC, AML
and sanctions rules that they are held to in their core banking services. The challenge for the Government is to
design this intervention so that it allows banks to meet their obligations without imposing insurmountable barriers
on the digital currency businesses building the legitimate digital currency economy. Section 5 describes how to
address this challenge, placing identifiable digital currency wallets at its centre.
If the UK does not create an acceptable environment for purchase and payment through digital currency, digital
currency flows could migrate to countries where merchants are comfortable trading in digital currencies.
Merchants will be reluctant to work with a currency that is not acknowledged in the UK, and will also face
uncertain taxation positions regarding transactions. The flows of money outside the country could, over time,
become significant (cash into the digital currency in the UK, cash out in a second country).
Question 8
Should the government regulate digital currencies to protect users? If so, should it create a bespoke regime, or
regulate through an existing national, European or international regime? For each option: what are the advantages
and disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to
compliance costs)? What other means could the government use to mitigate user detriment apart from regulation?
See answers to question 3.
24
http://www.ft.com/cms/s/0/dbe69366-5625-11e4-bbd6-00144feab7de.html#axzz3JnanSi9L
Copyright © 2014 Accenture All rights reserved
Page 14
Question 9
What are the crime risks associated with digital currencies? How significant are these risks? How do these risks vary
according to different digital currencies?
We believe that the risk of crime with digital currencies arises from their use in the black economy and from theft
from digital currency wallets. These risks are the same for each digital currency, but are only significant for the
more widely used ones, in particular Bitcoin.
Question 10
Should the government intervene to address these risks, or maintain the status quo? What are the outcomes of
taking no action?
The Government intervention and actions suggested in section 5 and Question 2 would address the risk of digital
currencies and the black economy. Additionally, Government intervention may be needed to protect against digital
currency theft from digital currency wallets.
Question 11
If the government were to take action to address the risks of financial crime, should it introduce regulation, or use
other powers? If the government were to introduce regulation, should it create a bespoke regime, or regulate
through an existing national, European or international regime? For each option: what are the advantages and
disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to
compliance costs)? What has been the impact of FinCEN’s decision in the USA on digital currencies?
See our answers in section 5 and question 3.
Question 12
What difficulties could occur with digital currencies and financial sanctions?
Usually, sanctions checks can only be applied if the counterparties of a payment transaction are known. In the case
of digital currency wallets, normal sanctions checks on digital currency transactions are possible only for payments
between identifiable digital currency wallets. That said, anonymous digital currency wallets could be treated as
sanctioned counterparties by default, or specific anonymous digital currency wallets could be sanctioned if they are
identified as participating in suspicious activity, even if the owner of the sanctioned digital currency wallet is
unknown.
Typically, sanctions filters hold payments in queues and block payments where there is a confirmed positive match
to a counterparty on a sanctions list. However, with digital currencies, it is not possible to block transactions,
making it difficult to impose sanctions controls. However, digital currency wallets could be frozen if used for
transactions with sanctioned counterparties.
Copyright © 2014 Accenture All rights reserved
Page 15
Question 13
What risks do digital currencies pose to monetary and financial stability? How significant are these risks?
Given the very small size of the digital currency economy – in the UK and globally – it would need to grow
enormously and account for a significant proportion of the UK economy for it to have an impact on monetary and
financial stability. It will take many years for the digital currency economy to grow to a significant size, providing
sufficient time and opportunity for any risks to monetary and financial stability to be identified and addressed.
Copyright © 2014 Accenture All rights reserved
Page 16
Accenture response
December 2014
Copyright © 2014 Accenture All rights reserved
Page 1
Contents
Page
Part 1 - Context
1. Introduction
3
2. Digital Currencies
4
3. Uses
6
4. Benefits
6
5. Creating a Safe, Legitimate Digital Currency Environment
7
6. Addressing Concerns with Digital Currencies
9
Part 2 – Answers to the consultation questions
11
About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with more than 305,000 people
serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all
industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates
with clients to help them become high-performance businesses and governments. The company generated net revenues of
US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com.
Accenture Payment Services
Accenture Payment Services offers banks various technical services intended to improve their business strategy, technology
and operational efficiency in five key areas: core payments, card payments, digital payments, transaction banking, and
compliance, risk, and operations. Accenture and its more than 1,500 professionals dedicated to payment engagements helps
banks simplify and integrate their payments systems and operations to reduce costs and improve productivity, meet new
regulatory requirements, enable new mobile and digital offerings, and maintain payments as a revenue generator. More than
50 clients worldwide have engaged Accenture Payment Services to help them turn their payment operations into highperforming businesses.
Copyright © 2014 Accenture All rights reserved
Page 2
Part 1 - Context
1. Introduction
1.1 This document outlines Accenture’s response to HM Treasury’s open consultation on “Digital currencies: Call
for Information” published on 3 November 2014.
1.2 Accenture provides a range of consulting, technology and outsourcing services supporting technical
infrastructure of payments and cards processes to various retailers, banks and payment processors. Through
this work, we have experience of the trends and hot topics in the payments industry, in the UK, in Europe and
globally, and their impact on organisations and consumers. Digital currencies are one such issue in the
payments industry and, as such, we welcome the opportunity to share our insights to HM Treasury’s timely
consultation.
1.3 Digital currencies are at an early stage of development and usage, but they are here to stay and the technology
has the potential to reinvent many aspects of financial services. However, some degree of government
intervention is needed to create a safe, legitimate environment for digital currencies to grow.
1.4 Our key theme is that regulation is appropriate for certain aspects of digital currency wallets1 (specifically
related to maintaining their legitimacy, safety and security) rather than for digital currencies per se. In the same
way that governments require identifiable bank accounts (through named accounts and know-your-customer
checks), a requirement for named, identifiable digital currency wallets would be a core component of a safe,
legitimate digital currency economy. A centralised authority may need to be established to supervise and
monitor the use of digital currency wallets.
1.5 Digital currencies, including crypto-currencies, use a distributed technology that allows digital data to be
uniquely and irrefutably identified – a technology that has huge potential to reinvent the way a wide range of
services operate, including financial services. Anything which requires evidence of ownership, transfer of
ownership, or evidence (signature) of authorisation and decisions can be reinvented using this technology - for
example, bonds, equities, land registry, contracts, and of course currency ownership and payments.
1.6 A key feature of this technology is that it works on a system of verification distributed throughout a network,
where consensus between nodes on the network, based on a set of mathematical rules confirms each
transaction irrevocably. There is no central processing and no central authority. This distributed verification is
the core strength of the technology, but it is the lack of a central authority that is cause for concern where the
technology is used to reinvent services that traditionally rely on central control and centralised processing.
1
For the purpose of this document, “digital currency wallet” means software and/or hardware that stores the private keys needed to
access a crypto-currency address e.g. a Bitcoin address, and transact in the crypto-currency on a distributed payment system. Our
references to “digital currency wallet” exclude any meaning related to more conventional digital wallets used to store and transact with
virtual credit, debit, charge or prepaid cards, or with account-to-account payment mechanisms using, for example, mobile phones.
Examples of these type of conventional digital wallets include Barclays Pingit, Paym, Zapp, RBS/Nat West Pay-Your-Contact, Visa V.me,
MasterCard Paypass, Apple Pay, Google Wallet, PayPal and Accenture’s own e/mWallet capability – to our knowledge, none of these
examples use crypto-currencies and none of the views expressed in this document are intended for these examples, nor generally for
digital wallets that do not use crypto-currencies.
Copyright © 2014 Accenture All rights reserved
Page 3
1.7 Therefore, the challenge for central authorities such as governments and regulators, who typically exercise
centralised control, is how they can achieve the same control outcomes when distributed technology is
deployed widely.
1.8 It is against this background that our response has been prepared. First, we outline the important features of
digital currencies, the benefits of using the technology, and how the issues and criticisms levelled at digital
currencies can be addressed. And with this context established we go on to provide answers to the specific
consultation question.
1.9 Throughout, we refer to Bitcoin (and its blockchain) as an example of distributed technology. Bitcoin, a cryptocurrency, is by far the most widely adopted digital currency technology, and our references to it apply generally
to digital currency technology, both proof-of-work currencies such as Bitcoin, and consensus digital currency
technology such as Ripple.
1.10 Our submission refers only to the use of digital currency technology for payments and the transfer of
monetary value. We have not considered the use of the technology for other purposes.
2. Digital Currencies
2.1 Digital currency technology works through the distributed nodes in a network achieving consensus. If a
payment is made from person A to person B in a digital currency, distributed nodes in the network agree that
according to the digital currency rules, person B’s digital currency wallet has received the payment from person
A’s digital currency wallet. In terms of Bitcoin, ownership of bitcoins sent from person A to person B are
registered on the distributed Bitcoin ledger known as the blockchain, and the nodes verifying the change in
ownership are known as miners.
2.2 Miners verify the change in ownership (by solving cryptographic algorithms) only because they are incentivised
to do so by, in Bitcoin’s case, getting paid in bitcoins. (Miners compete to solve the algorithms to verify
transactions and are rewarded if they are first to solve).
2.3 This incentive to verify transactions is the single most important feature that makes digital currency technology
a viable mechanism for payments, and has three significant implications:
1. The incentive mechanism creates a network effect, where the more people there are transacting in the
digital currency, the more valuable the digital currency becomes, leading to more transactions
2. If the reward for verifying transactions is made in the digital currency, the digital currency has to have
value2. Therefore in proof-of-work digital currencies such as Bitcoin it is not realistic to separate the
currency from the technology
3. In Bitcoin, as the reward is paid to the fastest solver, pools of Bitcoin miners have emerged to share
processing power and rewards in proportion to their processing power.
2
The incentive to operate a network “node” in a consensus-driven digital currency (for example, Ripple) is less dependent on the value of
the digital currency than in a proof-of-work digital currency (for example, Bitcoin); instead, the incentive in consensus-driven digital
currencies is to participate in a growing network and compete to provide services in it, for example currency conversion.
Copyright © 2014 Accenture All rights reserved
Page 4
2.4 Figure 1 illustrates this network for Bitcoin, where miners allow commerce through making bitcoins available
for payments. Because bitcoins have value and are available, merchants accept them. Because merchants
accept bitcoins, consumers will use bitcoins to make purchases. Because bitcoins are being used for purchases,
miners have the opportunity to profit by verifying the transactions. A virtuous circle then develops where the
more bitcoins are used for commerce, more merchants will accept them, more consumers will use them and
more commerce is conducted using bitcoins. The more bitcoins are used, the more valuable they become, and
the more incentivised miners are to compete to verify transactions and “mine” or create bitcoins.
Commerce with BTC
Merchants
Miners
Consumers
Figure 1 – Bitcoin Network Effects
2.5
There are 567 digital currencies listed on www.coinmarketcap.com (as of 18 November 2014), but only 16
have a market capitalisation greater than $1m and the largest, Bitcoin, has a market capitalisation ($5bn) 32 times
bigger than Ripple, the next largest. Therefore, although it is relatively easy to create a digital currency, only a small
number may achieve mass adoption. In the same way creating a social media website or a search engine is
relatively straightforward, achieving mass adoption is difficult. It is a feature of the internet that large companies
dominate e.g. Facebook (social media), Google (search), Amazon (ecommerce), eBay (auctions), and the same will
possibly be true for digital currencies i.e. only a small number of digital currencies may achieve mass usage and
adoption globally.
Copyright © 2014 Accenture All rights reserved
Page 5
3. Uses
3.1 There are two ways to use digital currencies for payments:
1. Goods are priced in digital currency and paid in the same digital currency
2. Goods are priced in another currency e.g. GBP but payment is made using digital currency.
3.2 In the first method, the sender needs a digital currency wallet containing the digital currency. To make
payment, the sender simply transfers the appropriate amount of digital currency to the receiver’s digital
currency wallet.
3.3 At the moment, the user experience with digital currency wallets and digital currencies is relatively unfriendly.
It requires registering for a digital currency wallet, buying (or being sent) digital currency, all done typically
using long character strings. This is not difficult, but is certainly not viable for mass consumer use. Improving
this consumer experience is a focus for many of the digital currency start-up companies, for example Circle3.
3.4 In the second method, a buyer of goods or services is unaware that digital currency is being used, and the buyer
and seller do not need to have their own digital currency wallet. They pay in their chosen currency e.g. GBP.
This is used to buy digital currency which is sent to the seller. The seller can choose to keep the digital currency,
or have it converted automatically into another currency of their choice e.g. USD. This method is user friendly
and is particularly suited for cross-border payments and purchases. Companies such as Coinbase4 and BitPay5
provide these types of services. The method is analogous to the long established foreign exchange practice
using a base currency e.g. the process of buying Nigerian Naira with Malaysian Ringgits typically involves buying
USD with Naira, then buying Ringgits with USD.
4. Benefits
4.1 The key benefit of using a digital currency for payments is to take friction out of the payment process, making it
easier, faster and more convenient for all parties to send and receive payments across the internet (regardless
of location), without significant charges for the sender or receiver. Areas where digital currencies reduce
friction include:
Transaction speed – typically between seconds (Ripple: 3 – 6 seconds) and minutes (Bitcoin: ~10 minutes)
compared to days for cross-border payments and for settlement of card transactions
3
https://www.circle.com/en_US.UTF-8/about “Circle is building a suite of consumer products aimed at enabling greater ease-of-use in
online and in-person payments, enhanced security and privacy for consumers, and the convenience of free, instant, global digital money
transfers”.
4
www.coinbase.com
5
www.bitpay.com
Copyright © 2014 Accenture All rights reserved
Page 6
Transaction cost – typically 0.04 USD for Bitcoin6, or 0.12 USD for Ripple7, compared to 1% - 2% for a card
transaction, 3% - 4% for a PayPal transaction8, and 8% or more for a cross-border remittance9
Borderless reach – digital currencies can be accepted anywhere in the world with access to the internet,
unlike fiat currencies
Open access (for merchants, payment institutions and electronic money institutions) – anyone or any
organisation can access digital currency payment mechanisms, such as the Bitcoin blockchain, unlike
centrally controlled payments systems such as Bacs, FPS and CHAPS
Transparency of payment information – transactions in digital currencies are available for everyone to see
and can be verified by anyone at anytime
Connectivity to a digital currency network is easy – all that is needed is an internet connection and a digital
currency wallet, compared to the gateways and technology needed to connect to interbank and card
payment networks
Transaction risks such as:
o centralised IT failure risk10 – unless the internet fails, this risk is confined to the IT used by the sender
and receiver of digital currency
o liquidity risk – in digital currency payments, ownership of the digital currency is transferred directly
from the sender to the receiver; there are no intermediaries such as banks or clearing systems
managing liquidity pools to enable payment transactions
o settlement risk – settlement is immediate with digital currency
o Herstatt risk11 – cross-border intermediaries are not necessary with digital currency transactions
Financial crime – the overhead to implement and maintain fraud, anti-money laundering (AML) and
sanctions controls. With digital currencies, the source and destination can be clearly identified, and each
transaction is permanent and public, making it easier to implement and maintain financial crime controls
(see next section).
5. Creating a Safe, Legitimate Digital Currency Economy – the Role of Governments and Banks
5.1 If digital currency wallets used in digital currency payments are held anonymously, then the payment
transactions between them are anonymous too. This is the root of much of the concern with digital currencies.
However, it can be addressed by creating an environment where digital currency wallets are properly
identifiable, through “Know Your Customer” (KYC) checks.
5.2 In the same way the banking system would attract money laundering and criminal activity if anonymous bank
accounts were allowed, the same is true when digital currency wallets for digital currencies are anonymous.
6
The amount varies depending on the transaction, but 0.0001 BTC is an example of a typical fee
20 XRP (source Ripple ripple_deep_dive_for_financial_professionals.pdf)
8
https://www.paypal.com/webapps/mpp/merchant-fees
9
The World Bank Migration and Development Brief 22 – April 11 2014
10
For example the Bank of England RTGS failure on 24 October 2014
11
Failure of a financial institution before settlement of a cross-border payment
7
Copyright © 2014 Accenture All rights reserved
Page 7
5.3 The solution for this is therefore to simply create an environment where digital currency wallets are
identifiable. Then transactions made with KYC digital currency wallets12 are identifiable as well. A properly
controlled, safe transacting environment can then be created through having identifiable digital currency
wallets with rules that they can send/receive payments only from other identifiable digital currency wallets.
5.4 Already, digital currency wallets that wish to connect to traditional bank accounts for cash-in and cash-out
transactions increasingly require proportional KYC for their use. With limited KYC credentials, limits are placed
on daily values of transactions and loading. With full KYC details registered, larger value transactions can be
executed making the digital currency wallet more functional and connected as a payment tool. This approach
encourages identification.
5.5 Individuals could still open and operate anonymous digital currency wallets, but they would not be able to
participate in the safe environment. This would result in the digital equivalent of a legitimate economy and a
black economy, as already exists with government issued currency. The difference is that there is a permanent
record of all transactions, on for example the Bitcoin blockchain, including those in the digital currency black
economy. Not only will this help with law enforcement and forensic analysis of anonymous transactions, it will
be difficult (if not impossible) for digital currency used in the digital currency black economy to be laundered
undetected back into the legitimate digital currency economy.
5.6 It is interesting to note that the US Government auctioned off 30,000 bitcoins in July 2014 13 confiscated from
the infamous Silk Road website which was shut down in October 2013 by the US authorities14. For the US
Government to do this, it must have had access to the digital currency wallets used, and thus it will be able to
see an audit trail of all the transactions made with those digital currency wallets on the blockchain, as well as
the digital currency wallets at the other end of the transactions. Even if the digital currency wallets used are
anonymous, and even if transactions have been through a “tumbler”15 this audit trail will be useful in forensic
analysis when combined with information from other sources.
5.7 In the same way UK/European regulation allows for Authorised Payment Institutions and Authorised Electronic
Money Institutions to operate as payments businesses, the concept of Authorised Digital Currency Wallet
Institutions could be introduced to enable and serve the digital currency economy. An Authorised Digital
Currency Wallet Institution could be a bank or other type of payment services provider (for example, payment
institutions, electronic money institutions, digital currency exchanges and digital currency wallet issuers), and
12
For example, in the UK, Bitbargain (https://bitbargain.co.uk/) and Bittylicious (https://bittylicious.com/ ) are two websites where
individuals with a UK bank account can buy and sell bitcoins (and additionally Litecoins on Bitbargain). Buyers/sellers need a digital
currency wallet (opened elsewhere), and need to register it with the website with proof of identity documents (utility bills, passport,
driving licence etc). Purchases can be made using internet bank transfer (Faster Payments), Barclays Pingit, RBS/Natwest Pay-Your-Contact
and Paym (and credit/debit cards for Bittylicious). When purchasing digital currency, buyers and sellers can see their counterparty’s details
– name, bank account, and, for mobile payment purchases, mobile phone number.
13
http://www.bloomberg.com/news/2014-07-01/bitcoin-auction-ends-single-bidder-wins-entire-cache.html
14
http://www.theguardian.com/technology/2013/oct/03/silk-road-underground-market-closed-bitcoin
15
A tumbler is an online service/software that can help disguise the origins of a digital currency transaction
Copyright © 2014 Accenture All rights reserved
Page 8
would be authorised and regulated by a central authority, for example by the FCA. The role of an Authorised
Digital Currency Wallet Institution could be to:
Issue digital currency wallets and identify the digital currency wallet owner through KYC checks
Maintain a compliance status of each digital currency wallet
Monitor digital currency wallet usage to check payments are between other identifiable digital currency
wallets
Monitor transactions for adherence to sanctions lists
Be able to freeze digital currency wallets where they are being used for suspicious activity.
5.8 We suggest that any digital currency regulation is confined to making Authorised Digital Currency Wallet
Institutions responsible for these limited safety/security functions, supervised by a centralised authority such as
the FCA.
6. Addressing Concerns with Digital Currencies
6.1 Digital currency technology has many strong features and capabilities that give it great potential to become
integral to payments, however we recognise of course that many concerns persist. These can be summarised
as:
Price volatility, making digital currencies risky for payment transactions
Use in criminal activity, including money laundering and payments for criminal activities
A risk of financial loss through unregulated digital currency trading e.g. exchanges such as Mt. Gox16
Restricted supply e.g. there will only ever be 21 million bitcoins, thus eliminating a monetary lever
traditionally used for economic stability.
6.2 Digital currencies are volatile because they are in their infancy and lack critical mass to be stable. Liquidity is
low, and they are susceptible to events such as the Mt Gox failure, and to actions such as the ban in China that
stops banks from handling bitcoins 17, as well as to speculation causing large price swings. They are also
susceptible to manipulators who can, for example, place large sell orders causing a drop in prices with the aim
of buying in even larger quantities at lower prices from panic sellers. As digital currencies grow in usage,
liquidity will increase, making them more stable – this is a feature of the virtuous circle described in section 2.4
(a network effect which could be assisted by regulation aimed at price manipulation). However, volatility is less
of an issue in the second of the two payment methods (section 3.1), where digital currency is held for only a
short time to make a payment, and is converted from and back into other currencies at the start and end of the
payment.
16
17
http://www.reuters.com/article/2014/02/28/us-bitcoin-mtgox-insight-idUSBREA1R06C20140228
http://www.bbc.co.uk/news/technology-25233224
Copyright © 2014 Accenture All rights reserved
Page 9
6.3 As described in section 5 digital currencies can help prevent financial crime if a safe, controlled environment –
the “legitimate digital currency economy” – is created, in which all digital currency wallets used are identifiable
and transactions to/from digital currency wallets outside that environment are prevented18. A “digital currency
black economy” with anonymous digital currency wallets will still occur, but this can be isolated from the
legitimate digital currency economy, and money laundering from it into the legitimate digital currency economy
can be prevented. Further, organisations supplying identifiable digital currency wallets could freeze digital
currency wallets where they are used for payments to/from identifiable digital currency wallets that appear on
sanctions lists.
6.4 Consumers can be protected from financial loss with digital currencies provided their digital currency wallets
are protected. There is an opportunity for organisations such as banks to provide this protection, and for
governments to introduce regulation to regulate digital currency wallet issuers (e.g. Authorised Digital Currency
Wallet Institutions introduced in section 5.7).
6.5 The concern around finite supply of digital currencies is an economic one and outside the scope of this
submission. However, we note that there is a finite supply of gold and the gold standard was used in the UK 19
successfully for over 200 years between 1717 and 1931. Additionally, in Bitcoin’s case, each bitcoin is divisible
to eight decimal places, so the true supply of bitcoins is 2.1x 1015 payment units, or over 290 thousand units for
every living person on the planet.
18
Transactions between digital currency wallets cannot be easily prevented (if at all – it would require a change to the digital currency
rules, or crypto-graphic algorithms), but they can be identified. With appropriate regulation and control over digital currency wallet
issuers, owners of identifiable digital currency wallets could be penalised, or prevented from accessing their digital currency wallet, if their
digital currency wallet is used for transactions outside the legitimate digital currency economy.
19
http://www.econlib.org/library/Enc/GoldStandard.html
Copyright © 2014 Accenture All rights reserved
Page 10
Part 2 – Consultation Questions
Question 1
What are the benefits of digital currencies? How significant are these benefits? How do these benefits fall to
different groups e.g. consumers, businesses, government, the wider economy? How do these benefits vary
according to different digital currencies?
The key benefit of digital currencies is to take friction out of payment systems. Friction exists in payments in
transaction costs, transaction traceability and transparency, speed, reach, fraud and other crime and various risks,
as described in section 4.1. As an example, looking at cost friction, a rough estimate for the cost of card payments
to merchants in the UK retail economy is £2bn - £3bn p.a.20 Digital currencies could reduce this cost significantly,
and do the same for cross-border payments. Taking friction out of payments would benefit consumers, merchants
and the economy as a whole. Governments also would benefit from a more efficient economy and potentially a
more effective environment for fighting financial crime.
Question 2
Should the government intervene to support the development and usage of digital currencies and related businesses
and technologies in the UK, or maintain the status quo? If the government were to intervene, what action should it
take?
Digital currencies will continue to develop with or without government intervention. However, a legitimate, safe
digital currency environment is needed for digital currencies to have widespread adoption, and for their potential
to be realised. It isn’t clear that this legitimate, safe digital currency economy will/can develop on its own, and
there is an opportunity for the Government to intervene and create a regulatory environment which makes it
legitimate and safe. It is also an opportunity to speed up payments innovation generally through digital currencies,
by creating greater certainty on the legitimacy of using digital currencies. We suggest only limited actions by the
Government, which could include:
Regulating so that digital currency wallets can be identified uniquely and recognised e.g. through KYC
checks
Recognising and authorising organisations (Authorised Digital Currency Wallet Institutions e.g. banks) that can provide identity checks and verification services to enable identifiable digital currency
wallets;
Providing a framework of clear rules and responsibilities for the participants of the digital currency wallet
market on how to place controls on the digital currency wallets to help prevent financial crimes (AML and
sanctions).
20
9bn debit card transactions x £0.09 +2.6bn credit card transactions x £0.41 = £1.9bn (sources: UK Payment Statistics 2014, Payments
Council and British Retail Consortium Retail Payments Survey 2013); Europe Economics estimates £3.2bn in its report, p.4 “The Economic
Impact of Interchange Fee Regulation in the UK. Final Report 28 June 2013”.
Copyright © 2014 Accenture All rights reserved
Page 11
Question 3
If the government were to regulate digital currencies, which types of digital currency should be covered? Should it
create a bespoke regulatory regime, or regulate through an existing national, European or international regime?
For each option: what are the advantages and disadvantages? What are the possible unintended consequences (for
instance, creating a barrier to entry due to compliance costs)?
Regulation should be limited to digital currency wallets, rather than be specific to digital currencies themselves.
Given the time required to regulate, it may be best to start off with a UK regime, before considering European or
international regimes. (Concerns that this approach may create unnecessary burden within the UK may be
balanced by the advantages created by regulatory intervention enabling a successful digital currency economy –
setting a standard for others to copy, as well as attracting innovators and investors.)
However, heavy regulation (or application of historical frameworks) could stifle innovation – to avoid this, an agile
regulatory regime should be set up to be flexible and develop specifically for digital currencies as the digital
currency economy grows. Regulation and rules need to be reasonable and proportionate, with a very clear
identification of the rules and responsibilities applicable to the participants of the digital currency wallet schemes.
Question 4
Are there currently barriers to digital currency businesses setting up in the UK? If so, what are they?
Digital currency businesses setting up in the UK need a bank account to operate as a business. UK banks are wary of
providing bank accounts to money service businesses (MSBs), and some21 are limiting their presence in this sector
(typically for AML and sanctions compliance reasons). Digital currency businesses are therefore likely to face
challenges opening a bank account, and without one they can’t operate. As an example, Coinfloor, a London based
digital currency exchange uses a Polish bank for its banking services22 citing “The [British] banks are very
conservative and are not very interested”23.Coinfloor has also recently stopped using the Faster Payments Service
for fund transfers for reasons that are not given.
Question 5
What are the potential benefits of this distributed ledger technology? How significant are these benefits?
See question 1 and section 4.
21
For example, Barclays and HSBC http://www.euromoney.com/Article/3220753/Money-service-businesses-seek-new-banking-suitors-asregulations-bite.html
22
https://coinfloor.co.uk/security
23
http://www.finextra.com/News/fullstory.aspx?newsitemid=26602&topic=payments
Copyright © 2014 Accenture All rights reserved
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Question 6
What risks do digital currencies pose to users? How significant are these risks? How do these risks vary according to
different digital currencies?
The key risk in using digital currency is to lose access to or control of a digital currency wallet e.g. through
forgetting a password, or through a fraudster gaining access to it. This is similar to the risk of losing access to an
internet bank account or a fraudster gaining access, for example through phishing. However, there is a difference in
that forgetting the password, or losing hardware storing a digital currency wallet means that the digital currency
access keys may be irretrievable (a unique characteristic of digital currencies is that the owner of digital currency is
the owner of the digital currency wallet giving access to the digital currency, unlike a bank where ownership of
funds in fiat currency is transferred by their owner to the bank).
Price fluctuation is also a risk to users. Prices should become more stable once a critical mass of usage and
transactions is reached, but until that point happens, holding large amounts of digital currency to make payments
is risky. This risk can be addressed by the second method of payment described in section 3.1 (temporary use of
digital currency in a payment), or by limiting the amount of digital currency held to just that needed for everyday
payment needs and topping up a digital currency wallet as required (similar to topping up an Oyster card).
The Call for Information mentions the lack of buyer protection with digital currencies as a concern, because
transactions are not reversible, which could be seen as a risk for buyers using digital currencies. However, this is no
different to paying by cash, cheque, Paym or Faster Payments. The risk is a commerce risk that can be addressed
through processes, such as chargebacks, built into digital commerce processes. Similarly, there is a risk of
erroneous or misdirected payments which cannot be reversed, a typical feature of payments with real-time finality.
This is best addressed through the user interface and payment initiation processes – both to help prevent users
sending payments in error, and to use the transparency of digital currency transactions to trace recipients and
recall payments if they do.
Businesses also face a serious risk of being ostracised and losing access to banking facilities if they are associated
with digital currencies, particularly Bitcoin. As described in Question 4, UK banks are wary of providing banking
services to money service businesses, and in particular digital currency businesses appear to find it difficult to get
banking services from UK banks. We have heard that some companies are cautious about Bitcoin and other digital
currencies as the risk of an adverse reaction from their banking partners is high.
Question 7
Should the government intervene to address these risks, or maintain the status quo? What are the outcomes of
taking no action? Would the market be able to address these risks itself?
Our answers to question 2 outline the actions the Government could take. Our recommendation is to regulate
digital currency wallets only to the extent of making them identifiable (as opposed to allowing them to be
anonymous) to prevent financial crimes. Government intervention is necessary to enable the development of the
safe, legitimate digital currency economy described in section 5. Without it, digital currencies will continue to be
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perceived to be part of the black economy, impeding the efforts of innovators and entrepreneurs to build
legitimate innovations and businesses using digital currencies.
As highlighted in section 5 if the Government allowed banks to provide anonymous bank accounts, their use in
fuelling the black economy would be pervasive; in the same way, Government intervention to require the
authorisation, use and regulation of identifiable digital currency wallets would catalyse the development of the
safe, legitimate digital currency economy.
Banks are critical to this legitimate digital currency economy, because even if they don’t participate with specific
digital currency services, they are needed to provide banking services to those who do. Entrepreneurs have
accused banks of obstructing the growth of fintech companies because they fear they will compete against them 24.
However, in our view, banks are very supportive of fintech start ups but are reluctant to be exposed to the big and
absolute fines for AML and sanctions breaches, not just from the UK but also overseas regulators, particularly the
USA. The potential upside from taking on start-ups as customers with possible AML exposures pales into
insignificance compared to the fines they risk (and is also the reason why UK banks are pulling back from even long
established money service businesses as described in Question 4).
Therefore, without Government intervention: UK banks are not likely to provide digital currency businesses with
support; payments innovation using digital currencies in the UK will be inhibited; and digital currency businesses
will migrate to other countries where banks are more supportive, such as Poland. The form of intervention needs
to go beyond encouragement – banks need to be able to apply to digital currency businesses the same KYC, AML
and sanctions rules that they are held to in their core banking services. The challenge for the Government is to
design this intervention so that it allows banks to meet their obligations without imposing insurmountable barriers
on the digital currency businesses building the legitimate digital currency economy. Section 5 describes how to
address this challenge, placing identifiable digital currency wallets at its centre.
If the UK does not create an acceptable environment for purchase and payment through digital currency, digital
currency flows could migrate to countries where merchants are comfortable trading in digital currencies.
Merchants will be reluctant to work with a currency that is not acknowledged in the UK, and will also face
uncertain taxation positions regarding transactions. The flows of money outside the country could, over time,
become significant (cash into the digital currency in the UK, cash out in a second country).
Question 8
Should the government regulate digital currencies to protect users? If so, should it create a bespoke regime, or
regulate through an existing national, European or international regime? For each option: what are the advantages
and disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to
compliance costs)? What other means could the government use to mitigate user detriment apart from regulation?
See answers to question 3.
24
http://www.ft.com/cms/s/0/dbe69366-5625-11e4-bbd6-00144feab7de.html#axzz3JnanSi9L
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Question 9
What are the crime risks associated with digital currencies? How significant are these risks? How do these risks vary
according to different digital currencies?
We believe that the risk of crime with digital currencies arises from their use in the black economy and from theft
from digital currency wallets. These risks are the same for each digital currency, but are only significant for the
more widely used ones, in particular Bitcoin.
Question 10
Should the government intervene to address these risks, or maintain the status quo? What are the outcomes of
taking no action?
The Government intervention and actions suggested in section 5 and Question 2 would address the risk of digital
currencies and the black economy. Additionally, Government intervention may be needed to protect against digital
currency theft from digital currency wallets.
Question 11
If the government were to take action to address the risks of financial crime, should it introduce regulation, or use
other powers? If the government were to introduce regulation, should it create a bespoke regime, or regulate
through an existing national, European or international regime? For each option: what are the advantages and
disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to
compliance costs)? What has been the impact of FinCEN’s decision in the USA on digital currencies?
See our answers in section 5 and question 3.
Question 12
What difficulties could occur with digital currencies and financial sanctions?
Usually, sanctions checks can only be applied if the counterparties of a payment transaction are known. In the case
of digital currency wallets, normal sanctions checks on digital currency transactions are possible only for payments
between identifiable digital currency wallets. That said, anonymous digital currency wallets could be treated as
sanctioned counterparties by default, or specific anonymous digital currency wallets could be sanctioned if they are
identified as participating in suspicious activity, even if the owner of the sanctioned digital currency wallet is
unknown.
Typically, sanctions filters hold payments in queues and block payments where there is a confirmed positive match
to a counterparty on a sanctions list. However, with digital currencies, it is not possible to block transactions,
making it difficult to impose sanctions controls. However, digital currency wallets could be frozen if used for
transactions with sanctioned counterparties.
Copyright © 2014 Accenture All rights reserved
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Question 13
What risks do digital currencies pose to monetary and financial stability? How significant are these risks?
Given the very small size of the digital currency economy – in the UK and globally – it would need to grow
enormously and account for a significant proportion of the UK economy for it to have an impact on monetary and
financial stability. It will take many years for the digital currency economy to grow to a significant size, providing
sufficient time and opportunity for any risks to monetary and financial stability to be identified and addressed.
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