Silicon Valley Bank's Response to ‘Digital Currencies: Call for Information’

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Silicon Valley Bank's Response to ‘Digital Currencies: Call for Information’

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Digital Currencies: Call for Information
Silicon Valley Bank
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?







Security and speed of operation for merchants. The prevention of fraud in the
transactions and assurance for the merchant that funds are good and
payments are received with no chargeback rights. This allows the merchant
to feel confident of the payment before shipping goods.
Low costs and real time settlement between sender and receiver. No real
benefit to consumers beyond this relative to credit cards who do not benefit
from lower transactions costs (which are paid by merchants) and they lose
the chargeback rights that other payment methods offer.
Ease of operation for the end users allow more consumers to enter the world
economy who might not have access from his or her home country or region.
New Payment companies, looking to disrupt traditional bank-based payment
methods, could ultimately look to VC’s as a mechanism to settle transactions
globally without the need for touching the traditional banking system.

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?


The Government should regulate the movement of value across the network
and should take the time to understand the limitations of the protocol as to
what is available in the transactions themselves. For example, currently it is
not possible to pass additional information along with the digital currency
from one point to another. The blockchain and the protocol doesn’t allow for
it. This limitation means name, address and other identifying information
cannot move along with the transaction, which limits the ability to track users
and identify the source of funds, as one example.

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)?


Compliance costs should not be a reason to not regulate the value transfer
system properly. The issue around regulation for digital currencies in an opensource protocol is that there need not be a firm involved in the procurement
or transfer of the currency. A user can send Bitcoin from his or her own



computers using the open protocol. Obtaining the digital currency is also
something that can be created through mining (although for Bitcoin
specifically, it is increasingly difficult to accomplish without massive
computing power) or purchasing from another owner who wishes to sell it off
for cash. Additionally, if the government wanted to regulate the network or
protocol itself, users could abandon that protocol and simply move to another
one.
Regulators and the government, understanding how digital currencies work,
should adopt a set of guidelines specifically for digital currencies firms and for
the banks that want to provide banking services to them that dictates how to
operate safely and sets expectations to follow for all the commercial firms in
the ecosystem. Activities outside of regulated firms should be prevented or
restricted, but the firms that would be regulated have a fair set of regulations
specific to this industry that they can actually achieve given the limitations of
the technology.

Question 4
Are there currently barriers to digital currency businesses setting up in the UK? If so,
what are they?




The regulated industry (FI’s) is reluctant to provide banking services to such
companies (and advice from the EBA is still broadly to stay away), a lack of
expertise, knowledge and current position (unregulated) do not make it easy
for such companies to operate in the UK. A clearer framework for banks to
help support these companies with banking services would enable them to
operate from the UK more easily and provide more certainty for banks to
avoid taking on unnecessary risk should the regulatory view of these
companies change. Such a framework needs to be:
o Specific – a broad based comment paper is unlikely to provide the
clarity that Bank’s seek
o Easy to understand – for example by being backed up with use case
examples of what is considered good practice and what is not.
Identity management – this comes into the previous point but also ensuring
that there is some KYC burden would give better transparency and more faith
to those involved as to the legitimacy of funds.

Question 5
What are the potential benefits of this distributed ledger technology? How
significant are these benefits?


The distributed ledger technology solves the fundamental problem of a nontangible value transfer system: double spending. This technology now
secures the transaction by validation between the nodes of the network
(miners) and the acceptance to the blockchain. The significance is the solving
of the ability to forge, counterfeit, or double spend the value.

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 current format is no regulation, no recourse, lack of fundamental
structure to who controls, owns, designs, markets can evolve quickly – what
stops the volume of currencies created, use of digital provides and no
compensation to victims currently.
The risks are significant – notably AML, monitoring, Sanctions and the speed.
Risk to users of hacking is not any higher than the risk already present in
online banking. The same hacking techniques (phishing, Malware, keyloggers,
screen scrapers, etc) are present in any online transaction. There is no
additional hacking risk and actually may be in fact less risk if one considers
the information being stolen and used in the numerous data breaches in the
US of credit card data this year.
The irrevocable nature of transactions is a big consumer risk when paying for
the delivery of a product or service. If the product is not delivered, there are
no chargeback rights for the consumer and no one to complain to. Some
services have recently come up to offer escrow-type services for larger
purchases made via digital currencies, and those help with the risk of delivery
for consumers.
Digital currency exchanges also face a risk of selling currency based on an
electronic funds transfer or credit card. Once the currency is purchased, the
digital funds are immediately available to be spent or transferred off the
exchange’s network and the purchaser has months to come back and claim
fraud then chargeback the charges for the purchase of the digital currency.
The risks of loss are similar to cash. While digital currencies are held in a
virtual wallet, your cash is held in your physical wallet and vulnerable to loss
or theft as well. One should not hold all of one’s cash in the same place, just
as one should not hold all of one’s digital cash in the same one place. This
has given rise to a number of storage companies for digital currencies, which
effectively end up providing safe custody (i.e. banking type) services to users
without any of the associated regulation or protection centrally.
Currency exchange risk is prevalent, but also on the onus of the purchaser
just like any commodity used for trading. One should ensure one understand
the volatility of the market before buying digital currency. An unfortunate
example could be when using digital currency for the purchase of a future
hotel room and then the value increases against the fiat currency before the
use of the room. In that case, the room “cost” more due to the fluctuation in
the currency conversion, but the inverse could be true. However, there are
some countries where the currency is far more volatile than a distributed
digital currency and the use of Bitcoin, for example, would be more stable.
The risk of insolvency by a wallet provider/exchange is of the highest risk,
e.g. Mt Gox. A thought would be for firms to be required to insure against
insolvency.
Is this really what people want? People are attracted to investment, but
enhancing the status quo of existing services to make them attractive, would
lead to people not requiring digital currencies.

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?



If this is to be regulated, then yes the government should lead and ensure
accountability, sustainability, credibility and liquidity of digital currency
participants or designate an appropriate body to do the same. There is likely
to be a strong attraction for investment scams and bust out, as it will be easy
to make propositions look attractive. Taking no action could leave the UK
static to global economy change – if others do go forward, however I see no
reason why the UK should progress without a wider global support.

Question 8
One of the ways in which the government could take action to protect users is to
regulate. 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?




Regulating the industry is always going to result in a trade off between higher
cost and less flexibility and certainty / safety for users and markets.
Regulation could help to mitigate some of those risks outlined above and
provide a framework for digital currencies to operate in that would make
these companies more attractive to a broader set of users and more able to
operate in the UK through access to banking services (as one example).
Ideally regulation would be an international regime to provide consistency
across markets but this is likely to prove challenging and therefore a more
realistic option in the short term would be to regulate at the European level
through an existing regime (which would in theory be easier to establish and
better understood by participants at the outset). If we see digital currencies
as simply another means of transferring value, then leveraging the existing
payments regulatory framework could be one way to achieve this without
killing the industry through regulation (noting the number of payment
companies set up in the UK as evidence that the regulatory burdens are not
overly penal). The FCA is a regulator in this context for the UK specifically
would likely prove some deterrent for those looking to exploit the industry for
money laundering purposes, provide consistency with other payment
methods and have an existing framework to be leveraged (and therefore
make it more cost efficient).

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?
No comment (covered in previous answers)
Question 10
Should the government intervene to address these risks, or maintain the status
quo? What are the outcomes of taking no action?

No comment
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?
No comment
Question 12
What difficulties could occur with digital currencies and financial sanctions?




Without requirements or the ability to provide information along with the
transfers or indeed without any AML/sanctions type requirements on
participants, there is no way to ensure that digital currencies are not used to
circumvent financial sanctions.
By far, more criminal acts are paid for with cash than any other type of value
transfer (which we have already likened digital currencies to). Short of
requiring users to register their wallets on an international registry so the
wallet is tied to an identity, it is difficult to be entirely sure of the identity of a
user of digital currency, even with blockchain mining technology.

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