Accenture - HMT Consultation on Digital Currencies

Copyright 2014 Accenture All rights reserved Page 1

Digital currencies: Call for Information

Accenture response

December 2014


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 worlds 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 high-

performing businesses.


Part 1 - Context

1. Introduction

1.1 This document outlines Accentures response to HM Treasurys 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 Treasurys 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 Accentures 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.


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 crypto-

currency, 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 Bs digital currency wallet has received the payment from person

As 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 Bitcoins 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.


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.

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.

Commerce with BTC

Consumers

Miners Merchants


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 receivers 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


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

7 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


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 201413 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 tumbler15 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 counterpartys 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


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

http://www.reuters.com/article/2014/02/28/us-bitcoin-mtgox-insight-idUSBREA1R06C20140228 17

http://www.bbc.co.uk/news/technology-25233224


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 UK19

successfully for over 200 years between 1717 and 1931. Additionally, in Bitcoins 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


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 isnt 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.


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 cant 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 interested23.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-as-regulations-bite.html 22

https://coinfloor.co.uk/security 23

http://www.finextra.com/News/fullstory.aspx?newsitemid=26602&topic=payments


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


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 dont 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


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 FinCENs 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.


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.

Accenture - HMT Consultation on Digital Currencies

Documents

Transcript of Accenture - HMT Consultation on Digital Currencies