Gavin Smith Comments on Citi Recommendation to UK Government

What happens if governments try to dominate the Blockchain?

Friday saw the release of Citi’s frank review of digital currency in response to the UK Treasury request for information on Digital Currency. While not entirely unexpected it does start to show where the “battle lines” are likely to be drawn between traditional banks and government on one side and digital currency adherents on the other. I would encourage interested parties read the full text of the Citi response obtained by Coindesk from this URL ( http://www.scribd.com/doc/266008779/Citi-Response-to-the-HMT-Call-for-Information-on-Digital-Money )

The first phase of the regulation “Battle” was accepted by the majority of Bitcoin service providers fairly quickly because of the recognition that performing KYC and AML checks had real benefits for the consumer of bitcoin services. It both prevented criminal and terrorist organisations gaining access to the financial benefits of the blockchain and also provided legitimate consumers with details of who they are doing business with – after all, exchanges and Bitcoin financial institutions can hardly force KYC checks on their customers while hiding behind a veil of secrecy themselves.

These changes have allowed great strides forward in the protection of customer assets and, thankfully, the instances of companies disappearing overnight with customer funds is becoming a much rarer occurrence.

Another direct customer benefit of an identified customer and KYC checks is the ability of companies to offer truly segregated customer accounts, a feature that is implied in traditional banking relationships, but which can now be proven due to the transparent nature of the blockchain.

All reputable companies in the industry will have clearly defined customer wallets which hold customer funds. These assets are delineated and belong to the customers and can be returned if required.

What protection do you have if you choose to do business with an anonymised company if a sovereign government locates that company and then chooses to raid it seizing all the bitcoins they hold? The company has no customer records so cannot prove who owns the assets; your assets will be seized by the authorities along with the funds of the “company”. You have no recourse or protection to retrieve your lost assets!

Instead of flouting the rules, progressive companies in the bitcoin space tailor their operation to provide the maximum privacy for their customers. For instance we have chosen to domicile our company in Switzerland with no operational presence in the US. We have used this model from the outset so we can respect the privacy of our customers while still following full KYC rules. With our model if the authorities believe a customer is laundering illegal money they can request these details through the courts. We are not, however, subject to blanket disclosure requests by the US or any other jurisdiction. This is where the focus should be; not the protection of illegal activity but the protection of a customer’s right to privacy.

Which brings me back to the Citi response; Citi have proposed that the UK Government introduce a form of digital currency as legal tender.  The key answer which really highlights the position that Citi (and I imagine a number of existing financial institutions) are taking is highlighted by the last answer to question 10.

Question 10 asked “Should the government intervene to address these risks, [associated with criminal organisations benefiting from digital currency] or maintain the status quo.” Followed by the second part of Question 10, “What are the outcomes of taking no action?”

Citi responded, “A first step should be to provide immediate guidance to regarding existing digital currencies. There are clearly benefits for businesses and consumers in using these currencies. The existing cannot be controlled unless a better, safer alternative emerges unless governments and banks are at the centre of this technological shift beyond paper and credit cards it will continue to support financial crime. To be a key participant may mean that banks and governments need to work together to develop digital currencies that supersede the existing physical and electronic solutions.”

So in essence it appears the suggested approach is to follow the path detailed in the response to Question 8 that has been followed by the EBA, Argentina, Brazil, and India; “warn” the public about the “dangers” of digital currency until an alternative controlled by governments and existing monopolistic banks can be introduced. This approach implies a massive increase in regulatory control and the corresponding dampening of entrepreneurial drive and innovation that has characterised bitcoin in its formative years.

I’ve always considered myself on the more moderate side of this discussion. I believe that certain levels of regulation are not only necessary but welcome because they protect the consumer and help with mainstream adoption of the currency.

If, however, the banking and regulatory authorities are intending an approach similar to that proposed by Citi then the bitcoin community as a whole should put clear water between themselves and these proposals and strive toward a genuine alternative to the current monopolistic banking system.

Gavin Smith
CEO, First Global Credit

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