Concerns over cryptocurrency regulations escalate as Bitcoin heralds record growth

 By Gina Clarke

As the UK and other EU governments are set to crackdown on digital currency Bitcoin, concerns are growing over potential fraud risks and loss of investment if the market takes a downturn.

So much so that earlier this year Japan introduced legislation to protect users losing money, especially after the previous liquidation of Mt Gox on the Tokyo stock exchange which lost millions in Bitcoin.

This movement could potentially act as a catalyst for the UK and countries worldwide to follow suit. The Treasury recently announced it had plans to regulate Bitcoin and other cryptocurrencies, bringing them in line with anti-money laundering and counter-terrorism financial legislation.

But this in itself comes fraught with problems. As Rob Kelly, Director of Marriott and Kelly Accountancy Ltd explains: "The main issue is that the government are yet to define what Bitcoin actually is. It sits on the fence of commodity and currency and both come with different needs for regulation. Some countries view it as currency, other as commodity. This changes the way things are taxed, produced and sold.

"Cryptocurrency is currently handled as private money and that is still a confusing legal status. This lack of regulation is believed to be what is holding businesses and start ups back from fully accepting cryptocurrency as a genuine transaction currency. However, more and more people are investing and more currencies are emerging, meaning that regulation or not, businesses may need to bow to demand."

Indeed, Nasdaq's recent announcement of releasing Bitcoin to bidding, meaning you won't actually have to have Bitcoins to make money from them, you can simply bid on their value, has made the industry bring into question acquisitions, regulations and mergers.

A 2016 enquiry byInvestmentBank.comfound that the first acquisition of Bitcoin gambling service SatoshiDice happened as far back as 2013 by an unnamed buyer. Followed by the acquisition of Bitcoin exchange price aggregator, Zeroblock, by Blockchain.info in the same year.

However, the volatility of the market and the lack of regulations are throwing doubt at the continuity of mergers and acquisitions. Peter Jeffery, Corporate Partner at Moore Blatch, believes that ultimately the currency will fail. He says, "Due to the Bitcoins volatile nature, it will inevitably fail as a currency, leaving not only many out of pocket, but it will also deter investors from using other cryptocurrency into the distant future.

"That Bitcoin is anonymous and as a result, can be traded to leave no tax trace, must be a concern to HMRC. As it stands it is completely unregulated within the UK market, exists only online and therefore presents many risks. Due to volatility it cannot safely be used in mergers and acquisitions as its value can change considerably in a very short space of time. Imagine selling your business for 1000 Bitcoins (worth $18,000,000) at exchange and then at completion finding that you received 1000 Bitcoins but they were worth only £1,000,000. Therefore, it has no suitability in corporate transactions, including mergers and acquisitions."

Kelly tends to agree. He says, "Due to it being unregulated, it is unlikely we will see any major movements. There are certain problems such as tax implications, and it isn't yet steady enough, or of enough value to consider for major mergers or acquisitions. The main options on the table currently are international transfer uses. I think the idea of trying to acquire Bitcoin at present is a wild idea, and not very likely at this stage."

And while interest by the EU's governments to impose regulations appear to be a step forward for the currency, it seems that this might present problems of their own. Kelly explains: "The risks of regulating, is that it could potentially demean Bitcoins value. From an investor's point of view, they may argue that regulation will stop people making as much money from cryptocurrencies, and could potentially push certain things back to the dark web. Also, people who were with Bitcoin from the beginning will potentially demand to be part of the regulation, giving way to too many voices and opinions. I feel that regulation will also need to partner with education and full understanding. We are yet to fully understand the full power of cryptocurrencies, which is exciting but also intimidating."

"However, there is currently more risk than paper money and bank accounts, and it doesn't have the protection that bank accounts can provide. If you lose it, it's gone. Regulation will help protect and hopefully lessen the risks involved, but it won't stop new threats such as scammers, cyber attacks, hackers and large corporations from trying to steal and access people's wallets. And that's another thing, it is unknown whether regulation will change the way that the currency is stored. If banks become fully involved, it will be interested to see how accounts will be set up and managed, or if wallets become real accounts."

A dose of reality

So with the price of Bitcoin set to top $18,000 in January 2018 and a new set of regulations upcoming. Is the future looking bright for Bitcoin? Not according to Steve Keen, professor of economics at London's Kingston University who told the RT that, "The whole idea that you can be a separate financial eco-system, which I think is the part of fantasy behind the formation of Bitcoin, is now getting the part of reality, that you part of that inter-linked system - whether you want to be or not. Therefore, you can be hit by what happens in other markets; you are not immune to having short squeezes, bears move in and drive the price down. All these sorts of effects are there, they are not unavoidable." 

Ultimately Keen believes that he is still not convinced that Bitcoin would work as a transactions service "which ultimately it has to be to become a rival to cash".

"And when it does that, my feeling is that the fundamental reason for using Bitcoins as opposed to the mining will cause the price to plunge dramatically."

Here the government has a conundrum, how can it safeguard people's money and ride the popularity of Bitcoin and other cryptocurrencies without essentially supporting those people should the bubble burst? According to Peter Jeffery, Corporate Partner at Moore Blatch, they simply shouldn't. He adds, "The Bitcoin is a good old gamble. The one thing that is certain - it is not stable and when it comes to real currency isn't that a fundamental requirement?"

About Moore Blatch

Moore Blatch is a law firm with expertise of working with entrepreneurs and investors in technology. Over the past 10 years, Moore Blatch has completed deals with an aggregate value exceeding £1.5billion. In the last year alone, Moore Blatch has completed nearly £500 million in deals.

Clients are typically entrepreneurial businesses, often VC or PE backed or on a junior market. In the past three years', Moore Blatch corporate deals have all been in the Managed Service Provider and Data Centre arena. With a wealth of experience in all areas of corporate finance work, Moore Blatch advises both private and public companies on:

Mergers; Acquisitions and disposals; IPOs; VC and private equity; Fundraisings; Management buy-outs and buy-ins; Domestic and international deals.