Tom Gullen

Tom Gullen

Tom is a web developer, drummer and passionate Bitcoin advocate.

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Bitcoin's UK Future Looks Bleak

by Tom Gullen | 11th, November 2013

Bitcoins could be a technological revolution. Technological revolutions generally move fast. The countries that could benefit the most from these fast moving technologies are the ones that position themselves early on to benefit from the progression these technologies offer.

Germany has taken an admirable lead rethinking it's position on digital currencies and recognising them as "units of account". Canada seems to be an ideal place for launching new Bitcoin related technologies such as the Bitcoin ATM.

Governments moving towards regulation of Bitcoin seem to have a dichotomising effect on the Bitcoin community. One side wishing to see governments embrace Bitcoin, regulate and support it. The other side viewing Bitcoin as an opportunity to totally separate money from government.

Convincing one side to consider the other sides point of view is difficult, there isn't much middle ground to edge into and these opinions generally stem from deep rooted basal life philosophies. All each side can do is pursue their beliefs by doing what they think is right and progressive which is why I decided to attempt to encourage progressive government interest in Bitcoin.

The Worst Outcome

One outcome both sides can agree on is that a government that views Bitcoin negatively and takes steps to outlaw its usage or possession would hurt everyone (in the short term at least). Not just people who hold Bitcoins, but wider society. Putting the boot on Bitcoin and trying to drown it chokes development of exciting opportunities and keeps it penned in as a fringe and obscure technology, furthering its inaccessibility to the general public.

What exciting and revolutionary developments exactly would be choked is impossible to say. When the Internet was first developed I'm not sure anyone could have predicted the numerous monumental benefits it offers society today.

UK Banking

As anyone in the UK who has attempted to open a bank account to run a Bitcoin business knows, as it stands your chances are slim to none. My credit history was checked and passed (phew!), I had a decent size of starting capital, my business plan had no borrowing or lending requirements and I had evidence from HMRC to show that the business did not come under the scope of Money Laundering Regulations. All that was needed for me to operate my humble Bitcoin selling business in the UK was a simple bank account.

Their refusal for opening the account was shrouded in mystery. I spent a few hours with our current banking providers talking to various people trying to simply get an explanation, and no one would give me one. Eventually they wrote to me and told me they refuse to give me a reason as it would "divulge trade secrets". This secrecy is a defensive tactic to protect them from claims of anti-competitive behaviour. Resigning information you are not required to divulge can rarely work in your favour.

Banks have deeply entrenched themselves into society. We've reached a stage now where banks act as gatekeepers for new startups in the UK, without their authorisation good luck on running a business. There is a severe conflict of interest here especially when you consider Bitcoins potential to take large bites out of their most profitable operations; for example the remittance industry.

But more on the banks later...

Step in the OFT

The first thing I did was complain to the Office of Fair Trading. Their reply was:

"When considering which issues to examine further we take into account that the OFT has finite resources and must prioritise its work. We assess complaints we receive by reference to our published principles. The OFT considers a range of factors, including impact on consumers, strategic significance, risk and resources. In the case of your complaint, it appears that the benefit for consumers of investigating your complaint is likely to be limited in comparison with other markets that we could study."

It's a total catch-22. The banks are suppressing the UK Bitcoin economy keeps it small enough so that the OFT don't consider the market big enough to investigate.

It doesn't matter anyway

Even if you are able to obtain a bank account, the simple act of selling Bitcoins is an entirely unviable business in the UK. HMRC (the UK tax agency) have clumsily labelled Bitcoins as 'Single Purpose Vouchers'. This means that VAT is due on them.

If you're intending to sell Bitcoins past ~£77,000 revenue you'll need to register for VAT. Once registered for VAT, you'll need to add 10% - 20% (depending on if you qualify for "Flat VAT") to each sale. If you're selling Bitcoins with a modest 5% markup to make the operation worthwhile, you're now going to have to mark them up as much as 25%. No one will buy them, they will go elsewhere. Also with a modest 5% markup, after £77k turnover you would expect to earn ~£3,500 in fees. Nowhere near enough to justify the overheads of running a business if you did decide to turn down business once the VAT threshold had been reached.

Foreign exchange transactions are normally exempt supplies. If the UK wants to see more UK Bitcoin business Bitcoin needs to share the same tax benefits as other currency.

This is why the UK is lacking any decent gateways into the Bitcoin world.

But can't you just do it anyway?

There are perhaps ways to structure Bitcoin businesses more creatively to at least give yourself a reasonable defence if the government does come knocking. For example acting as a medium for people to exchange Bitcoins could perhaps remove the VAT burden. However this isn't solving the problem, the buck is simply being passed to the end users who probably are not aware that they might be using these systems with this unfair tax burden.

VAT is a show stopper for the UK Bitcoin industry.

Going Further Up

I'm fortunate enough to have the Rt. Hon Dr Vince Cable as my local MP. Before approaching him I wanted to better understand what the UK government's position was on Bitcoin as this is a good foundation before trying to open up dialogue. I issued several "Freedom of Information" (FOI) requests to key departments. Below is a table showing the responses and the outcome:

Department FOI Request Outcome
Bank of England Link Information not held
Dept. for Business, Innovation and Skills Link Information not held
HMRC Link Refused
Her Majesty's Treasury Link Refused
Home Office Link Refused
Financial Conduct Authority Link Refused

Common reasons for refusal are FOI Act of 2000 section 35 which outlines formulation of government policy.

It's depressing that firstly key government departments have not apparently to the best of my knowledge even discussed this potentially revolutionary technology. It's even more depressing that in a democratic society, discussion of policy regarding this technology is conducted in secrecy. HMRC's VAT legislation is already outdated in many areas especially regarding online trade. My confidence that they will appear from behind these doors with legislation that is progressive based on a firm understanding of Bitcoin is low.

Some of these responses also indicate glaring misunderstandings of what Bitcoin is, hilariously the Bank of England wrote back to tell me "There have been no meetings held at the BoE attended by Bitcoin".

After being shown the stop sign by our government I decided to approach Dr Vince Cable about the issue, as I strongly feel it is important and worth of his attention in two key areas 1) anti-competitive nature of the banking industry and 2) allowing Bitcoin to share the same tax benefits as other currencies and services.

The Voice of British Banking

One of the first things Dr Cable did was contact the Chief Exec of the BBA. The full reply can be viewed here.

The BBA title themselves the "voice of banking & financial services" so it's interesting to hear what arguments the group who are probably most opposed to Bitcoin can offer. The BBA represent 170 banks.

The response made the points:

"You may be aware that there is considerable debate at present about the potential for virtual currencies to be used for financial crime purposes. Banks are highly committed to meeting their obligations to prevent financial crime"

This seemingly suggests that the BBA is engaged in debates about Bitcoin. This is bleak news as this debate is entirely inaccessible to the general public. Because Bitcoin is decentralised it doesn't lend itself well to establishing groups that are able to compete on the same level as the BBA. I have strong concerns that the financial sector is being vastly over represented in any of these debates. If true the likelihood of favourable outcome for Bitcoin in the UK is diminishing.

Secondly the point that banks are "highly comitted to meeting their obligations to prevent financial crime" should be subject to ridicule. The BBA represents HSBC, the bank that allegedly used "fake receipts to facilitate money laundering" as reported back in March 2013. In 2012, HSBC had to pay a £1.2bn fine as a settlement for their participation and profiting from money laundering. Not only is it likely the BBA are vastly over represented in this debate, in my opinion they should have lost the rights to participate in these debates.

"The anonymity that is associated with Bitcoins and the illegal purposes that the currency can therefore be used for are of course relevant"

"The banking industry has highlighted this issue through our contributions to current risk assessment of money laundering and terrorist financing being led by the Government"

More evidence that the BBA is being over represented in these debates. Terrorist financing is presented as a concern from them, even though there exists absolutely no evidence Bitcoin has been used for terrorist financing.

The insinuation that Bitcoin is anonymous exposes a lack of understanding of Bitcoin and is the basis for the BBA's claim that Bitcoin is a suitable tool for laundering money and financing terrorism. Back in 2012 the FBI commented:

"Although Bitcoin does not have a centralized authority, the FBI assesses with medium confidence that law enforcement can discover more information about, and in some cases identify, malicious actors, if the actors convert their Bitcoins into a fiat currency. Third-party Bitcoin services may require customers to submit valid identification or bank information to complete transactions. Furthermore, any third-party service that qualifies as a money transmitter, and therefore a MSB, must register with the FinCEN and implement an anti-money laundering program."

If terrorists are indeed receiving funding from Bitcoin or criminals are indeed using Bitcoin to launder, the FBI think they can in some instances identify these people. The FBI are more qualified to comment on this than banks who have a conflict of interest.

The future looks bleak

There is not attainable indication that the government understands Bitcoin correctly. There is a strong possibility that the banking and financial sector are being vastly over represented in this debate and their hollow arguments are being given more credence than they deserve.

The Treasury comments that they have "no plans to regulate the use and issuance of virtual currencies". Again, this reply indicate a gross misunderstanding of Bitcoin (the Treasury can't issue Bitcoins even if they wanted to). This naivety is a weakness that the banks who find themselves fortunate to somehow be involved sensibly in these debates can abuse.

Dr Vince Cable has told me he is now genuinely engaged with the subject. It's reassuring to know that there is someone in government that is giving the proper consideration to Bitcoin that it requires.

I do hope that fair and progressive outcomes do emerge here in the UK for Bitcoin in a reasonable timeframe. It doesn't appear likely. With Vince Cable telling me he's enaged with Bitcoin, I am more hopeful.

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thehen 12.0k rep

This is an incredibly interesting article - thanks.

Monday, November 11, 2013 at 3:01:14 PM
newt 128.8k rep

Not terribly surprising given you need a license to watch tv there.
Anyway, Thanks Tom.

Monday, November 11, 2013 at 5:10:13 PM
awheewall 1,002 rep

Great article and investigation Tom.

It did make me chuckle (and worry me) to read the responses of the Bank of England - "no meetings have been held where Bitcoin attended", and the Treasury - "no plans to regulate the use and issuance of virtual currencies".

What absolute morons. :-)

Monday, November 11, 2013 at 5:12:37 PM
madaxe 977 rep

"The anonymity that is associated with coins and the illegal purposes that the currency can therefore be used for are of course relevant"

Ban cash! Wait, they're already working on that.

My advice: incorporate offshore, bank offshore, and let HMRC lose out. Perhaps if enough folks hit them where it hurts (the treasury), they might be willing to engage their brains.... or more likely, like any stupid, wounded animal, they'll lash out at random at the wrong people.

Ho hum.

Monday, November 11, 2013 at 5:23:07 PM
johnnylemuria 977 rep

Welcome to the Agora.
[Hyperlink removed - users with less than 500 rep cannot post links]

Monday, November 11, 2013 at 10:18:50 PM
Paradox 41.7k rep

Tom, are you sure they took your correspondence seriously? The government probably has a file on you and your letter writing. ;-)

Tuesday, November 12, 2013 at 2:05:03 AM
bitprice 539 rep

See my response here - I'm much more optimistic about Bitcoin in the UK:

[Hyperlink removed - users with less than 500 rep cannot post links]

Tuesday, November 12, 2013 at 9:21:27 AM
bitprice 539 rep

Search for "Bitcoin's UK Future Doesn't Look Quite So Bleak" on Reddit

Tuesday, November 12, 2013 at 9:22:21 AM
srs 1,002 rep

Congratulations on an excellent and insightful article.

As a fellow brit I really want our country to embrace rather than hinder new technologies, Allowing Bitcoin for small businesses will really help ensure we're not left behind China, Germany, and America who are already embracing it and correctly regulating this.

I fear the banking industry is holding back because they must be seen as being cautious given the recent financial mess and ironically causing Bitcoin's inception.
The banks will make an absolute fortune offering Bitcoin vaults and fractional banking just like they do with a country's fiat currency, it's literally a vast international gold mine to be had and only needs a credible large organization behind it who gets how important this is.

I want to believe the UK isn't going to miss the boat and we just need to help our banks see the distinction between the commodity and the users, how it is indeed traceable if necessary and why they need to care about this tiny yet rapidly growing $3billion market.

I love our country and it's sad to see the UK is being held back at this important early stage time, we really need to step up so if there's anything I can do to help lobby or approach people please let me know. Perhaps we could get a list of reasons of how Bitcoin can help people and businesses grow and send this to our MPs so they're informed as to why we should be looking to embrace it?

Tuesday, November 12, 2013 at 9:30:10 AM
Big kate 473 rep

Newt our coment implies that you live in a country that doesnt issue any form of licences - which i doubt you mean

"it must be really cool to live where you live seeing has how anyone can just get in a car and drive it, can own and use any weapon they like from automatic guns to chemical weapons, you can build whatever you want - where ever you want, buy and sell alcohol to anyone and you wont be done if you short change them, a place without goverment licences must be amazing"

The pity is that even if all of that were true of the UK we might still need a licence to watch TV, as its not issued by the government. The BBC is a monoply with control of its airways, just as cable companies control the cable, or cellular controls their airwaves. If you don't buy a licence you will effectivly be done for piracy, oif taking something without paying.

I hope that clears up why you sound simply ignorant, which I doubt was the aim, and why your comment is inapproriate. Perhaps what your were trying to say was that Britain is autocratic, allowing its people less liberties than you presumably have in your country?

On a more serious note - was the issue about in effect you asking for a banking licence? Or possibility to operate as someone who works as financial agent i.e. to someone who sell stocks (bonds) and shares. The close thing to bitcoin would be presumably Junk bonds but ones that give no interest either, since they are functionally valueless and only hold a convertable value because others belive them to have value.

bitcoins like so much are based on faith. If the pound, the dollar, the euro, stopped being recognised as a currency and nobody was prepared to exchange them for anything that was recognised as a currency - then all holders of the pound. the dollar, the euro would not be bankrupt since the objects held no value they would just have no savings. a classic example of this is after a breakdown of a society, when one person has bread and the other person wants to obtain it, all the green squares of paper in the world wont get them the bread unless the person with the bread believes that these squares have value and can be use by them to purchase other objects.

a good exampe of this is on the news yesterday where people in the philipines without food or water are held back by men with guns from getting what food and water are available - in that context it doesn't mattter how many objects you have - in that context the only currency is power

Tuesday, November 12, 2013 at 10:01:02 AM
p7r 492 rep

Your VAT calculations are out. You would only have to sell them at a premium if you mined them, at which point you could discount the price to make them competitive, meaning they would be a bargain to those users who are not in the EU, but given current difficulty you are going to struggle to mine at a cost-effective price unless the exchange price starts to rise at a rate beating difficulty. Plus, mining is hard, and so this is smallish market.

To be clear, you would only have to pay VAT on your fees, not on the total sum amount, so if you were acting as a clearing house, exchange, payment provider, etc. your maths would be wrong and your fees would go from 5% to 6% for those inside the EU, and even then with some creative thinking and siting of servers and offices in Jersey you could avoid even that.

Tuesday, November 12, 2013 at 10:23:38 AM
Erik 492 rep

As you may have read from the Edward Snowden disclosures, they track your browser and keep using FOXACID until they have successfully infected your browser in such a way that it leaks your identity. The identity tokens are gradually populated with identifying information in their database, until they actually see your name, your face, your address, everything, actually. As soon as you visit your Facebook, LinkedIn, Gmail, YahooMail or LiveMail account or forget to log out, it is bingo already. Using their MITM (Man-In-The-Middle) attacks, they know exactly who is buying how many bitcoins, because the bitcoin exchanges are under continuous surveillance. If the amount is large enough, they repossess the money immediately. It usually does not take much time before they just plunder the entire bitcoin exchange. If the NSA contractor is a rogue guy, the amount will go into his own pockets. Since you are now a money-laundering scaundrel suspected of terrorism, they will also do MITM attacks while you are visiting your banking websites. They will syphon away the money there too; for their agency or for themselves, because that is impossible to determine from the outside. Do not complain about such mishap because doing so will only make your situation worse.

Tuesday, November 12, 2013 at 10:25:20 AM
EddyDingDongs 3,447 rep

It seems like at the top of each pyramid you'll find the banking industry. Now taking them head-on is totally futile, they have all the money.. So if there is a future for projects like Bitcoin then it must be done in the most strategic and intelligent way so that they don't see you coming... A little bit of this reminds me of the beginnings of PayPal back when eBay was a new thing and everybody was afraid to shop online.. I'm not saying I agree with PayPal's constant policy changes, but it's just an example that something new can happen in the banking industry.

In the end don't let any of these things upset you all too much, life goes on and make the most of the tools you've got at the moment. If the currency of the time is Sea Shells then live next to the beach.


Tuesday, November 12, 2013 at 11:21:31 AM
AbelaNET 14.9k rep

Thanks for this article. Very good info and it is a subject that interests me.

Tuesday, November 12, 2013 at 5:02:52 PM
jwjb 4,919 rep

Informative and interesting, thanks.

Wednesday, November 13, 2013 at 5:59:04 PM

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