Philip Hammond at Davos 2018

Regulate Bitcoin before it disrupts world economy, says Chancellor

Image credit: Reuters/Denis Balibouse

Speaking at the World Economic Forum (WEF) in Davos, Switzerland, the UK Chancellor Philip Hammond has come out in favour of regulation of cryptocurrencies, joining other global leaders in finance.

Hammond told the WEF that cryptocurrencies should be treated with caution, and possibly regulated before they balloon far enough to disrupt the global economy.

“I am interested in Bitcoin, and the Bank of England, as you know, among the central banks, has been leading on looking at Bitcoin […] it is a very interesting new development,” he said.

“I think we should be cautious about Bitcoin and possibly we do need to look at the way we regulate this environment before the amount of outstanding Bitcoin becomes large enough to be systematically important in the global economy; it’s not there yet but it could get there soon.”

He said that there was a need for world leaders to be proactive and get a handle on digital currencies before they could pose a serious threat to economic stability.

Cryptocurrencies like Bitcoin are decentralised, which poses challenges to attempts to impose regulations.

Cryptocurrencies are digital currencies that require cryptographic problems to be solved in order to complete transactions. These problems are solved by “cryptocurrency miners”, who are awarded new cryptocurrency as a reward for using their CPU to solve these problems. When a transaction is completed, it is added to a decentralised public ledger: a blockchain.

In 2017, Bitcoin underwent a stratospheric rise in value, peaking at a value of almost $20,000 (£14,000) in December. The value of the currency has now fallen rapidly to below $10,000 (£7000), approximately halving in value in a month.

Aside from its volatility, other risks associated with cryptocurrencies include the possibility that it is a bubble (a theory supported by the fact that the currencies have no fundamental value), varying regulatory approaches between countries, concerns about its association with anonymous criminality on the ‘dark web’, and its vulnerability to hackers: a recent report estimated that more than 10 per cent  of new cryptocurrency is stolen by hackers.

While these risks must be taken into account, Hammond said, it is important to make the most of the underlying blockchain technology behind cryptocurrencies: “What is really important is that in regulating cryptocurrencies we don’t inadvertently constrain the potential of the technology that underlies it – the blockchain technology – which has a wider and more important application.”

According to Hammond, the issue of cryptocurrency regulation could be a major topic of discussion at the next meeting of the G20 group, which will be held in November in Buenos Aires.

“It needs to be done at international level and of course it will be at the agenda for the G20 meetings in Argentina,” he said.

Prime Minister Theresa May – who spoke at Davos about artificial intelligence and the social responsibility of tech companies – agreed with Hammond that the handling of cryptocurrencies needed consideration.

“We should be looking at these very seriously precisely because of the way they can be used, particularly by criminals,” she said. “It is something that has been developing. I think it is something that we do need to look at.”

Cryptocurrencies were touched upon by other panels at the 2018 WEF. Thomas Jordan, chairman of the Swiss National Bank, also stated that cryptocurrencies should be regulated, while Professor Joseph Stiglitz, the Nobel prize-winning economist and former chief economist of the World Bank, expressed greater scepticism about the future of cryptocurrencies, arguing that they have no value.

“We have a good medium of exchange called the dollar,” said Stiglitz. “We can trade in that [so] why do people want Bitcoin? For secrecy. The banking system can and is already moving towards greater use of digital payments, but you don’t need Bitcoin for that.”

As regulations on Bitcoin and other cryptocurrencies are introduced to crack down on the criminality that the mostly-anonymous currency enables, the currency will become effectively useless, he argued.

“By regulating the abuses, you are going to regulate it out of existence.”

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