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This article was first published in the February 2016 China edition of Accounting and Business magazine.

The Bank of England is looking into launching a national digital currency for the UK – a reform that could have a hefty impact on how accounts are kept in most British companies. While public confidence, trust, understanding, security and the sheer level of detail would make such a move tough to undertake, the UK central bank’s chief economist Andrew Haldane has said that the bank is considering the idea. 

His comments, made at Portadown Chamber of Commerce in Northern Ireland in September last year, came among a series of moves by governments and banks indicating they are prepared to bring virtual currencies in from the cold. In the US, a draft law to regulate virtual currencies was recently debated by the country’s Uniform Law Commission, which proposes legislation to US states to promote regulatory harmonisation.

This revelation marks a sea-change in thinking on virtual currencies, which only a year ago were the subject of intense criticism from the law enforcement and financial regulators, and efforts to ban them worldwide. Indeed, that remains the status quo in some jurisdictions. Russia, China, several EU nations – for example, Slovenia – and smaller jurisdictions, such as Bolivia, have banned the use of virtual currency market leader Bitcoin.

But this law enforcement effort has also led to police and regulators taking a closer look at virtual currencies and is encouraging some to think about how they can be brought into the ambit of standard regulated financial systems. This could see them used legitimately by companies and subject to professional accounting assessments. 

Cybercrime summit

At the latest Europol-Interpol cybercrime conference (30 September-2 October 2015) at The Hague, the Netherlands, Accounting and Business was told that the EU and global police agencies are training key staff in virtual currencies and in how they can be misused. A programme of courses was launched in Japan and Singapore last summer and was scheduled to move to Brussels as we went to press.

Security authorities seem to be taking a two-pronged approach: cooperating with virtual currency operators to help them develop legal currencies while also working hard to combat those who persist in misusing them.

The currency operators themselves are taking steps to formalise their processes, with former lawyers and advisers to law enforcement agencies taking up jobs within virtual currency businesses, especially in the US, in the past year. Wil van Gemert, Europol’s deputy director of operations, told the conference: ‘The links between law enforcement, government and virtual currency operators are developing all the time. Former government people are moving into the commercial sector and [there is] increased cooperation between the operators and law enforcement.’

Olivier Burgersdijk, head of strategy at Europol’s European Cybercrime Centre, added: ‘Virtual currencies offer anonymous payment systems, so there is no ID. Bitcoin is the number one digital currency for cybercriminals. But it is also used by legitimate groups, so we do not want to take it down.’

There were suggestions at the conference that the banks are looking to introduce their own virtual currencies. Conference delegates from HSBC and Barclays informally confirmed to Accounting and Business they were interested in these developments – but would not give details. 

Meanwhile, Europol signed an agreement with the European Banking Federation (EBF) in September 2014 to formalise cooperation on cybersecurity. Conference speaker and EBF executive director Sébastien de Brouwer called for further legislation to regulate Bitcoin and other virtual currencies. ‘Bitcoin is already used for money laundering and fraud,’ he said. ‘Banks are being pushed to allow some use of these currencies but it needs much more common work between us all.

‘There is the possibility of a mature market for virtual currencies. The discussion is progressing in the right direction. This will be served by having good legislation.’ 

He added that his staff were working on compliance issues and legislation that would offer ‘privacy for users but accountability to law enforcement’, and that the EBF had discussed the issue with EU finance ministers. ‘Law enforcement know that criminals are using Bitcoin. It’s a very tough nut to crack. They encrypt the currency on the darknet, so it is very hard to trace. We need global coordination because no single country can deal with it on their own.’

Benoit Godart, Europol liaison officer at the Singapore-based Interpol Global Complex for Innovation (IGCI), said: ‘We need to work to achieve new legislation,’ especially working with EU policymakers.

A European Court of Justice ruling in October exempted Bitcoin exchange transactions from VAT in the EU. The decision was taken to mean that the court recognises Bitcoin as a legitimate means of payment. Some commentators at the conference added that this would help Europe catch up with US regulatory progress on virtual currencies.

Blockchain key

Noboru Nakatani, the IGCI executive director, who has worked with Japan’s Cyber Defence Institute, stressed that Bitcoin’s blockchain (the public ledger that records Bitcoin transactions) offered regulators the chance to control and monitor virtual currency transactions. He said: ‘The information in the blockchain and how it works is something we need to use and we must be very proactive in anticipating threats from cyberspace.’

Clearly, such data could be essential for accountants and auditors seeking to produce and check books for companies using virtual currencies, and also for financial institutions that have to log suspicious transaction reports with anti-money laundering agencies. Ryan Lazanis, founder of Canada-based online accounting service Xen Accounting, sees a bright future for blockchain, for example. He said: ‘The blockchain as a technology is far more powerful and exciting than Bitcoin as a currency. It is pure, secure and trustworthy.’

While Europol and European banking and technology companies discuss ways to improve virtual currency regulation and how to work with blockchain technology, the US has gone a step further with the formation of a Blockchain Alliance. The grouping includes US government agencies, the FBI, the Secret Service, the US Justice Department and virtual currency companies.

The idea is to save time by creating a single point of contact between the virtual currency companies and the agencies of the state. It is headed by Jason Weinstein, who left his post as US deputy assistant attorney general to join virtual currency business BitFury Group in March 2015. He said: ‘The alliance will facilitate discussion between the industry and regulators.’

And in another example of private-public cooperation, Microsoft has signed an agreement with Europol and had a speaker at the conference. Looking ahead, Richard Domingues Boscovich, assistant general counsel, digital crimes unit, Microsoft, said new technologies would provide further opportunities for cybercriminals. 

He said: ‘Cybercrime is going to be around for some time. As everything goes towards automation and everything gets computerised, criminals will gravitate towards these things. Creative people are great but they never think about the bad stuff and so now we look at all of our new products to see if there are unintended purposes to which they could be put.’ 

Andrew Burnyeat, journalist based in The Hague