The Curious Picture of Bitcoin in the UK

Thursday 13 March 2014

Continental Europe has embraced bitcoin in a way that even the US, the land of freedom and opportunity, has not. Across the English Channel, though, the picture is not as clear. Britain is home to an enthusiastic community of bitcoiners, but the UK as a whole is deeply ambivalent about the cryptocurrency. Whilst there are plenty of individuals who recognise the potential of bitcoin and are keen to explore its possibilities, the establishment – specifically the banks and the government – are rather more standoffish and uncertain. This conflict will likely both hamper bitcoin’s adoption in the UK and, paradoxically, fuel its rise as an unofficial currency.

London Skyline: Cmglee Horminan

London Skyline: Cmglee

Satoshi Square
In January this year, London saw its first Satoshi Square event. Satoshi Square is an informal, outdoors face-to-face meet-up held on the edge of the City of London – the city’s wealthy financial district and, indeed, the world’s financial capital. Here, the narrow streets and picturesque buildings of old-fashioned London, beloved by Gothic novelists of the Victorian age, butt up against the glass, steel and concrete monuments to progress; the imposing dome of St Paul’s Cathedral, designed by Sir Christopher Wren, is as much a part of the landscape as the ultra-modern ‘Gherkin’ or NatWest bank’s Tower 42. This is an area with great heritage and long experience in finance, and the evidence for centuries of prosperity is there for everyone to see.

Organised by Tom Robinson of Elliptic, the bitcoin vault and insurance start-up based in London, the event was attended by around 100 people at its peak. These bitcoin enthusiasts met to network, find out the latest news and engage in real-time trading of the style depicted in 1980s Wall Street movies: all shouting and waving to bid for coins, with the difference that these would then be exchanged using smartphone apps.

Satoshi Square is neatly illustrative of the UK’s ambivalence towards the world’s most popular cryptocurrency. On the one hand, it demonstrates the vibrant culture that is quickly growing up around bitcoin – not only in London but in cities around the country. On the other, it speaks volumes that its proponents operate in public, but outside of the establishment. Clearly, part of Satoshi Square’s appeal is the buzz and the opportunity to meet like-minded enthusiasts. But why go to the trouble of handing over physical money for bitcoins if there was a simpler way of doing it?

Buying bitcoins in the UK
It’s not hard to buy bitcoins in the UK. There are a number of websites that sell them, and the process is generally relatively fast and straightforward. What it is almost impossible to do – without the kind of live auction-style pit sale offered by Satoshi Square – is purchase them at competitive rates.

The leading sites – meaning the ones that make purchasing bitcoins as simple and economical as possible – all work in the same way. Upon agreeing to buy coins and providing their bitcoin address, the buyer is given an order code, the required payment in sterling and the bank details of the vendor. They are then required to log into their online banking, add a new payee – jumping through the hoops demanded by the banks to do so – and transfer the right sum of money, with the code as the transaction reference, to the vendor. The vendor checks their account, and when the money arrives they make the bitcoin transfer. Complicated? Yes. Expensive? Yes: you can expect to pay anything between 5 and 10 percent over the market price on the major European exchanges. Long-winded? Yes. Everything is done manually. Not only that, but at least two of the major sites make it very clear that only the given order code must be used as the transaction reference. Mention ‘bitcoin’, even once, and you are banned.

There is, at the time of writing, just one functioning automated bitcoin exchange in the UK. Its days may be numbered: the bank that deals with its transactions has just withdrawn its services, and the exchange is looking for another partner. Other UK exchanges have existed in the past, in some form, but all have run into problems when the banks refused to process their transactions. (Another still technically operates, but uses postal orders – money orders sent by old-fashioned snail mail – to move funds in and out.) The CEO of the only truly viable exchange recently wrote to all of his sites’ users with this request: ‘We have now been operating for 2 months. We have close to 1,000 registered users and an exchange which appears to run without errors. We have had some software glitches, but these have generally been put right within minutes. We have always appreciated your forbearance. So far, so good. Whilst we are holding on deposit a great deal of your money and, in cold storage, a large number of bitcoins, you seem loathe to trade in great numbers. We seem to have ended up running a “bank” rather than an exchange! Please let me know how we can change things to encourage you to trade.’

Chief amongst the reasons for this reluctance is not the trading fees, which stand at a very reasonable 0.25 percent. It is the cost of transferring fiat money both in and out of the exchange: £10 (€12) each way. This made it prohibitively expensive to purchase small amounts of bitcoins. Instead, it was cheaper to buy them from one of the sites mentioned above and transfer them in – at least that is free. But once they are in, there is little to do with them. The low volume of trades means that the spread between bid and ask is unrealistically high, and consequently few trades are worth it – a nasty Catch-22 to fix. The steep fees involved are exactly the kind of problem that bitcoin takes in its stride: in obstructing bitcoin’s adoption, the banks are both highlighting the very problem they cause and pointing to its answer.

There is another alternative for Brits wanting to buy bitcoins: the European exchanges themselves, including bitcoin.de. As members of the SEPA region, there is nothing to stop Brits from sending money to one of these and buying bitcoins at market rates. Although British banks will charge for the transfer, this is still by far the best option for larger bitcoin orders. If you’re planning to sell your coins, let alone trade in any volume, it’s practically mandatory. Dealing with a proper, large, well-established exchange removes many of the issues around trust or competitiveness that otherwise persist for UK buyers. The sad reality is that the successful, professional, high-volume face of bitcoin trading in the UK is actually firmly European.

Bitcoins for beer
You could be forgiven for thinking that the UK banking system doesn’t want its customers to use its services to buy bitcoins, then. But the Brits are an enterprising bunch, and even in London – especially in London – heart of the financial system, they have found ways to buy, sell and trade in bitcoins. Bitcoin ATMs arrived in London long before they started appearing in other major cities. Amid a sea of recent press releases about new machines springing up around the world, a BBC news story stands out.

‘On the 39th floor above Canary Wharf, overlooking London’s finance centre, I found a cash machine with a difference. This ATM chews up your £10 notes rather than spewing them out, and in return you get a computer code. This is the world’s first Bitcoin cash machine and if the people showing it to me are to be believed, it shows us the future of money.’

The story is dated 2 July, 2013.

Kings College by Alan Dunn

Punting opposite Kings College by Alan Dunn

A short train journey away is the historic University town of Cambridge. Like London, it’s a city with long heritage and a reputation for excellence in all fields. Unlike London, there’s less outward evidence to progress; although the outskirts have an extremely strong tech scene (known as ‘Silicon Fen’), the centre is still dominated by buildings centuries old. The crenellations of the immense Gothic chapel of Kings College may be the most impressive landmark, but they are not the oldest; churches stand here that are almost 1,000 years old, predating even the university itself. Among the city’s eight centuries of prestigious college buildings are scattered little shops and tearooms, pubs and student haunts. Soot-blackened sandstone, worn smooth by the ages; red clinker buildings tucked away here and there; little gardens back onto the river winding through the backs. In the summer months the Cam is full of punts lazily making their way up and down as the students celebrate the end of another arduous year of lectures and exams, their training for entrance into the elite jobs of politics, science, economics and broadcasting that they have traditionally dominated.

Cambridge was home to Alan Turing, the computer scientist and cryptanalyst whose work was fundamental in cracking the World War 2 Enigma cipher. If any city in the UK could be expected to embrace bitcoin, it is Cambridge. Such is the case: hunt around the city and you will find many aficionados, as well as numerous businesses that have taken the step of accepting bitcoin for their goods. At least two pubs in the city accept bitcoins as payment for beer, and have done since June 2013 – well before the cryptocurrency hit the big time with its all-time highs of that winter and the press interest that accompanied it.

Bitcoin tax
So, the British banks don’t like bitcoin but entrepreneurs have recognised its merits and are keen to capitalise on both its advantages over fiat and the media spotlight that follows it around. What about the government?

The UK’s tax authorities appear more confused than antagonistic. Back in June 2011 an article about bitcoin appeared in the popular magazine New Scientist. The article, largely positive about the potential of bitcoin, quoted the official tax position at the time: ‘HMRC, the UK government’s tax-colllecting body, says people do not incur a tax liability when trading in bitcoins as long as they do not turn their profits into regular cash. Once conventional money is involved, however, the income could become taxable, HMRC told New Scientist.’ Full marks for making a comment at all, but ‘could be taxable’ is not exactly the clarity that accountants require.

Fast forward a couple of years and HMRC had woken up to the reality that conventional money could be involved, and in significant quantities, as people converted their hugely-appreciated coins into cash. In November 2013 HMRC apparently classified bitcoin as vouchers. CoinDesk quotes Tom Robinson, CEO of exchange BitPrice (which later ‘rebranded’ itself as Elliptic, a bitcoin storage and insurance vault rather than exchange service), as extracting the following information from HMRC: '“Our Policy teams’ view is that these are not currency. It is our view that the provision of bitcoins is the sale of vouchers. These are likely to be ‘single purpose’ vouchers.” Robinson said: “This is obviously an entirely inappropriate classification for bitcoin: they aren’t issued by anyone, they don’t have a ‘face value’ and they can be redeemed for a wide range of goods and services.”’

Even HMRC itself seemed confused about whether they should charge VAT on bitcoin sales, with different cases treated in different ways. Two months later (following meetings with Robinson aimed at educating the tax authorities about bitcoin’s nature) and HMRC was actively considering reclassifying bitcoin as a private currency, reducing the tax liability and removing the need to pay capital gains tax. At the time of writing, HMRC have just confirmed that they will not charge VAT on bitcoin profits. The news was greeted with great enthusiasm by bitcoin enterprises around the world, and points to London becoming the bitcoin capital of the world. The Bitcoin Foundation even plans to relocate there in the coming months, further cementing the UK reputation as a pro-bitcoin country – despite the obstacles posed by its intransigent banking sector. A look at the bitcoin business directory shows that it is already a frontrunner, with some 340 or so businesses listed. London alone has over 90, putting it on a par and even exceeding some of the European centres of action.

Conclusion
Bitcoin has many fans in the UK. The country compares favourably for downloads of the bitcoin client with the US, Nordic countries and other leading bitcoin adopters, there’s a thriving scene of meet-ups and a burgeoning business culture.

It’s equally clear that the British banks don’t want to know about bitcoin and have done what they can to push the problem, as they see it, out of sight. Rather than embrace it – or at least enable it, as the European banks appear to have done – they have stonewalled and back-pedalled on any involvement, making it harder than necessary for people to buy bitcoins. Meanwhile the tax authorities, like many others around the world, are making up policy on the fly but have apparently come out as firmly pro-bitcoin.

Some of this is just down to bitcoin’s status as a new and disruptive technology and will be ironed out in due course. But London is the world’s financial capital, and the banks that have made it the powerhouse it is are dragging their heels.

Regulation is anathema to bitcoin purists, who see the cryptocurrency as the solution to the problems of government interference in the money supply and of the corporate financial system. In the UK, however, a little clarification might just make things easier for everyone.

A version of this article was first published on bitcoin.de, one of the foremost Euro exchanges.

Brandon Hurst


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