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As No-Deal Brexit Looms, UK Blockchain Startups Are Weighing Options

From longer approval processes to the threat they might lose access to the European market, it’s safe to say U.K. blockchain startups are looking for contingency plans.

A quick recap: in 2016, the U.K. held a referendum on whether to stay in the European Union (E.U.), with a majority of voters opting to leave the economic bloc. Since then, the government has been negotiating with E.U. officials on the terms of its exit – but recent hurdles have raised the specter of a “no-deal Brexit” that could lead to economic turbulence and uncertainty.

It’s that uncertainty that has some blockchain startups sweating about their future prospects – at least in the months ahead as politicians attempt to hammer out an agreement.

“Brexit is a hindrance to everything in the short term,” said Jamie McNaught, CEO and founder of Solidi Ltd, which is developing a blockchain-based payments platform that uses cryptocurrencies to facilitate money remittances.

He told CoinDesk:

“[It’s] because all fintech regulation experts and lawyers are busy with so many things at the moment. They wouldn’t be busy if the Brexit hasn’t happened. In terms of just getting time with people is difficult at this moment. Will it (Brexit) be a hindrance in the mid-and-long term? That really depends on how successful the Brexit will be.”

The startup is one of the four blockchain companies that were accepted by the U.K.’s Financial Conduct Authority (FCA) for a normally six-month-long sandbox test in December 2017.

Until this July, Solidi was still in the regulatory test, as “the whole thing is being held up by some of the requirement as to become regulated,” McNaught said.

What Solidi is waiting for is the approval of a money service business (MSB) license from HM Revenue & Customs, the U.K. authority that reviews anti-money laundering compliance. Solidi has waited nine months to get approved for the MSB license, but the process previously took about five weeks, and the startup is not the only company in this position according to the FCA, McNaught said.

Stormy horizon

To other blockchain firms who aren’t facing that specific issue, the ramifications of a “hard Brexit” have become a big concern.

Renat Khasanshyn, co-founder of Etherisc, a European firm offering decentralized insurance protocol, expects Brexit will create hurdles for users and developers of its protocol and, therefore, hamper client growth. The company’s platform allows providers to build insurance products on top of an open-source infrastructure.

But if negotiations around Brexit falter, cross-border market testing will be much harder, and compliance costs for providers will increase, as Khasanshyn explained.

“The users of our protocol will be impacted by Brexit negatively because they will need to comply with regulations in the U.K. and the EU, which will likely go in different directions,” Khasanshyn told CoinDesk. “And they will comply and pay for this compliance twice.”

For London-based blockchain startup Globacap, the biggest concern is likely to be the threat of the loss of passporting rights.

In its white paper on Brexit, the British government proposed new trade arrangements with the EU, suggesting the U.K. and the economic bloc maintain current agreements to trade goods but not services.

Under the proposal, British financial services companies such as banks, insurers and asset managers risk losing their passporting rights – which grant them unconstrained access to other EU markets – when the U.K. formally exits the bloc next year.

Myles Milston, CEO and founder of Globacap, explained that “normally, once [we] become a fully authorized securities firm, we get passporting [rights] into the rest of the countries in the EU.”

“However, obviously with Brexit, we might not get that passporting right anymore,” he went on to say. “So it doesn’t actually affect the sandbox test, but it might affect our business model after the sandbox.”

Sunnier shores

Unless a deal is struck to extend market access – at least for a transition period – these firms will have to pay up to open new bases of operation in the EU or face a severe loss of market access.

Blockchain companies that provide payment or e-money services, therefore, anticipate unfavorable impacts on their businesses, with a number of firms contemplating to set up separate EU subsidiaries to avoid being blocked from the market altogether.

Globacap is another project participating in the FCA sandbox, within which it is working on the issuance of debt and equity securities on blockchain in the FCA’s oversight.

As soon as the project goes through the test and is fully launched as a company, it plans to open an office in Europe and apply for regulatory clearance to avoid losing its passporting rights, Milston said.

“At the moment we are deciding where the best place is in Europe to start that,” he added.

Nivaura, a U.K.-based fintech company building an issuance and administration platform for securities, including tokenized securities, says its seeking approval from German regulators to open an office in the country.

“The passporting now takes about three months, and we can go anywhere,” said Avtar Sehra, CEO and chief product architect for Nivaura.”But if we have to go into Germany and set up a whole new business, there is a whole approval process. It could take from a year up to 18 months.”

Not all doom and gloom

Risks aside, not everyone that spoke to CoinDesk about the potential Brexit impact had a negative view of the situation.

Richard Cohen, a U.K.-based lawyer at international law firm Allen & Overy, contended that Brexit would have little effect on the blockchain industry as a whole – in fact, he sees it as a potential positive for the country in terms of its approach to fintech.

“The U.K. will be allowed to come up with a regulatory framework that is much more favorable to fintech companies and become a friendly jurisdiction in which banks can make the best use of blockchain and global opportunities,” Cohen argued.

Alastair Johnson, CEO of Nuggets, an e-commerce and payment ID platform, also struck a largely positive note, telling CoinDesk that his company has found the U.K. government to be a supportive partner.

And its actions to date – particularly through the FCA, which has sought to include blockchain and distributed ledger startups within its sandbox cohorts – bear out that assertion

“The U.K. is very supportive at the potential of innovation in fintech and technology as a whole,” Johnson said. “And I think they will also see that as an opportunity to create markets, continue growth and associate with Europe and the world as a whole. It’s everything that driving the support.”

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How Will the UK Deal With Crypto After Brexit: Expert Take

In our Expert Takes, opinion leaders from inside and outside the crypto industry express their views, share their experience and give professional advice. Expert Takes cover everything from blockchain technology and ICO funding to taxation, regulation and cryptocurrency adoption by different sectors of the economy.

If you would like to contribute an Expert Take, please email your ideas and CV to george@cointelegraph.com.

The United Kingdom and the European Union failed to reach an agreement on an orderly uncoupling, which is a major geopolitical and strategic event, with global implications. Uncertainty about the outcome of the Brexit referendum has already started to weaken growth in the U.K. — which is expected to get worse, based on a highly classified cabinet briefing, with economic fallout in the rest of the Organization for Economic Cooperation and Development countries. The International Monetary Fund said the EU could lose as much as 1.5 percent of gross domestic product from a “no-deal” Brexit, while the U.K. would suffer an even bigger hit — a 4 percent loss of national income.  

Membership of the EU, including the ‘‘The EU Blockchain Observatory and Forum,” with EU’s fintech market valued at $6 billion, has contributed to the economic prosperity of the U.K.  ‘‘Digital technologies like blockchain can be game changers for financial services and beyond,’’ explained Mariya Gabriel, Commissioner for the Digital Economy and Society. Kay Swinburne, a member of the European Parliament (MEP), agrees on blockchain’s utility, but is nevertheless convinced that London’s fintech sector can ensure its future without the EU Blockchain Observatory Forum and without relying on an equivalence for mutual access to EU markets after the country leaves the trading bloc. Because, the U.K. and its territory Gibraltar — the age-old tax haven that has repositioned itself as the new crypto venue of choice — have already created separate virtual currency and blockchain technology initiatives as strategic tools for income growth and national competitiveness. The U.K. has also negotiated a unique deal for uninterrupted access to the EU’s Galileo satellite system in order to sustain their digital economy post-Brexit.

David Coburn, the MEP who foresaw the occurrence of Brexit as a result of EU’s Capital Markets Union initiative said, “I am looking forward to Brexit. Tax competition is healthy.”  

Brexit and the EU’s cryptocurrency and blockchain legislative initiatives

From a legal framework perspective, crypto-assets — unlike financial instruments — are not greatly harmonized in the EU nor highly regulated in the majority of EU member states. The differences in their approach to crypto-asset regulation is due to the differences in their legal framework, the economies and the institutional practices of the respective authorities.  

22 out of 28 EU member states — including the U.K. — have signed on to the EU’s blockchain partnership to share experiences and exchange expertise in technical and regulatory fields and prepare for the launch of EU-wide blockchain applications across the Digital Single Market for the benefit of the public and private sectors. Croatia, Cyprus, Denmark, Hungary, Italy and Romania have opted out.

The EU has been pushing for cryptocurrency regulation at the European and even G20 level, coordinated by the OECD, taking it’s regulation out of the control of member states. The EU also took the lead in proposing an EU-wide digital tax ahead of the OECD. All the while, EU member state cryptocurrency classifications for income tax and for VAT purposes, as well as their taxation, vary widely from member state to member state, with cross-border tax applications as detailed in current tax treaties remaining uncertain. These multiple tax issues are compounded by the individualized implementation of the EU’s Anti-Money Laundering (AML) laws by member states that will likely create barriers to pan-European blockchain implementations — as pointed out by Carlos Torres, CEO of Spanish bank Bilbao Vizcaya Argentaria (BBVA), who, after issuing the first blockchain-based loan, cautioned that blockchain technology is ‘‘not mature’’ and faces major challenges, including the ‘‘volatility of underlying cryptocurrencies’’ and possible compatibility issues with tax authorities and financial regulators.  

1. The Capital Markets Union

The EU unveiled its plan for a Capital Markets Union and a single market for technology-enabled innovation in financial services, with EU-level legislative proposals to enable the financial sector to make use of the rapid advances in new technologies — including in blockchain, artificial intelligence and cloud services — to lower the cost of funding and make the financial system more integrated and resilient in the event of another financial crisis.    

Petru Sorin Dandea, of the European Economic and Social Committee explained that “fintech players should be subject to the same rules as the financial sector.” He believes that the Digital Single Market plan could be instrumental in deepening and broadening the capital markets by integrating digitization, which could serve as a stimulus for fintech.   

The U.K. has been a leader in the CMU initiative, but now with the Brexit deadline approaching, it plans to implement its own crypto regulations before 2019.

Members of the European Parliament also passed a blockchain resolution in the Industry, Research and Energy Committee in order that the EU remains a global hub for fintech — operated on pan-European platforms — post-Brexit, when the EU’s largest financial center, London, leaves the union. As Daniel Mareels of the EESC explained:

“It is clear that, post-Brexit, the EU will have major financial centers, including the U.K. and Switzerland, as neighbors. In this context, it is important for the EU to consolidate, integrate and ensure that it is in a strong position. The establishment of the CMU and the recent initiatives on fintech and the digital economy are part of these ambitious objectives.”

Undoubtedly these are historic times for London, which is losing financial institutions to other EU financial centers on a daily basis. Over the past decade, London was featured center stage in two major events. From 2007 to 2008, it was engulfed in the global financial crisis. Major banks utilized  the U.K.’s network of offshore tax havens in structuring opaque mortgage-backed securities that caused the credit crisis that wreaked havoc on the world economy, threatening the collapse of the world’s largest financial institutions and which was cured by the bailout and nationalization of banks by governments. The U.K. led the massive bailouts with $850 billion that was required to save stricken institutions, which became the target of popular resentment and public scrutiny. And since June 2016, London has been forced to deal with a second major challenge: managing the ongoing difficulties posed by the decision to leave the EU. A decision that has jeopardized its role in opaque, offshore euro-transacted business.

Nevertheless, to skillfully transition from Brexit, London is forging new alliances with Australia, Brazil, Canada, China, Israel, Russia, South Africa and South Korea — countries that have solid commitments to blockchain implementation.  

2. Anti-Money Laundering

The EU has amended its fifth Anti-Money Laundering (AML) directive for crypto-asset, beneficial-ownership disclosure rules on April 19, but this amendment will be transposed into member state national laws in an individualized fashion within the next 18 months — by January of 2020.

Vera Jourova, a member of the European Comission responsible for Justice, Consumers and Gender Equity, at a Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) meeting, explained that ‘‘there is a lack of implementation of AML by 20 member states, as well as very poor cooperation among member states in enforcing AML.’’ Banks are free to move capital across EU states and beyond, but checks on money laundering and other financial crimes remain largely a national competence — a mismatch that EU authorities say hampers transnational/cross-border controls and creates financial stability risks. Some member states are calling for a new body to be set up to counter money laundering at the EU level, while others favor the idea of giving more power to one of the existing EU financial regulators, such as the European Banking Authority (EBA).  

The U.K. launched a new AML watchdog in the beginning of this year and has indicated that, despite Brexit, it intends to adopt EU’s fifth AML directive that is designed to combat terrorism and money laundering, in a move that could unmask the beneficiaries of thousands of secretive trusts for the first time. The directive will apply only to the U.K., rather than its satellites. U.K.-affiliated offshore financial centers will be left to decide whether or not to adopt some or all of the measures.

3. Anti-Competition

The European Parliament Committee on Economic and Monetary Affairs (ECON) sees crypto assets as an indispensable element of European fintech but warns against anti-competitive behavior by traditional banks, which is monitored by the EU Antitrust Commission.  

The EU Antitrust Commission also monitors aggressive tax planning — including by crypto-businesses — that skews competition within the EU. Ricardo Cardoso, the spokesperson handling Commissioner Margrethe Vestager’s portfolio, said that the EC ‘‘has no ongoing investigations concerning cryptocurrency-related issues and we would never speculate on such matters.’’ Instead, TAX3 was established, which has been a threat from the EU to the U.K.’s network of offshore tax havens.  

4. Digital Tax

With a long-term solution of taxing digital firms being postponed until 2020 by the OECD, the EU Commission took the lead by proposing an EU-wide digital tax ahead of the OECD — a brand new taxable nexus, ‘‘digital presence’’ or virtual permanent establishment concepts, which are not addressed in current tax treaties. As Krister Andersson of the EESC said:   

“When assessing the effective level of taxation of the digital sector, the EESC underlines the need to take into account the changes in the tax codes going forward, due to the ongoing implementation of BEPS rules and, in particular, to consider the substantially increased level of taxation in the U.S. of U.S. digital firms operating in the EU, due to changes in the U.S. Tax Code.”

U.K. Chancellor of the Exchequer Philip Hammond disagrees and has called for a global approach to digital taxation through further dialogue at the OECD — rather than pursuing the EU solution.

5.VAT

For the most part, member states characterize crypto-assets as something other than ‘‘legal tender.’ But despite this fact member states — except for the Czech Republic, Estonia, and Poland — as well as the U.K., follow a 2015 decision by the Court of Justice of the European Union that exempts cryptocurrency transactions from VAT because ‘‘Bitcoin’’ had no other purpose than to be a means of payment.

On July 16, the U.K. Parliament voted to amend the Brexit Customs Paper to ensure the U.K. does not remain within the EU VAT regime post-Brexit, which means that the U.K. will not attempt to collect EU VAT on behalf of other EU states, enjoy many cross border trade VAT simplifications, nor remain subject to European Court of Justice rulings on indirect tax.

Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD..

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Blockchain Can Help UK 'Stay Relevant' After Brexit, Says EU Lawmaker

A British Member of the European Parliament (MEP) has called on the City of London and the Bank of England to embrace blockchain technology as a means of staying relevant in the post-Brexit era.

Kay Swinburne, who is also the most senior legislator on the EU’s Economic and Monetary Committee, told Business Insider that “the conservative status quo is now too risky with Brexit,” and that the U.K. must embrace distributed ledger technology (DLT) to make its markets more efficient.

Swinburne reportedly said:

“The UK post-Brexit: how does the City of London stay relevant? The City of London stays relevant by suddenly becoming the proponents of the new technologies and not just patching existing systems to make them work post-Brexit, actually leapfrogging.”

The MEP added that she felt that a post-Brexit Britain was better positioned than the EU to benefit from blockchain technology, but only if it is prepared to take risks.

Comparing the blockchain moment with the “Big Bang” of the 1980s – an uptick in market activity after the swift deregulation of the markets under Margaret Thatcher – she said, “We’ve got proof of concept of DLT in so many areas. It now needs to be scaled up. We’ve got to take some risks. We have the opportunity to really make a difference in a way that I don’t think Europe post-Brexit is going to be able to do.”

The Conservative Party MEP also appealed to the Bank of England to incorporate blockchain into a more modern monetary policy vision, arguing it should be the first central bank to “open up” and accept that future monetary policy “doesn’t involve issuing notes all the time, maybe it involves other alternative payment systems.”

The U.K. has demonstrated continued interest in blockchain. Most recently, the government’s technology development arm, Innovate UK, announced in January that it plans to invest £19 million ($26.6 million) in projects contributing to “the fields of emerging and enabling technologies” including distributed ledger technologies.

Previously, in late 2016, the nation’s finance watchdog, the Financial Conduct Authority, launched a regulatory “sandbox” to provide a number blockchain-focused startups a test environment for new financial products.

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Deutsche Bank: Bitcoin Crash Among 2018 Financial Worries

The economy globally has continued its strong uptick throughout 2017, partially spurred on by very low interest rates and massive investment into various markets. However, according to Deutsche Bank Chief International Economist Torsten Slok, the major risks for the global economy in 2018 include a crash of Bitcoin.

Slok sees huge potential for volatility in the price of the cryptocurrency, as do other economists, and has indicated that the price may even see huge changes before the close of the current year. His main concerns include regulation, transparency, and disclosure, as well as volatility drifting into the overall market. He said:

“It’s mainly because it (Bitcoin price volatility) is something that I think financial markets so far have been discounting as a small issue,” Slok said. “We do worry a bit that it could become more systemic, in particular, if the current trends continue into 2018.”

One of many

While Bitcoin presents a potential risk for the market going forward, a multitude of other risks may well take down the economy first. Of particular concern are Brexit developments, US inflation rates, North Korea’s nuclear testing plans, and a potential housing bubble in Sweden or Norway.

Of course crypto fanatics would argue that Bitcoin actually hedges against all these other market risks, since it represents a non-fiat connected asset that is not prone to inflationary pressures or market fluctuations brought on by national reserve banks. By internal monetary manipulation, centralized entities produce greater risks.

For example, Mike Costache, an advisor of Hdac says:

“Bitcoin is anti-trust money that is that antidote to [economic crisis]. The US dollar after several rounds of Quantitative Easing (the exact equivalent of a Corporation purchasing its own bonds, which is self-dealing and more or less illegal) is a bubble. This is why I say ‘Bitcoin isn’t the bubble, it’s the pin.’”

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Bitcoin Under Fire – Profit for Gold?

Cryptocurrencies, especially Bitcoin, have flown a little too close to the sun recently, and it has seen them get burned by a few key monetary institutions, as well as governments. This attack on Bitcoin, as well as fear and speculation around other markets, could spell a good time for investment in gold.

Seen as an insurance policy, gold has been a steady and safe investment for hundreds of years. As markets, beyond even the crypto market, get spooked, investors could see a safety net in the precious metal.

Good time for gold

While all the attention over the last few months or so has been solely aimed at digital currencies and their astronomical gains, gold has not been suffering, although many thought it would.

Gold recently hit a new high of $1,350, and part of that was a $100 rise seen over three months for the steady commodity. It seems paltry for those who have been spoiled by swings as big as 25 percent in a day by digital currencies, but in its own right, it is a big jump.

Essentially, that jump, and new high, was reason enough for gold to be no longer considered a bear market – and all this while Bitcoin was making its own massive gains.

Why will gold profit from Bitcoin under fire?

As Bitcoin was rising, so was gold, but when Bitcoin came under fire from China, and JP Morgan recently, gold profited even more.

Gold was always seen as a safe and steady investment; not too much growth, but never really any decline. When sexy cryptocurrencies came along, with their 800 percent gains in less than a year, many put their funds into it.

However, in the bad times, and for those investors who are a little more cautious, gold acts as a good insurance policy, as well as a reliable option to diversify with.

Additionally, it only takes a relatively small number of investors around the world to decide to allocate five to 10 percent of their wealth to gold, to radically improve its valuation.

Real world factors aiding gold’s appeal

10 Reasons

It’s not only Bitcoin that has talk of bubbles and uncertainty around it. The stock market has shown many times it has its propensity to pop, and there is a similar bubble feeling at the moment.

The US stock market is already too high, and that has to do with a concentration of speculation into a very limited number of stocks in the NASDAQ. Lesser company stocks have already fallen.

The dollar is also weakening, as it has done since its inception. But, it has its own factors to worry about. None more so than its country’s leader, Donald Trump. Trump, as well as his war of words – so far – for North Korea, is putting a lot of doubt into financial markets, making gold again appear to be the safest and steadiest option.