Mercator Report Finds Conflicting Bitcoin Regulation Harmful to Industry

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23 October 2014

Mercator Advisory Group has published a research note on global bitcoin regulation, making it the latest established name in the financial industry to release a report on bitcoin.

The note, titled ‘Global Digital Currency Regulations: Divergent Paths‘, examined trends in digital currency regulation and concluded that industry development is currently hampered by a lack of regulatory consistency.

“The global payments industry has been taken aback by the rise of the new payment technology represented by bitcoin and other digital currencies, which at its core has the potential to radically change the paradigm in which electronic payments are handled,” the report read.

However, the author warns that the response to digital currencies among regulators has been mixed, as true understanding of the benefits, opportunities and disadvantages of the technology is still lacking.

Mercator Advisory Group is an established advisory and consultancy firm in the financial industry that specializes in payments and banking analysis. The group began studying block chain technology earlier this year and this is its first report on subject.

A second research note, focused on remittances, is already in the works.

Regulation hampered by confusion

In an interview with CoinDesk, Tristan Hugo-Webb, associate director of the group’s International Advisory Service, and the author of the research note, discussed the group’s findings and forecasts.

Tristan said he was surprised by the spectrum of regulatory proposals issued by various jurisdictions around the globe. Financial regulators tend to be evenhanded when crafting policies, he said, but consistency is lacking in digital currency regulatory frameworks.

“In general, payment regulation tends to be copycat,” said Tristan. “You will usually see countries following other countries.”

However, that is still not the case in the digital currency space, as different jurisdictions tend to propose divergent solutions. Hugo-Webb thinks it will take a “couple of years” before we see governments understanding the benefits of digital currency. He added that more consistency will be possible once regulators fully understand digital currency technology, but that this may take a while to achieve.

“If you were to talk to regulators, I bet you not many of them would understand how bitcoin works,” Hugo-Webb said.

Divergent approach to regulation

Hugo-Webb attributes much of the confusion in regulatory circles to a lack of understanding and experience with the technology. Therefore he does not expect a lot of progress on the regulatory front in the short term.

He believes some jurisdictions will be in a better position to pass favorable regulation, however. Europe could potentially benefit from EU-wide rules, argued Hugo-Webb, but relatively small jurisdictions could decide to embrace digital currencies – with the Isle of Man as a good example.

“It all depends on what sort of regulation emerges. From how I see it, there are five categories that have come up so far,” said Hugo-Webb.

Jurisdictions that actively promote digital currency, like the Isle of Man and to some extent Ecuador, are in the first category. The second category is reserved for jurisdictions that choose to tax bitcoin transactions, while jurisdictions with transaction reporting requirements make up the third category. The fourth category includes jurisdictions that have issued public warnings about digital currency, but stopped short of taking any action on the regulatory front. Jurisdictions openly hostile to digital currency, like Russia and Bangladesh, belong in the fifth category.

Hugo-Webb expects most countries will eventually become more open to digital currency:

“I really think that over time we will see more countries move from having a neutral stance toward embracing digital currency one way or the other. The future of digital currency is bright. It will take time, but digital currency has a place. It is not going to be a fad that fades out over the next few years.”

Hugo-Webb pointed out that Mercator is not interested solely in bitcoin, which he described as a first-generation cryptocurrency, but in digital currency technology in general.

Competitiveness and adoption

The varied approach to regulation also makes some jurisdictions more competitive than others, as digital currency companies are more likely to incorporate in areas with a clear regulatory framework. The question of compliance costs cannot be ignored, as inadequate or burdensome regulation could render digital currency less competitive.

“It is going to face compliance costs, it is going to face pressure from the payments industry, which will demand a level playing field,” Hugo-Webb argued.

However, properly regulated digital currency services will gain, too, as companies operating in reputable jurisdictions with effective regulation will benefit from higher levels of consumer trust, thus attracting more business and offsetting compliance costs.

Hugo-Webb found that the financial industry remains divided into two distinct camps – companies that do not want to have anything to do with digital currency due to reputational risk concerns and companies willing to explore the new technology as a way of cuttings costs.

As far as the financial industry is concerned, digital currency remains a divisive issue and Mercator does not expect this to change anytime soon.

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