Is the time right for Jersey and Guernsey to embrace the potential of Bitcoin, or should the islands steer clear for the sake of their financial services industries? Kirsten Morel weighs up the arguments
If it"s the roller coaster rides that get you going at the funfair, it"s likely Bitcoin is your kind of asset class when it comes to investment.
Had you bought, or mined, Bitcoin at the end of 2011, when the cryptocurrency"s value was just above 29 cents, come last November your investment would have gone through the roof, as one Bitcoin became worth just over $1,000.
On the other hand, had you invested at that peak, you would have lost almost half your investment by now - at the time of writing, Bitcoin had fallen to just over $571. Investing in Bitcoin is certainly not for the risk averse, and not just because it"s a volatile commodity but because nobody really understands what drives its value up or down.
Every rise and fall in Bitcoin"s value is followed by a slew of articles and commentators trying to explain why. Ironically, the strongest reason offered for the rising value is the enormous amount of media hype surrounding this digital asset. Yes, people understand there"s a limited supply of Bitcoin and that new coins are generated (mined) at regular intervals. Many also understand that Bitcoin is deflationary, but none of these facts help investors understand why there wasn"t a catastrophic fall in value when Mt Gox, the once dominant Bitcoin exchange, collapsed earlier this year amid various rumours and recriminations.
Given the uncertainty, why would anyone want to put their hard-earned money into such an enigmatic and volatile asset class? Moreover, why is Jersey looking at cryptocurrencies and blockchain technology (the technology that underlies Bitcoin) as a potential source of business for the future?
An oily parallel
Looking at the investment potential of Bitcoin, Daniel Masters, Director at Global Advisors, the investment firm that has just launched the world"s first regulated Bitcoin investment fund, compares today"s Bitcoin ecosystem to that of the oil industry 30 years ago.
“During my first 15 years, the oil market was completely fractured, there was little in the way of exchanges and there were multiple company failures and so on. To all intents and purposes, it looked similar to the Bitcoin market we see today.”
Global Advisors launched a commodities fund back in the late Nineties, which had the effect of creating a channel for capital to flow into the energy industry, sparking innovation and development that would otherwise have been slow to take hold.
“By investing, a wonderful miracle of economics came to pass,” Masters explains. “When people invested, it drove the price of oil higher and made other forms of energy viable. By 2010, the Chinese were using 10 million barrels of oil per day. Had that investment not occurred, God knows what would have happened.”
While oil"s viscous reality may seem a million miles from the ephemeral world of cryptocurrencies, Masters sees Bitcoin addressing issues in the banking sector in a similar way to oil in the energy industry.
“I look at Bitcoin and it has all the hallmarks that oil had in that first 15-year period. It also has a compelling story. When you look at the costs and limits of sending and receiving money, you realise that Bitcoin is a very interesting technology.”
It"s the enormous inefficiencies in the banking sector, those that were unmasked so brutally during the credit crunch, that have created the narrative that Masters believes Bitcoin is destined to follow.
Importantly for Jersey, the launch of the Global Advisers Bitcoin Investment Fund (GABI) was accompanied by a great deal of press attention. As the world"s first fully regulated Bitcoin investment fund, GABI carries Jersey"s regulatory seal of approval. For a jurisdiction that does all it can to maintain a strong reputation as an international finance centre, this is no small move - particularly as Bitcoin is repeatedly linked with criminal activity.
Treading carefully
“We have a Sensitive Activities Policy,” says John Everett, Director of Funds and Policy at the Jersey Financial Services Commission. “This covers activities that could give the island a bad name. Bitcoin could fall into that.” As a result, GABI is available only to institutional investors or sophisticated investors with over a million pounds in assets (excluding a residential home).
“Reports from world regulatory authorities tend to agree that Bitcoin isn"t for retail investors and that there are risks,” says Everett. “Jersey"s expert fund regime means you won"t have retail investors involved in it and that you have to sign a declaration of the understanding of risk.”
As much as GABI is a world first, if Jersey"s involvement in Bitcoin is limited to hosting investment funds then it"s unlikely to become a significant industry. Tellingly, the launch of GABI was used by Jersey"s Government as an opportunity to welcome cryptocurrency business to the island, adding that this is only as long as it falls within Jersey"s existing regulatory framework.
Describing cryptocurrency as "business" is important because Bitcoin, according to Robbie Andrews, Co-founder of Bit.coin.je, Jersey"s cryptocurrency community, is much more than an asset class, and the wider Bitcoin industry is looking for a home.
“A truly global space has popped up in the last five years that has grown so fast and isn"t led by a single country,” Andrews explains. “It doesn"t have a geographical location to call home, and if you were to pick anywhere in the world, Jersey and the Channel Islands are as good candidates as any.”
Certainly competitive jurisdictions, most notably the Isle of Man, have stepped forward to show their willingness to accommodate Bitcoin businesses. However, there is little clarity about whether such public announcements, like the Manx government saying that it would enact cryptocurrency laws towards the end of this year, are designed to attract media attention or do in fact have substance.
Even Jersey"s much smaller sister island of Alderney got in on the act last year by announcing that it would partner with the Royal Mint to evaluate the feasibility of creating a gold-backed version of Bitcoin. The idea immediately attracted comments about reputational risk to the Bailiwick of Guernsey, of which Alderney is a part, and has since been put to bed.
Guernsey has since stayed quiet about Bitcoin and while island resident Toby Birch, a founder member of the UK Digital Currency Association, puts much of this down to regulatory fears, he"s hopeful for change.
“The regulator is very risk averse,” Birch says. “It"s a classic case of being protective and not allowing anything to happen. Having got off to an uncertain start, however, we will hopefully be able to fast-track some legislation in the year ahead.”
Guernsey"s slow start has, in Toby Birch"s mind, put the island “six months behind” and this is reflected in its lack of Bitcoin business activity.
Stealing a march
This slow start contrasts sharply with Jersey, which has more than a dozen businesses publicly accepting Bitcoin and which is openly talking about developing businesses based on Bitcoin or services based on blockchain technology.
“The way the blockchain works allows for a decentralised network of trust, or a trustless network,” explains Robbie Andrews. “Every transaction is time-stamped and verified by a massive network.”
Applications of this technology are being developed by a number of companies, including one in Jersey called Blockcraft. One view at the moment is that the blockchain can be used to remove the middle man from transactions, and while many professionals won"t be happy to hear it, it"s expected to be used to replace roles such as notarial services, centralised registers and accounting services.
“If you can have the same power as your lawyer or accountant in your PC, then you will save a huge amount of money,” says Andrews.
So Bitcoin has potential as an asset for investment, as a currency and, further down the line, as a technology that could reshape economies. Although initially reticent, regulators are moving to understand and accept Bitcoin and politicians are coming on side too. So if Jersey or Guernsey wants to make the most of Bitcoin, what would make the biggest impact?
Paradoxically, for a technology that poses a genuine threat to the banking system, Andrews sees banks as being key to jumping ahead in the Bitcoin race.
“You have a perfect storm of businesses that are generating a lot of money but no banks that are willing to deal with it,” says Andrews. “I think there"s a gap here that Jersey could take advantage of, and it will only be a matter of time before another jurisdiction does.”
Adam Cleary, Founder of London-based Bullion Bitcoin, agrees that finding a bank to deal with Bitcoin businesses is crucial, but is not a panacea.
“Access to banking is a critical issue, but other issues also impact the choice of jurisdiction, particularly taxation and regulation"” he says. “Fidor Bank in Germany is actively providing services to digital currency businesses, but this has not as yet resulted in an overwhelming advantage for Germany as a Bitcoin jurisdiction.”
As with most things in the technology world, it"s difficult for the non-techie to see beyond the hype, but in Bitcoin, which has thrived in the limelight, there is a great deal of substance. Whether it is this currency or another incarnation of blockchain technology, there"s a lot more of the cryptocurrency world to discover.
It"s perhaps too early to say whether Bitcoin will become an important part of the Channel Islands" economies, but there"s a passion driving those involved. And while ensuring that financial services reputations aren"t damaged, both Jersey and Guernsey have an opportunity to be among the first to explore this exciting new frontier.
The dark side of Bitcoin
Bitcoin is certainly not short of evangelists and it"s quickly come to the attention of the mainstream media. However, the early days of Bitcoin were littered with as many stories about its dark side as there were stories about its potential benefits.
Bitcoin"s popularity among users of Silk Road, an anonymous online marketplace hidden in the darker recesses of the internet, was one of the main drivers for the scare stories, which tended to focus on Bitcoin"s ability to enable people to buy drugs, engage in criminal activity or launder money with very little chance of being caught.
Ultimately, the FBI caught up with the alleged man behind Silk Road, Ross William Ulbricht, and as part of their investigation they seized 170,000 Bitcoins (over $100 million) from both Ulbricht and the site.
Earlier this summer, US Marshalls auctioned almost 30,000 coins seized from the site, which would have been worth around $17 million at the time - but Silk Road"s downfall did not stop a second version quickly coming online.
Bitcoin"s involvement with the shady site did not stop, and earlier this year $2.7 million worth of Bitcoins were stolen from Silk Road 2.0, highlighting not only the darker uses of Bitcoin, but also proving that, digital or not, a currency will always be a target for theft.