Q&A: IOM's Peter Greenhill on new digital currency regime
Published 20th September 2014
What spurred IOM to recognise digital currencies, such as bitcoin? Was it related to the large number of locally licensed iGaming companies, given that sector’s dominance of bitcoin transactions?
The Isle of Man prides itself on recognising and welcoming innovation and then introducing the appropriate levels of regulation and control around these ideas. The parallels are clear between how we are now responding to the new digital currency age and how we reacted first to the emergence of iGaming several years ago. It should be clear to any observer that the digital currency “train” has not only left the station, but is gathering speed rapidly.
The ability that digital currencies give to transfer value almost instantaneously and almost free, without the issues of chargebacks and card refusal, has meant that this payment method is already growing at a much faster rate than PayPal when that was introduced. To ignore or delay taking action to protect the consumer, keep crime out and ensure that the operators in this market have the correct background and expertise to manage their businesses effectively would be a derogation of our responsibilities.
Digital currency companies, miners, exchanges, wallet solution providers and other support services moving to the Isle of Man will be able to immediately fit into a world class telecoms and power infrastructure that has grown up around the world leaders in iGaming and other e-Businesses that have made their home with us.
How will you manage to apply existing anti-money laundering and KYC standards to bitcoin and other virtual currencies, given their anonymity?
The existing AML and KYC codes on the Isle of Man are robust and are operating effectively, and we work closely with our gaming operators to ensure that these codes are followed correctly.
With regards to the anonymity question, one example of the ways that this can be addressed comes from GoCoin, who have just announced their incorporation on the Isle of Man and have designed a system which will connect public bitcoin keys with the individual that controls the corresponding private key. This design is flexible enough to cover both existing AML/KYC standards but also future trends as they emerge.
Why doesn’t the Isle of Man just forge ahead with introducing a full regulatory regime for digital currencies?
Industry innovation is moving at a tremendous pace, and introducing a full regulatory regime at this time would be both costly and may be well out of date before the rules are enacted. Further, international standards or restrictions may be introduced as the market develops.
Given the relatively small size of the industry, in comparison with the mainstream finance sector, we have decided to introduce a proportionate AML regime which can be implemented in a timely manner, protects the Isle of Man’s reputation and fights crime.
Will you now be looking to attract bitcoin casinos to the island, with a view to them becoming regulated as iGaming businesses?
We are already receiving interest from a number of gaming companies who recognise and applaud our approach to digital currencies and these will, of course, be dealt with under the control of our Gambling Supervision Commission.
What standards would iGaming-related bitcoin businesses need to adhere to, in order to establish there?
Those businesses would obviously have to adhere fully to our Online Gaming Regulation Act 2001 and to ensure that they have the appropriate AML/KYC and Combating the Financing of Terrorism measures in place, and that they fully protect all player funds. This means that any deposits or winnings are secure and can be enforced by law. Typically this is achieved through a segregated client account, not merely a separate account.
When will the new rules start to apply?
There will be two stages. First there will be the inclusion of digital currency activity in Schedule 4 of the Proceeds of Crime Act 2008, which will occur later in 2014. The effect of this will be that businesses will need to comply with the AML code.
Second will be the inclusion of digital currency activity in the Designated Business (Registration and Oversight) Bill 2014 which is still subject to Tynwald (our Parliament) approval and subsequent Royal Assent. It is expected that that Bill will be enacted during the first half of 2015. When enacted, digital currency businesses will be required to register with the Financial Supervision Commission, which will become responsible for oversight of their anti-money laundering compliance.
Will banks on the Isle of Man take business from new iGaming start-up businesses which handle digital currencies?
A number of the banks on the Isle of Man are already in discussions with gaming and other companies who are or want to be involved in some way with digital currencies. The Isle of Man is outside the EU, but the recent announcement by the European Banking Authority (EBA Opinion on “virtual currencies” 4th July 2014) makes very interesting reading.
Whilst they are recommending that national supervisory authorities discourage banks from buying, holding or selling digital currencies, they state that they would still allow banks to maintain, standard banking arrangements such as a current account relationship with businesses active in digital currencies.
How will digital currency mining be treated for tax purposes?
We would always suggest that companies apply for their own independent tax advice. The Isle of Man is currently considering a practice note in support of its recent announcements to clarify the stance of trading in bitcoins. In the UK, the buying of digital currencies and then selling for a profit would normally attract Capital Gains Tax, in the case of an individual, or a profit if undertaken as a business.
Whilst in other jurisdictions there may be taxation implications, on the Island there is no charge to Capital Gains Tax and zero percent taxation for businesses. In the case of miners, their activity may be considered in the same way as any other business on the Isle of Man (except banking business and land) and the general rate of corporate income tax therefore would be 0%. However,
we must stress that this will be clarified once the taxation guidance note is published.
What kind of response have you had from companies since announcing the initiative?
Since making our announcement regarding our approach to digital currencies, we have received a large number of enquiries from interested companies. Several of these have already visited the Island and have set up companies. Others are in the process of setting up site visits, and are discussing moving their operations to us.
At the recent Bitfin conference in Dublin, we had a steady stream of companies from all aspects of the digital currency industry seeking more information and arranging their fact-finding trips. We have made it very clear that we are only interested in those companies who embrace robust regulatory regimes and who share our values in protecting the consumer and keeping crime out. This approach has worked extremely well for the Isle of Man in iGaming, attracting world leading companies, and we expect that the same will be the case for the digital currency sector.