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London aims to become a bitcoin hub

U.K. policymakers are set to woo the burgeoning bitcoin industry on Wednesday, with a new study looking at the opportunities and risks involved with the technology.

In a speech at London's Canary Wharf in the east of London, U.K. Finance Minister George Osborne said the government had begun exploring the potential of virtual currencies and digital money, such as bitcoin.

"These alternative payment systems are popular because they are quick, cheap, and convenient – and I want to see whether we can make more use of them for the benefit of the U.K. economy and British consumers. I also want to be alert to the risks that accompany any new technology," he said.

Osborne was speaking at the launch of Innovate Finance, a new industry body for the "fintech" - or financial technology - industry, which covers technology including digital currencies, mobile banking apps, crowdfunding platforms and more.

"With the right backing from government, I believe we can make London the fintech capital of the world," he added.

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Bitcoin is a "virtual" currency that allows users to exchange online credits for goods and services. While there is no central bank that issues them, bitcoins can be created online by using a computer to complete difficult tasks, a process known as mining. Some 13 million bitcoins are believed to be in circulation, with a cap of 21 million — meaning no more bitcoins can be created after that point.

The digital currency has sparked interest by venture capitalists on both sides of the Atlantic but has also run into regulatory issues in many countries.

James Smith, CEO and co-founder of digital currency storage company Elliptic, said he welcomed a move towards regulation as it would likely reassure potential customers – such as hedge funds and big banks – about putting their money into bitcoin.

"A lot of the bigger financial players, such as banks, they've had all sorts of fines for AML (anti-money laundering) problems, and bitcoin looks a lot like cash so they're very wary of touching it because they don't want to fall into the same traps," he told CNBC.

"They feel a lot more comfortable with digital currencies when they know what the government's stance is on it."

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Bitcoin's price volatility has led it to be heavily criticized. The currency first first received international media attention in April 2013 which culminated in its price rallying over $100. Later in the year a regulatory meeting on Capitol Hill helped it surge above $1,000.

However, with Chinese authorities tightening the rules on bitcoin and a Japanese exchange filing for bankruptcy protection, investors decided to cash in on their holdings. The price has since remained steady at around $600 with little news flow this summer. The volume of trades has also reduced, according to data from bitcoincharts.com.

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London, already classed as a financial hub to rival that of New York's, has attracted industry sectors like tech startups and Islamic funding. Bitcoin transactions were initially taxed with a 20 percent charge in the U.K., but the country's tax authority announced it was scrapping this added cost back in March.

Greg Jarret, CEO of Bitcoin Superfund, a U.K.-based bitcoin investment vehicle, said there was the potential for Britain to become the world's bitcoin hub, but there were some stumbling blocks.

"Whether or not there's enough investment (in the U.K.), and whether we can outpace Silicon Valley in terms of VC (venture capital) money - that could be challenging," he told CNBC.

"British investors are much more conservative in their outlook. Having said that, the U.K. has a much better legal framework that the U.S."

In New York, regulators have already made their move and are currently weighing up a raft of new rules to regulate bitcoin and other virtual currencies. On July 17, New York State's Department of Financial Services proposed issuing a "BitLicense" that would protect consumers, prevent money laundering and enforce cyber security.

Elliptic's James Smith, however, described New York's measures as "very heavy handed" and said Britain's reaction was preferable.

"They're in danger of stamping out the business before it even takes off. The U.K. has – and Europe in general – have taken a stand-back-and-see-what-happens approach," he said.

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Many bitcoin enthusiasts remain defiant that their cryptocurrency should remain free from regulation, any centralized authority and any threat to its opaqueness. Jon Matonis, an executive director of the Bitcoin Foundation, which is a lobby group for the technology, has previously written about his concerns on regulation.

Writing on bitcoin news website Coindesk, he said that if new regulation meant that if users were required to give away internet protocol addresses - and therefore their locations - then bitcoins in that regulated jurisdiction could start trading at a discount price.

Bitcoin Superfund's Jarret, however, argued that regulation was necessary for digital currencies to really take off.

"The reality is there are a lot of great features in bitcoin and digital currencies in general for society," he said. "So it's important that it becomes widely used and the only way that's going to happen if it's regulated, so people feel comfortable using it."