by Ariadne Panagiota Fatsi, researcher of the unit «International & European Law»

1. Introduction

Although digital currencies have been around since the late eighties and became more widespread in the early nineties, governing bodies, such as the EU, have yet to produce and approve a set of common regulations concerning digital currency (and especially cryptocurrency) in all of its brands and forms and in all nations which regularly use it. This research attempts a deeper understanding of the fundamentals of digital currency and the problematic aspects of its nature, which are, after all, the reason why uniform regulations are rendered indispensable.

In the first part of this research, we will firstly refer to some key terms and definitions concerning the nature of these currencies. Then, the criticism concerning mostly cryptocurrencies will be discussed. On chapter 4, we shall take a closer look to the common regulations within the EU, while chapter 5 will examine the possibility of global uniform regulations.

2. Digital Currencies and Cryptocurrencies: Definitions

A digital currency, also referred to as digital money, electronic currency or cybercash, is a medium of exchange available only in digital form. As of that, it is not a tangible currency, as it is not accessed in physical form (e.g. banknotes, coins). These currencies share the characteristic that they have a value in the real world and can be used to afford products and services. Digital currencies are generated, stored and transferred in the digital world and they are for the most part not associated with the government of any country. They can be accessed or transferred through devices such as but not limited to computers, smartphones, tablets etc. Their ownership can be transferred instantaneously regardless of borders. Digital currencies can be divided into soft and hard ones. On the one hand, soft digital currencies are the ones on which transactions can be cancelled and payments can be reversed. This is how PayPal and credit cards work. On the other hand, hard digital currencies work more like cash, are cheaper to operate, but unless “softened” by a third party service they offer no ability to reverse payments or dispute a transaction. A main example of hard digital currencies are cryptocurrencies.

Cryptocurrencies fall under the category of digital currencies, but there are substantial differences between these two. A cryptocurrency is based on cryptography, which includes a significant amount of algorithms and mostly mathematics to keep communications secure. While attempts on legislation concerning digital currencies have already begun in both the EU and the US, cryptocurrencies have not yet been addressed in regulations, mainly because of their volatile, partially anonymous and decentralized nature. The blockchain technology makes cryptocurrencies absolutely decentralized, making the users the main regulators of the transactions. Cryptocurrencies can be bought with “real” money or be “mined”. The concept of mining is fundamental to gain an understanding of how cryptocurrencies work. Mining (downloading a certain software and having one’s computer solve calculations to generate cryptocurrency) is the way of ensuring scarcity for the cryptocurrency by making the acquisition of it a hard and time-consuming endeavour. For instance, the Bitcoin program is designed to only make 21 billion Bitcoins available for mining (of which about 17 billion were already mined in December 2017). Meanwhile, mining a new Bitcoin is becoming increasingly difficult; therefore, the 21 billion mark will , according to calculations, be hit in 2140.

 3. Criticism

The Bitcoin is, by its own definition and nature, unstable as a currency. This is the reason why it poses threats on many different levels including the legal regulations, the financial stability, taxes and transparency of transactions. The value of Bitcoins has fluctuated considerably since their introduction to the digital currency market, reaching the peak of their value in 2013. It is possible that this is caused by the infancy of the currency and we can speculate that its value will eventually stabilise, but it could also be suggestive of idiosyncratic and innate weaknesses, such as the lack of a central regulatory authority that would work as a steadying factor. This problematic nature could be considered the primary common denominator of all cryptocurrency.

The non-existent regulatory system is yet another major issue. Digital currencies are centralized. This means that they are ran by a central system, a group of people and computers who can guarantee the service (bank, company, etc.) and provide solutions in case of dispute. Cryptocurrencies are decentralized. They are based on a transaction chain (also found as Blockchain) where all the transactions are recorded and the community makes the regulations. Digital currency services require identification. It is very common that the user will have to provide ID details, picture, address, phone number and other personal data to be able to use the service. Cryptocurrencies are not completely anonymous, as all transactions are recorded, but confidential information is not necessary to use the service. Digital currencies are, however, not transparent, as some information is confidential. On the Blockchain, one can access all the transactions.  However, one could argue that cryptocurrencies are not that transparent either, because one can see the transactions. Τhere is no connection, however, to a name or any personal data. As the text of the Anti Money Laundering EU Directive suggests, “The inclusion of providers engaged in exchange services between virtual currencies and fiat currencies and custodian wallet providers will not entirely address the issue of anonymity attached to virtual currency transactions, as a large part of the virtual currency environment will remain anonymous because users can also transact without such providers. To combat the risks related to the anonymity, national Financial Intelligence Units (FIUs) should be able to obtain information allowing them to associate virtual currency addresses to the identity of the owner of virtual currency. In addition, the possibility to allow users to self-declare to designated authorities on a voluntary basis should be further assessed (article 9).”

Transaction disputes are an area in which digital currencies still rule supreme, as the central authority can deal with a number of arising issues and cancel payments upon the request of the user or the authorities. With cryptocurrencies, however, the Blockchain cannot be erased without the consent of a majority of users and it is highly unlikely that they will consent to changes, as even in significant hacking cases like “The hack of DAO”[1] the response was mixed and no actual decision was made. Due to this fact cryptocurrencies are ideal to host money laundering, fraud and other criminal transactions and these are the biggest concerns when discussing about whether the cryptocurrencies of today will survive, even though they face the same problems their predecessors did.

Given the currency is not regulated by a consolidated body, it creates concerns regarding law enforcement and taxation authorities due to its obscurity and lack of digital footprints, and therefore the ease with which it can be exploited for money laundering and various illegal deeds. This is exhibited in the case of Liberty Reserve, which basically put forward a predecessor-product to popular crypto currencies of the present. Liberty Reserve was forced out of business by U.S. federal prosecutors in May 2013 who charged its creator, Arthur Budovsky, and six accomplices with money laundering. Liberty Reserve was alleged to have been the medium/means to launder the sum of more or less $6 billion in criminal proceeds during its short-lived history of operations. A foremost present-day dispute over crypto currencies like Bitcoin is on transparency. Since the data of the transactions are absolutely transparent (the procedure, the hows and the whats), the persons associated to any given transaction, as with cash transactions, cannot be straightforwardly pinpointed. If digital currencies become more popular, it would necessitate the consideration of revenue recognition in regards to any transactions undertaken with their usage, the accompanying measurement criteria and possible taxation implications, the category within which they would fall (cash or non–cash assets), and consequently the accounting policies that should apply (depreciation). If the acquisition of a digital currency is considered an asset, it should be deliberated how one would account it for in book-keeping and records, for instance what follows when an accounts receivable entry is paid via cryptocurrency (e.g. Bitcoins).

4. Common Legislative Attempts in the EU

Uniform regulations on a global scale have not been achieved to this day, as most Member States of the United Nations have been struggling with regulating digital currencies within their own borders. However, a step to the right direction would be the AML Directive of the EU (Directive 2015/849), especially after the 4th amendment (Directive 2018/843). The AMLD has been welcomed with much relief by analysts worldwide and is the first common regulation on digital currencies. Within its text, matters concerning the criticism we mentioned above are discussed and there are useful definitions about what is or is not virtual currency. Moreover, there are additional measures about safety, transparency of transactions, disclosure of information about a transaction “in exceptional circumstances, where that information would expose the beneficial owner to a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation” (article 30 par. 6) and preventing terrorist organizations from being funded through blockchain. In order to achieve these goals, the Directive suggests a high level of cooperation between the authorities of each state as far as confidential information is concerned and also states that what cannot be solved within a State can be resolved on a Union level, with the Union participating with regard to the base of subsidiarity and proportionality (article 50). The AML Directive is a very efficient document overall, with its only possible drawback being that it creates a stricter regulatory system for cryptocurrency and so the holders of cryptocurrency could depart for greener pastures and bring their transactions to places with lower regulatory standards.

Another document of much interest is the 2016/2007(INI) Resolution of the European Parliament of May 2016, which provides a set of tools and regulations regarding virtual and digital currencies. Although this document is not legally binding, its significance rests, firstly, on the fact that it provides a very widely acceptable definition of digital and virtual currencies[2], with reference being made to the virtual currencies which a country can create to combat a national economic crisis. Is also assesses the risks concerning virtual currencies, most of which we have already discussed. Lastly, it suggests the setting up of specific measures , which consist of ensuring trust and transparency for the users of this technology and creating a task force (TF DLT) led by the Commission, with the mandate to provide expertise, raise awareness of the end users, address consumer protection and develop a stress – test system for digital currency entities.

The United Kingdom is fully supportive of the EU’s attempts to regulate digital currencies and is expected to further negotiate with the EU on this matter within 2018. The Treasury Committee launched an inquiry into cryptocurrencies and Blockchain technology in February 2018, trying to find a compromise between innovations and secure online transactions. Sources close to the UK report that the government wishes to reach a solution which will attract digital currency companies and not fall behind their EU counterparts.

5. Is a common international framework achievable?

It is unfortunately quite hard to imagine how common regulations between all States could be reached. This is due to the fact that some States have policies about digital currencies which seem too far apart from each other to find common grounds. In Japan, for instance, Bitcoin is a normal way of payment, accepted by everyone, while in China the enterprise world is showing its appreciation for the new currencies whereas the government and the People’s Bank are anxiously trying to regulate if not ban the growing trend, fearing that a currency they have no control over would perhaps cause inflation. Strangely enough, the first chinese government to ban cryptocurrencies has published a report rating some of them, including Bitcoin and Ethereum. Other Asian States like Thailand, Singapore, India, Vietnam, Indonesia and Philippines have no regulations whatsoever on digital currency. The position of Russia is also quite problematic, as a few months after planning to completely ban cryptocurrencies in order to combat terrorist funding and money laundering, the Russian ministry of finance decided to come to a compromise and find a way to regulate cryptocurrencies in January 2018. Transactions in cryptocurrency are still not encouraged by the State, but since the City Court of Saint Petersburg revoked the blocking of 40 Bitcoin related websites in 2017, the government settled with regulating the digital currencies, though it is still occasionally backing out, causing the price of Bitcoins to slide.

Another major stakeholder, the United States of America, is also anxiously trying for uniform regulations, but despite the measures taken in some States, a federal approach has not yet been achieved. In July 2017, nevertheless, the Uniform Laws on Virtual Currency Businesses Act were adopted by all the States of America, with provisions which were rather oriented towards regulating the businesses operating in the field of virtual currencies than virtual currency itself, but however provided some quite solid definitions on what can be characterized as a virtual currency. In March 2018, the US Securities and Exchange Commission (SEC) claimed that if certain platforms offer a type of asset which could be characterized as a security, they should register with the SEC or there could even be some sub-penalties. Analysts estimate that this could make the public more suspicious of entities which do not implement the federal security laws.  In the aftermath of this statement, Bitcoin’s price dropped below the 10.000$ mark, which is considered to be a psychological key number.

While it does seem that a common regulatory system cannot easily be achieved, the United Nations have been taking some steps towards this direction.The organization itself seems more than willing to embrace both Bitcoin and Ethereum as soon as possible, as the World Food Program (WFP) has been experimenting with various digital currencies over the past three years. Currently, there are a lot of offers for donations with cryptocurrencies and the WFP is actively researching whether a Blockchain would prove useful for providing humanitarian aid. Meanwhile, the UNODC (Office on Drugs and Crime)  already in 2017 launched training programmes for law enforcement officers from 22 different countries, focused on teaching them how to detect fraud and illegal transactions on cryptocurrencies. The UNRISD, UNESCAP and IMF have all produced very informative and enlightening essays about the issue.

6. Concluding remarks

Taking everything into consideration, it really remains to be seen whether all States can reach common regulations on digital currency and cryptocurrency; it does however seem highly unlikely that this will be the case when not even the policies of the major stakeholders are aligned with each other. It is, however, a very positive step that the EU has managed to come to conclusions about regulations within its fields of competence. Whether cryptocurrencies are a passing fad or here to stay, it is most definite that a concrete legal framework is necessary. Whether this will be achieved on a global scale is yet to be determined; however it is just as important that even the regulations which have already been voted upon are accompanied by the bodies which can make them function.

[1] The DAO (Decentralized Autonomous Organization) was created to operate as a crowdfunding platform for the acquisition of Ethereum. It was very successful until the event of the hacking in 2017. On June 18, a hacker intervened and drained the account of the smart contract. The loss was calculated around 3.6M Ether worth (approximately 70M USD). This hack has since then been a prime example for the issues arising due to cryptocurrency.

[2] According to that, “virtual currencies (VCs) are sometimes referred to as digital cash, and the European Banking Authority (EBA) regards them as being a digital representation of value that is neither issued by a central bank or a public authority nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment, and can be transferred, stored or traded electronically; whereas VCs are most notably based on distributed ledger technology (DLT), the technological basis for more than 600 VC schemes, which facilitates ‘peer-to-peer’ exchange, the most prominent of which to date is Bitcoin; while it was launched in 2009 and currently holds a market share among DLT-based VCs of almost 90 %, with a market value of the outstanding Bitcoins of around EUR 5 billion, it has not yet reached systemic dimensions”.


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