Virtual currencies began creating controversy soon after their launch. The nature of virtual currencies is difficult to apprehend, the underlying technology is complicated, their operations are conducted in a decentralized way, and they are almost unregulated. No-one can predict if a particular virtual currency may become a direct competitor for existing currencies in the distant future, or if it might just collapse overnight. What is certain, however, is the high level of volatility demonstrated by today's market leader, Bitcoin.
This raises questions concerning the possible impact of virtual currencies on a number of sensitive fields. It appears that there is little, if any, influence expected on monetary policy, or on the stability of the financial system. However, some danger might arise for payment systems, including reputational damage for systems which are not directly exposed to virtual currencies. The most problematic field is consumer protection, as there are no safety nets, such as deposit guarantee funds, available to alleviate losses. Extending prudential supervision to virtual currencies might be difficult, if not impossible, so most regulators are now pondering how to regulate the points of contact between virtual currencies and fiat money, i.e. where one is exchanged for the other.
The Paris terrorist attacks in late 2015 have revived interest in virtual currencies, as there is a growing fear that they could be used with criminal intent. The European legal framework will be adapted to take the terrorist threat into account. [1]
This raises questions concerning the possible impact of virtual currencies on a number of sensitive fields. It appears that there is little, if any, influence expected on monetary policy, or on the stability of the financial system. However, some danger might arise for payment systems, including reputational damage for systems which are not directly exposed to virtual currencies. The most problematic field is consumer protection, as there are no safety nets, such as deposit guarantee funds, available to alleviate losses. Extending prudential supervision to virtual currencies might be difficult, if not impossible, so most regulators are now pondering how to regulate the points of contact between virtual currencies and fiat money, i.e. where one is exchanged for the other.
The Paris terrorist attacks in late 2015 have revived interest in virtual currencies, as there is a growing fear that they could be used with criminal intent. The European legal framework will be adapted to take the terrorist threat into account. [1]
The EU has passed no specific legislation on virtual currencies and the EU law or authorities do not say much about the legal status of the crypto currencies. In October 2012, the European Central Bank issued a report on virtual currency schemes that discusses the Bitcoin system and briefly analyzes its legal status under existing EU legislation.[2] Some professionals have suggested that the Bitcoin may fall within the definition of the Electronic Money Directive 2009/110/EC. That Directive defines electronic money based on three criteria: (a) electronic storage, (b) issuance upon receipt of funds, and (c) acceptance as a means of payment by a legal or natural person other than the issuer.[3] The report states that the Bitcoin meets the first and third criteria but not the second. Other experts suggest that the Bitcoin falls within the definition of Payment Services Directive 2007/64/EC. In general, this Directive prescribes rules related to the execution of payments through electronic money. However, as the report concludes, the Bitcoin falls outside the scope of Directive 2007/64/EC because this Directive does not deal with electronic money and because payment institutions introduced by the Directive are not permitted to issue electronic money.
The report also notes that the Bitcoin issue has been raised with the European Commission’s Payments Committee.
On December 13, 2013, the European Banking Authority (EBA), the regulatory agency of the EU responsible for advising EU institutions on banking, e-money regulation, and payments, issued a warning on the dangers associated with transactions, such as buying, holding, or trading virtual currencies. The EBA pointed out that since the Bitcoin is not regulated, consumers are not protected and are at risk of losing their money and that consumers may still be liable for taxes when using virtual currencies.[4][5]
The report also notes that the Bitcoin issue has been raised with the European Commission’s Payments Committee.
On December 13, 2013, the European Banking Authority (EBA), the regulatory agency of the EU responsible for advising EU institutions on banking, e-money regulation, and payments, issued a warning on the dangers associated with transactions, such as buying, holding, or trading virtual currencies. The EBA pointed out that since the Bitcoin is not regulated, consumers are not protected and are at risk of losing their money and that consumers may still be liable for taxes when using virtual currencies.[4][5]
In the backdrop of recent terrorist attacks across the European Union and the Panama papers leak, the European Commission has put forth a proposal to amend the existing Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. The proposal calls for the amendment of EU Directive 2015/849and Directive 2009/101/EC, both related to prevention of money laundering or terrorist financing.[6]
In 5 July 2016, the executive branch of the European Union adopted a proposal[7] meant to make it more difficult for terrorists and money-launderers to operate by revising existing anti-money laundering (AML) protections.[8]
Among others the Commission proposed that, to prevent misuse of virtual currencies for money laundering and terrorist financing purposes, the Commission proposes to bring virtual currency exchange platforms and custodian wallet providers under the scope of the Anti-Money Laundering Directive. These entities will have to apply customer due diligence controls when exchanging virtual for real currencies, ending the anonymity associated with such exchanges.[9]
In the above mentioned proposal, the Commission also proposes to minimize the use of anonymous payments through pre-paid cards, by lowering thresholds for identification from €250 to €150 and widening customer verification requirements. Proportionality has been taken into account, with particular regard paid to the use of these cards by financially vulnerable citizens.[9]
In 5 July 2016, the executive branch of the European Union adopted a proposal[7] meant to make it more difficult for terrorists and money-launderers to operate by revising existing anti-money laundering (AML) protections.[8]
Among others the Commission proposed that, to prevent misuse of virtual currencies for money laundering and terrorist financing purposes, the Commission proposes to bring virtual currency exchange platforms and custodian wallet providers under the scope of the Anti-Money Laundering Directive. These entities will have to apply customer due diligence controls when exchanging virtual for real currencies, ending the anonymity associated with such exchanges.[9]
In the above mentioned proposal, the Commission also proposes to minimize the use of anonymous payments through pre-paid cards, by lowering thresholds for identification from €250 to €150 and widening customer verification requirements. Proportionality has been taken into account, with particular regard paid to the use of these cards by financially vulnerable citizens.[9]
Sources:
[1] Christian Scheinert: Virtual currencies Challenges following their introduction, EPRS | European Parliamentary Research Service, PE 579.110, March 2016
[2] EUROPEAN CENTRAL BANK, VIRTUAL CURRENCY SCHEMES (Oct. 2012) http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf [22.08.2016.]
[3] 1 Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the Taking Up, Pursuit and Prudential Supervision of the Business of Electronic Money Institutions, Amending Directives 2005/60/EC and 2006/48/EC and Repealing Directive 2000/46/EC, 2009 O.J. (L 267) 7, Article 2 (2)
[4] Press Release, European Banking Authority, EBA Warns Consumers on Virtual Currencies (Dec. 13, 2013), http://www.eba.europa.eu/-/eba-warns-consumers-on-virtual-currencies [22.08.2016.]
[5] The Law Library of Congress, Global Legal Research Center: Regulation of Bitcoin in Selected Jurisdictions, 2014
[6] http://www.newsbtc.com/2016/07/26/european-commission-regulations/
[7] Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC, Strasbourg, 5.7.2016 COM(2016) 450 final 2016/0208 (COD)
[8] http://www.coindesk.com/european-union-proposes-tighter-bitcoin-controls-panama-papers-response/
[9] European Commission - Press release: Commission strengthens transparency rules to tackle terrorism financing, tax avoidance and money laundering, Strasbourg, 5 July 2016
[1] Christian Scheinert: Virtual currencies Challenges following their introduction, EPRS | European Parliamentary Research Service, PE 579.110, March 2016
[2] EUROPEAN CENTRAL BANK, VIRTUAL CURRENCY SCHEMES (Oct. 2012) http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf [22.08.2016.]
[3] 1 Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the Taking Up, Pursuit and Prudential Supervision of the Business of Electronic Money Institutions, Amending Directives 2005/60/EC and 2006/48/EC and Repealing Directive 2000/46/EC, 2009 O.J. (L 267) 7, Article 2 (2)
[4] Press Release, European Banking Authority, EBA Warns Consumers on Virtual Currencies (Dec. 13, 2013), http://www.eba.europa.eu/-/eba-warns-consumers-on-virtual-currencies [22.08.2016.]
[5] The Law Library of Congress, Global Legal Research Center: Regulation of Bitcoin in Selected Jurisdictions, 2014
[6] http://www.newsbtc.com/2016/07/26/european-commission-regulations/
[7] Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC, Strasbourg, 5.7.2016 COM(2016) 450 final 2016/0208 (COD)
[8] http://www.coindesk.com/european-union-proposes-tighter-bitcoin-controls-panama-papers-response/
[9] European Commission - Press release: Commission strengthens transparency rules to tackle terrorism financing, tax avoidance and money laundering, Strasbourg, 5 July 2016