Cryptocurrencies, and Bitcoin in particular, have been gaining popularity while causing concern to central banks, supervisory authorities and other government agencies. Although sedulous bibliographic research has been conducted by various scholars, the impact of cryptocurrencies will remain punctuated by question marks until the full dimensions of the phenomenon unravel. There is an array of challenging questions that policy makers are confronted with: How did cryptocurrencies emerge? Is Bitcoin a temporary trend? Can regulation cope with the evolving nature of peer-to-peer practices? This paper offers a contribution to relevant academic literature by viewing the phenomenon through the perspective of Greek and EU legislation.
I. The Emergence of Bitcoin
1. Technological progress has stimulated web-based peer-to-peer markets that are transforming business settings beyond recognition. These virtual peer communities are inducing a profound change on society, rendering traditional market models obsolete. Bitcoin as a P2P (peer-to-peer) electronic cash system was introduced by Satoshi Nakamoto. The inception of the idea was based on the need to move away from the trust based model for the processing of electronic payments and to create an electronic payment system that would not rely on a third trusted party, namely a financial institution, but on cryptographic proof instead, leading to the elimination of transaction costs[i]. Although the relevant technology is still in its infancy, Bitcoin in 2009, ushered a wave of new cryptocurrencies, or alternative currencies, or virtual currencies, as they are often referred to, such as Litecoin, Ethereum, Zcash, ZEC, Dash, Ripple (XRP) and Monero (XMR)[ii]. And the number keeps rising[iii].
II. How Bitcoin works
2. Any new Bitcoin user is required to install a digital wallet on the computer or mobile phone (or a web wallet). Bitcoin uses a free, open-source (i.e. viewable to everyone) code. This software does not require any identification information and enables the user to generate a “Bitcoin address”. Upon the creation of a Bitcoin address, follows the generation of a cryptographic key pair consisting of a public key and private key. This key pair enables the user to acquire or send Bitcoins that will be held at the Bitcoin address of the digital or web wallet. Every Bitcoin transaction is included in an open ledger called “block chain”[iv]. The latter is a shared public transaction log, i.e. a de-centralized network comprised of unlimited computes, which stores all Bitcoin transactions permanently. No transaction can be reversed. Through this block chain, the balance and the transactions of Bitcoin users are visible to anyone. To prevent fraud and double-spending, Bitcoin has developed a verification process. A timestamp server is added along with each transfer of ownership[v]. Every user in the Bitcoin network receives a copy of the block chain. This ensures that the block chain remains valid since the shared block chain ledger verifies the legitimacy of each transfer.
3. The verification process of the Bitcoin transactions includes the use of complex mathematical algorisms. “Bitcoin mining” is the process of adding transaction records to Bitcoin's public ledger of past transactions or block chain. Miners run double round hash verification processes in order to validate Bitcoin transactions and their effort is usually compensated in form of newly issued Bitcoins and from the transaction fees included in the transactions validated[vi].
4. Bitcoin mining is a very competitive and profitable business. When more miners join the network, it becomes increasingly difficult to make a profit, and miners need to efficiently surpass operating costs. In total, only 21 million Bitcoins can be mined. If the current rate of the mining process continues, this number will be reached by 2140[vii]. Given that the demand for Bitcoins will rise, since they are progressively used in daily transactions, the supply will be decreased, leading to the increase of the Bitcoin’s price. In order to allow for a larger supply, Bitcoin's protocol will need to change once the number (21 mil.) is unlocked [viii].
III. The legal framework in EU and Greece
5. For the time being, no specific legal framework governing the operation and use of Bitcoin or other cryptocurrencies exists in Greece. Similarly, EU and state authorities of EU-members refrain from regulating the cryptocurrencies’ phenomenon, limiting their actions to the issuance of warnings about the risks associated with their use[ix].
6. In an attempt to explore the legal nature of virtual currencies, due to the lack of a specific legal definition, one could define Bitcoin, and other virtual currencies, as a digital display of value, not issued by a central bank, financial institution or electronic money institution, which, under specific conditions, can be used as an alternative form of money.
7. Within the EU, only euro banknotes and coins, are legal tender[x]. Euro, as a currency, may take the form of banknotes, coins, scriptural money and electronic money. This is not the case for virtual currencies as they use their own denomination (for instance Bitcoin). Virtual currencies cannot be considered legally money due to four main reasons: (a) they are not scriptural, digital or virtual forms of a particular currency, (b) they are not declared as the official currency of any state, (c) they are not widely used to exchange value and (d) they are not issued from a centralized authority[xi].
8. The Electronic Money Institutions Directive 2009/110 EC, transposed in Greece with Law 4261/2014, has the potential to serve as the legal basis for virtual currencies. However, Bitcoin and virtual currencies in general, differ from the electronic money as defined in the Directive “in so far as, unlike that money, for virtual currencies the funds are not expressed in traditional accounting units, such as in euro, but in virtual accounting units, such as the ‘bitcoin’” as it is held in paragraph 12 of the judgment of the Court of Justice of the European Union in Case C-264/14, Skatteverket v David Hedqvist (hereinafter “Case C-264/14”).
9. The European Central Bank (ECB) rejects the inclusion of Bitcoin in the definition of electronic money and consequently the provisions of the above Directive[xii]. Further, ECB does not consider virtual currencies as money, insofar they do not fulfill the functions of money as a medium of exchange, a store of value and a unit of account[xiii]. The European Banking Authority considers virtual currencies as private money or a commodity[xiv] and highlights the dangers arising from the purchase, possession or trading of same.
10. Bitcoin also cannot be classified as tangible property within the meaning of Article 14 of the VAT Directive[xv] since “(…) virtual currency has no purpose other than to be a means of payment” (Case C-264/14, paragraph 24). On the other hand, transactions to exchange traditional currencies for unites of the ‘bitcoin’ virtual currency (and vice versa) constitute the supply of services for consideration within the meaning of the Directive, since they consist of the exchange of different means of payment and there is a direct link between the service provided and the consideration received, i.e. “a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he [Mr. David Hedqvist] sells that currency to his clients (…)” (Case C-264/14, paragraph 31).
11. When there is an express agreement between the buyer and the seller in order to accept a given virtual currency, Bitcoin could be considered as a means of payment. Indeed, “(…) the ‘bitcoin’ virtual currency, being a contractual means of payment, cannot be regarded as a current account or a deposit account, a payment or a transfer. Moreover, unlike a debt, cheques and other negotiable instruments referred to in Article 135(1)(d) of the VAT Directive, the ‘bitcoin’ virtual currency is a direct means of payment between the operators that accept it.” (Case C-264/14, paragraph 42) and “(…) transactions involving non-traditional currencies, that is to say, currencies other than those that are legal tender in one or more countries, in so far as those currencies have been accepted by the parties to a transaction as an alternative to legal tender and have no purpose other than to be a means of payment, are financial transactions.” (Case C-264/14, paragraph 49). This means that virtual currencies do not constitute money and consequently do not fall within the scope of payment services legislation (Article 4 para. 3 of Law 3862/2010 and Directive 2015/2366/EU on payment services[xvi]).
12. The tax implications of the use of Bitcoin are not to be disregarded. Transactions paid for in virtual currencies may be taxed in the same way as paid for with traditional currencies. Nevertheless, it must be noted that the exchange of traditional currencies for units of the Bitcoin is exempt from VAT[xvii]. More specifically, as held by the Court of Justice of the European Union “(…) the exemptions laid down in Article 135(1)(f) of the VAT Directive, it suffices to recall that that provision covers, inter alia, transactions in ‘shares, interests in companies or associations, debentures and other securities’, namely securities conferring a property right over legal persons and ‘other securities’ that have to be regarded as being comparable in nature to the other securities specifically mentioned in that provision (judgment in Granton Advertising, C‑461/12, EU:C:2014:1745, paragraph 27)” (Case C-264/14, paragraph 53).
13. Finally, as concerns grow that cryptocurrencies are being used to facilitate financial crimes and launder money, it is worth assessing whether Bitcoin falls within the scope of the anti-money laundering legislation[xviii]. The dominant tendency in the EU is that the relevant rules do not apply to cryptocurrencies. This is because virtual currencies largely operate decentralized - or at least through node networks - and are independent, since they are not controlled by an entity that may be held liable. It is not unlikely, however, that the relevant laws may be shifting to the other side of the spectrum in the near future[xix].
14. The regulatory framework within which Bitcoin and other virtual currencies can operate, still remains obscure. For cryptocurrencies to fully realize their potential, self-regulation which often emerges as a consequence of economic exchange, could be the optimal solution. A reformed regulatory framework that does not stifle innovation, provides an attractive alternative to the cost of merely expanding the current regulatory regime so as to cover also digital peer-to-peer platforms. Indeed, existing regulations are overly burdensome and the emergence of virtual currencies has caused a revisiting of relevant laws. It is a demanding task trying to calculate the phenomenon’s costs and benefits, not only because not all data can be quantified, but also because often related studies are driven by political objectives. Cryptocurrencies’ impact is tangible and the concerns cited by state officials on potential threats are not to be disregarded. A balance between regulation and innovation is a difficult mission for decision-makers and the need for further in-depth research on the legal implications of this P2P electronic cash system is apparent.