When first appearing on the market, Bitcoins were valued at the rather minimal amount of $1 per Bitcoin. After soaring to the height of $1000 in November 2013, they have since settled at current value of $630 a piece. The proliferation of Bitcoin users goes hand in hand with the emergence of operators providing Bitcoin-related services, enabling, for instance, the exchange of Bitcoins for conventional, official currencies. Since its inception, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have been charged with its supervision.
Definition of Bitcoin
Bitcoin is a virtual currency. The acquisition of Bitcoin takes place on an online exchange platform where conventional currencies are used to purchase Bitcoins. The virtual currency is then transferred to a personalised Bitcoin account known as a "digital wallet".
On a European level, virtual currencies, such as Bitcoin, do not come within the scope of the European Directive 2009/110/CE of 16 September 2009 on electronic money.
In a warning to consumers on virtual currencies published on 12 December 2013, the EBA defined the virtual currency as: "a form of unregulated digital money that is not issued or guaranteed by a central bank and that can act as means of payment. Virtual currencies have come in many forms, beginning as currencies within online computer gaming environments and social networks, and developing into means of payment accepted ‘offline’ or in ‘real life’. It is now increasingly possible to use virtual currencies as a means to pay for goods and services with retailers, restaurants and entertainment venues. These transactions often do not incur any fees or charges, and do not involve a bank."
The Luxembourg financial sector regulator CSSF ("Commission de Surveillance du Secteur Financier"), in its press release of 14 February 2014, considers that "virtual currencies are considered as money, since they are accepted as a means of payment of goods and services by a sufficiently large group of people".
On 12 December 2013, the EBA issued a warning identifying a series of potential risks arising from the purchase, holding or trading of virtual currencies. It noted that the virtual currency can be acquired directly from a person who already owns them or through an exchange platform and is therefore, in principle, unregulated. Furthermore, unlike banks, the exchange platforms do not hold their virtual currencies as a deposit. Thus, in case of loss of money from an exchange platform, its malfunction or theft of money from a Bitcoin user's digital wallet, there is no legal protection, such as that offered by traditional deposit guarantee schemes, which covers losses of funds processed on the trading platforms.
In the absence of EU legislation providing for a right to reimbursement, unauthorized or erroneous transactions made from individuals' electronic wallets cannot be cancelled. In addition, the virtual currency's exchange rate is very volatile rendering the value of Bitcoins unstable. Furthermore, there is no traceability for virtual currency transactions which provides consumers of virtual currency with a high level of anonymity. These transactions may in turn, thus, be used for criminal purposes, such as money laundering.
Bitcoins' legal framework
In its press release of 14 February 2014, the CSSF takes an official position in which it provides clarifications on the way it intends to deal with Bitcoin-related services operators.
The CSSF reiterates that no person can be established in Luxembourg with a view of carrying out an activity of the financial sector without an authorisation by the Minister of Finance and without being subject to the prudential supervision of the CSSF (Article 14 of the Law of 5 April 1993 on the financial sector).
The CSSF adds that : "Therefore, the potential interested persons who would like to establish themselves in Luxembourg in order to carry out an activity of the financial sector (as, for instance, the issuing of means of payments in the form of virtual or other currencies, the provision of payment services using virtual or other currencies, the creation of a market (platform) to trade virtual or other currencies) shall define their business purpose and their activity in a sufficiently concrete and precise manner to allow the CSSF to determine for which status they need to receive the ministerial authorisation."
The CSSF thereby encourages potential operators to present their project, in order to assess, on a "case by case" basis, which authorisation the operators must obtain. The press release shows that the CSSF is willing to regulate the exercise of this new type of business.
Some countries, such as USA and Japan, consider Bitcoins to be goods as well as financial instruments. The United States is therefore looking to impose VAT on Bitcoin transactions to limit the speculative nature of Bitcoin and reduce its volatility. France has banned Bitcoins' use in order to protect users from making investments considered to be risky. Unlike the United States and Japan, Luxembourg has defined the Bitcoin as scriptural money and not as a commodity that can be regulated.
On 14 May 2014, the European Commission in its response to a question by the European Parliament on developments regarding virtual currencies such as Bitcoins, noted that it is closely following developments on digital/virtual currencies, such as Bitcoin, and has been doing so well before the recent MTGox scandal in Japan.
The European Commission is currently participating in a working group led by the European Banking Authority, which includes the ECB, ESMA and various Member States' representatives, in order to define virtual currencies and assess whether they should and can be regulated. The European Commission does not have a final position on this important issue, but has noted that it will take action as soon as the conclusions of the working group are released. These are expected by the end of June 2014.