The subject of digital currencies, virtual currencies, cryptocurrencies and crypto-assets has been analysed and considered by various policymakers at the EU level (eg, by the European Commission, the European Parliament, the European Central Bank and the European supervisory agencies – the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) and the international level (eg, the International Monetary Fund (IMF), the Bank for International Settlement and the Financial Action Task Force (FATF)). Each of these policymakers has touched on the subject in a different way.
There are several different interpretations of e-money, digital money, cryptocurrency and virtual currency throughout the literature.(1) Most policy documentation uses the term 'virtual currencies' instead of 'cryptocurrencies'(2) and many policymakers have classified cryptocurrencies as a subcategory of virtual currencies, which in turn represents a subcategory of digital currencies.(3) Crypto-assets are relatively lightly regulated(4) and international standard-setting bodies have no common taxonomy for crypto-assets.(5)
Traditionally, money is associated with three different functions – that is, "as a (i) medium of exchange, (ii) unit of account, and (iii) store of value"(6) – and is based on four key properties:
- the issuer (central bank or other);
- the form (electronic or physical);
- the accessibility (universal or limited); and
- the transfer mechanism (centralised or decentralised).(7)
Money denominated in a particular currency (money in a traditional sense) includes money in a physical format (notes and coins, usually with legal tender status) and different types of electronic representation of money, such as central bank money (deposits in the central bank that can be used for payments) or commercial bank money.(8)
The IMF believes that virtual currencies fall short of the legal concept of currency or money and do not fulfil the three economic roles associated with money.(9)
Except for the new Fifth EU Anti-money Laundering (AML) and Counter Terrorist Financing Directive (2018/843),(10) the terms 'virtual currencies' and 'crypto-assets' have not been defined with legal relevance in other fields of law. Thus, the European Central Bank stated that the legal definition of 'virtual currencies' tends to vary depending on the context (eg, taxation, the registration and licensing of market participants or anti-money laundering).(11)
To date, the European Central Bank and the European Commission have offered definitions of 'virtual currencies'. The European Central Bank does not regard virtual currencies as full forms of 'money', as defined in economic literature, and considers that virtual currencies do not fit the economic or legal definition of 'money' or 'currency' and that they still have a low level of acceptance among the general public. The European Central Bank defines 'virtual currency' as "a digital representation of value, not issued by a central bank, credit institution or e-money institution, which, in some circumstances, can be used as an alternative to money".(12) In this regard, it uses the term 'virtual currency scheme' when describing "both the aspect of value (i.e. virtual currency) and that of the inherent or in-built mechanisms ensuring that value can be transferred".(13) The European Central Bank arranges virtual currency schemes into three categories:
- closed virtual currency schemes – no link to the real economy (eg, massive multiplayer online games and virtual currencies which can be used only in those games);
- virtual currency schemes with uni-directional flows – link to the real economy, since the virtual currency may be bought with real money, but cannot be exchanged back to real money (eg, frequent flyer programmes which could not be redeemed back to real money); and
- virtual currency schemes with bi-directional flows – can be exchanged for real money and vice versa.(14)
The European Banking Authority defines 'virtual currencies' as a digital representation of value that is neither issued by a central bank or public authority, nor necessarily attached to a fiat currency (legal tender) but is used by natural or legal persons as a means of exchange and can be transferred, stored or traded electronically. Further, in its recent report on crypto-assets,(15) the European Banking Authority provided a broader definition, which includes virtual currencies and tokens under the term 'crypto-asset', defining them using three characteristics:
- they depend primarily on cryptography and distributed ledger technology (DLT) or similar technology as part of its perceived or inherent value,
- neither issued nor guaranteed by a central bank or public authority, and
- can be used as a means of exchange and/or for investment purposes and/or to access a good or service.
In the fifth AML directive,(16) the European Commission extended the scope of the directive to virtual currency platforms and wallet providers and explicitly set out the following definition:
Virtual currencies means a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.
The fifth AML directive (Recital 10) states that virtual currencies should not be confused with electronic money within the scope of the EU Electronic Money Directive (2009/110/EU) or larger concept of funds within the scope of the revised Second EU Payment Services Directive (2015/2366/EU).
In addition, according to the FATF:
Virtual currency is a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status (i.e. when tendered to a creditor, is a valid and legal offer of payment) in any jurisdiction. It is not issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the virtual currency.(17)
These definitions prima facie imply that virtual currency (on the basis of the taxonomy):
- is distinguished from fiat currency (ie, real currency, real money or national currency);(18)
- is distinct from e-money (as defined in the Second EU Electronic Money Directive(19)) since e-money always represents real currency with legal tender status and it does not change the unit of account, but preserves it in an electronic form; and
- is a subcategory of digital currency.(20)
According to the European Parliament, almost all cryptocurrencies are:
- a digital representation of value;
- not attached to a legally established currency;
- not possessing the legal status of currency or money; and
- electronically transferable, storable and tradeable.(21)
The European Union aims to provide a legal framework which would not endanger the nascent market of virtual currencies and crypto-assets, but rather promote legal security and facilitate growth for businesses dealing with virtual currencies and crypto-assets.
One of the stepping stones in maintaining and securing an applicable and effective legal framework is providing for a definition of 'virtual currencies' and 'crypto-assets'. While the European Union has sought to legally define 'virtual currencies' under the AML regulation, it is yet to be seen whether this definition will be expanded to other fields of law.
The future of virtual currencies and crypto-assets regulation is in its nascent state and a close eye should be kept on its legal and business development.
For further information on this topic please contact Željka Rostaš Blažekovic at Porobija & Porobija by telephone (+385 1 4693 999) or email ([email protected]). The Porobija & Porobija website can be accessed at www.porobija.hr.
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