Privacy and virtual identity researcher, Niels Vandezande of the Interdisciplinary Centre for Law and ICT (ICRI) at the University of Leuven explores legislative developments targeting virtual currencies like bitcoin in the US and EU, and argues that 2015 may be an important year for virtual currencies due to increasing stability and upcoming court decisions.
Virtual currencies – and especially cryptocurrencies such as Bitcoin – have been heavily discussed during the last year. At the moment, however, there is still little clarity on how virtual currencies are to be considered from a regulatory perspective. Previous discussions within various governments have mostly focused on how to tax capital gains made through virtual currencies. This has even resulted in a widely criticized US Internal Revenue Service (IRS) opinion that considered virtual currencies as property, rather than as a payment method.
One year after the sudden price surge of bitcoin – during which the virtual currency briefly broke the USD 1,000 barrier – the legal landscape seems to have changed very little. Sure, the days of wild speculation are over as the value of bitcoin moves along in a slow, mostly downward, trend – barely reaching the USD 400 mark in the last months. Lawmakers, however, are only just beginning to gear up for action.
New York’s BitLicense
The US State of New York is the first to propose a legal framework that would comprehensively regulate virtual currencies. In short, anyone exploiting a virtual currency business activity would be required to apply for a license. These licensed activities are subsequently subjected to capital requirements, customer asset protection requirements, and accounting, reporting and supervisory requirements. The legislative proposal also includes provisions regarding money laundering, cyber security, and marketing.
Generally, the BitLicense framework seems to take a few hints from the EU’s legal framework on electronic money, for instance aiming to ensure greater transparency. It could, however, also be construed as raising the bar for market entrance in this field. Moreover, it would also affect occasional users, as their data is to be recorded. The proposal has therefore met its fair share of criticism.
EBA call for action
Earlier this year, the European Banking Authority issued an opinion on virtual currencies. In the opinion, the EBA uses a wide definition of virtual currencies, distinguishing them from official fiat currency and regulated e-money, which sets this opinion apart. Moreover, the EBA extensively documents the benefits of virtual currencies, citing lower transaction costs and shorter transaction processing times.
Despite its fairly positive view of virtual currencies, the EBA also highlights that there are substantial risks for stakeholders. According to the EBA, the risks of virtual currencies can only be mitigated by subjecting virtual currency schemes to specific regulation. As adopting such specific legal framework would take considerable time and effort, the EBA also proposes short-term actions aimed at shielding regulated financial services from virtual currencies.
One of the items identified by the EBA for short-term consideration is money laundering. The European Commission has already indicated that virtual currencies will be considered for possible inclusion in the Anti-Money Laundering Directive. The proposal for a fourth revision of this directive is currently being discussed at the level of the European Commission, the European Parliament and the Council of the EU.
Place your bets
At this point, it’s still too early to say how these legislative discussions will impact the future of virtual currencies. Especially at the level of the EU, the idea to take legislative initiative on virtual currencies has only recently surfaced and is therefore still likely to be debated. Also, ongoing procedures – such as the review of the Payment Services Directive – and upcoming procedures – such as the review of the Second E-money Directive – could still be brought into the discussion. For the time being, the legal uncertainty therefore remains and the stakes for speculation on the outcome have only risen.
In the meantime, public interest in virtual currencies and media coverage thereof has been fading. More stable prices are rarely newsworthy and juicy court cases are still pending trial. While this certainly doesn’t indicate the end of virtual currencies, it could very well indicate the end of the volatility caused by sudden price surges and drops due to mainly speculative behavior. More stability in the value of virtual currencies would greatly enhance their trustworthiness and their usefulness as reliable payment methods. With the hype receding, lawmakers are now poised to join the party. For users looking for alternatives for cash and card payments, 2015 could therefore become a much more interesting year than 2014.
This article gives the views of the author, and does not represent the position of the LSE Media Policy Project blog, nor of the London School of Economics.