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20190316 - CLBFest - Virtual Currencies - Niels Vandezande


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Niels Vandezande (, from the niche law firm Time.lex discussed virtual currencies

- What was the payment landscape when bitcoin started out (2008/2009) v what is it now?
- What is bitcoin's place in the payment landscape?
- What are alternatives (for the underbanked)?
- What is money?
- Does the e-money directive apply to virtual currencies? in principle, no
- Does the payment services directive apply to virtual currencies (services)? in principle, no

The context was the second (2019) edition of the Computational Law and Blockchain Festival (#CLBFest), Brussels' node.

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20190316 - CLBFest - Virtual Currencies - Niels Vandezande

  1. 1. CL+B FEST 2019 16 March 2019 Dr. Niels Vandezande VIRTUAL CURRENCIES, A VIABLE TRANSFER OF VALUE?
  3. 3. • 2008: Bitcoin white paper Satoshi Nakamoto • First blockchain use case • 2009: genesis block • 2010: First physical transaction • 2 pizza’s @ BTC 10.000 • 2011: parity with USD • 2013: first hype -> BTC 1 > USD 1.000 • 2014-2016: relative stability around USD 500 • 2017: second hype -> BTC 1 = USD 20.000 • 2018-2019: going down (BTC 1 around USD 4.000) 3 BITCOIN
  4. 4. 4 BITCOIN AND CRYPTOCURRENCIES • Other cryptocurrencies: • Often imitations of bitcoin, but could also serve other purposes: Ethereum • -> issue of network economics • Bitcoin forks: seceding from the bitcoin blockchain • Bitcoin Cash • Bitcoin Gold • Bitcoin Private • Scalability issues • Bitcoin can only process limited amount of transactions (4/s versus 25k/s Visa) • consequence: confirmation delays and high transaction costs
  6. 6. • No payment apps • App Store only launched in 2008 • Slow processing time • Often several working days • High transaction fees • Due to many parties involved in a typical transaction • Network costs • Particularly expensive before wider adoption of broadband • Financial crisis • Trust in financial system undermined 6 PAYMENTS LANDSCAPE: SITUATION AT 2008
  8. 8. 8 PAYMENTS LANDSCAPE: ACTORS By Dyah N.K. Makhijani (2006) “An Introduction of Payment Systems”, pembayaran/edukasi/Documents/1fe856cd22d04b9abfd4 4ab050545fefAnIntroductiononPaymentSystem.pdf.
  10. 10. 10 PAYMENTS LANDSCAPE: COSTS Accourt (2016) “Bank charges on international payments An analysis of the UK SME market”, report for MoneyMovers.
  11. 11. • Swift payments • Cheap payments • No reliance on intermediaries • Anonymity • Good for underbanked • No seizure or theft • No taxes • No chargebacks 11 PAYMENTS LANDSCAPE: PROMISES OF BITCOIN
  12. 12. • Swift payments • Bottleneck due to scaling problem • Cheap payments • High transaction fees due to scaling problem • No reliance on intermediaries • Plethora of intermediaries mimicking traditional intermediaries • Anonymity • Not that hard to identify person behind the transaction 12 PAYMENTS LANDSCAPE: PROMISES OF BITCOIN
  13. 13. • Good for underbanked • No reliance on banks, but also alternatives • No seizure or theft • Keys can be seized or stolen • No taxes • False, can be subjected to VAT and capital gains tax • No chargebacks • But non-revocation can also be a bad thing 13 PAYMENTS LANDSCAPE: PROMISES OF BITCOIN
  14. 14. • Benefits: who mines a block receives new units of bitcoin (12,5 anno 2018) • Costs: • Equipment: specialized ASIC-miners required • Electricity: every transaction uses about as much electricity as a median household per month • Data: bitcoin blockchain > 170GB 14 BITCOIN: COSTS AND BENEFITS By Marco Krohn (Own work) [CC BY-SA 4.0 (], via Wikimedia Commons
  17. 17. UNDERBANKED 17
  18. 18. M-Pesa • Mobile phone money transfer • Available in Kenya, Tanzania, Afghanistan, South Africa, India, Romania (and Albania) • Allows users to deposit, withdraw, transfer money and pay for goods and services • Using account on mobile phone, operated by telecom provider 18 ALTERNATIVES FOR UNDERBANKED
  22. 22. • Assets used to conclude payments? • But: there is also money that doesn’t serve as means of payment • And means of payment that aren’t money • UCC: a medium of exchange currently authorized or adopted by a domestic or foreign government • In part refers to legal tender • Black’s Law Dictionary: generally accepted medium of exchange – often with the status of legal tender – that represents purchasing power, or assets that can be easily converted into cash • First part: legal tender • Second part: but also not legal tender (see M1 and M2) MONEY: DEFINITION 22
  23. 23. • State theory: State determines means of payment, unit of account and denominations -> Not just legal tender, but what is accepted by State • Societal theory: what has confidence of the people and is used in commerce • Functions: medium of exchange, unit of account, store of value 23 MONEY: ECONOMIC THEORIES
  24. 24. • Popular opinion: bartering theory • Money was created to solve the issues of bartering • However: • no perfect bartering society ever existed • Money as unit of account came before physical circulation • First money: money as credit • Oldest law codes noted debts in weights of silver (even before 2000 B.C.) • However, that silver did not circulate, it only serves as common unit of account to settle debts • See also Yap stones: stone served as money, but did not have to circulate • => centralized or even decentralized ledgers! • Next step: money as physical unit • First coins found in Lydia (700 B.C.) 24 MONEY: ORIGINS By Bartek.cieslak (Own work) [CC BY-SA 3.0 (], via Wikimedia Commons
  26. 26. E-MONEY: SECOND DIRECTIVE (2009/110/EC) • E-money • Definition refined (see next slide) • E-money institutions • Lighter regime (no longer credit institutions, but still no deposit-taking) • Operational requirements: EUR 350k initial capital, own funds rules • Prudential rules: see PSD • Broader activities (limited credit-granting relating to payment services) • Safeguarding requirements • Waivers and redeemability maintained • Review: should have coincided with review PSD 26
  27. 27. E-MONEY: SCOPE • Electronically, including magnetically, stored value • Technology neutral • Funds must be available to bearer • Represented by a claim on the issuer • Question of ownership • Reimbursement -> redeemability • Issued on receipt of funds • Protection against over-issuing (though EMD1 failed here) • Creation of new units must correspond to funds received hereto (prepaid) • Accepted by institutions other than their issuer • Distinction from single- or limited-purpose instruments • See limited network scope exemption 27
  28. 28. PAYMENT SERVICES: SECOND DIRECTIVE (2015/2366) • Scope: addition of third parties, tightening of scope exemptions • Authorization and operational requirements largely the same • Tighter rules regarding execution of transactions (e.g. focus on strong user authentication, limitation of payer’s liability for unauthorized transactions to EUR 50) • Quid EMD2? • Applicable since January 2018 28
  29. 29. PAYMENT SERVICES: SCOPE • Provision of payment services as main business • Funds: could include VC, though not universally accepted • Focus on payment accounts • Services: • Cash withdrawal and placement • Transactions funded by payment account or credit line • Issuing payment instruments • Money remittance (cash-based, without account) • Payment initiation and account information services 29
  30. 30. PAYMENT SERVICES: SCOPE EXEMPTIONS • Cash transactions, document-based transactions, cash transport, etc. • Technical service providers • Added value exemption • Those not acting as mere intermediary are exempted • PSD2: more clearly limited to electronic communications services and for limited value • Limited networks exemption • Services within limited network or limited range of goods/services exempted • PSD2: limited network around issuer, limited range of goods/services, services limited to one MS for social or tax purposes • Money exchange exemption • Only covers cash-to-cash operations 30
  31. 31. VIRTUAL CURRENCIES: E-MONEY? • Closed scheme virtual currencies • No exchange between VC and legal tender -> no e-money • Unidirectional scheme virtual currencies • Could theoretically fulfill all criteria • However: differentiation needed in practice • Bidirectional scheme virtual currencies • Also here: possible in theory, need for differentiation in practice • E.g. cryptocurrencies: issuing (in the sense of creation) controlled by algorithm, not by receipt of funds • E.g. Second Life Linden dollar: can only be used in Second Life 31
  32. 32. VIRTUAL CURRENCIES: PAYMENT SERVICES? • Closed scheme and unidirectional scheme virtual currencies • Not included under scope (and would benefit from scope exemption anyway) • Bidirectional scheme virtual currencies • Scope exemption could apply to services with limited acceptance • Differences between MS: FR and LU in favor of inclusion; BE, DE and UK not • However: also here case-by-case approach needed • Consequence: if EMD2 and PSD2 cannot be applied -> resort to regular contract law 32
  33. 33. VIRTUAL CURRENCIES: LICENSED SERVICE PROVIDERS? • Several cases in BE, LU and UK of virtual currency service providers being licensed • Need to distinguish between what the license is for and what not • Positive development • Could help foster trust • Can be competitive advantage • Could lead to transitory measures • Negative development • Divergence between MS does not facilitate harmonization of this framework -> passporting? • False perception of trustworthiness of other service providers • Burden for market entrants 33
  34. 34. CONCLUSIONS 34
  35. 35. CRYPTOCURRENCIES: APPLICABILITY CURRENT LAW • Can we apply some of the current frameworks in EU financial law? • E-money and payment services: principally not applicable • Can we make these frameworks applicable? • E-money and payment services: e-money is in need of overhaul, list of payment services can be extended
  36. 36. • No legal tender: can be accepted at own risk, but not mandatory • User: bears the risk of loss, theft, value fluctuations, etc. • Service provider: • No payment service of e-money: so no license required • but: could be coupled to offering payment services (e.g. Circle) • ->need to investigate whether other services offered are bound to license duty 36 CRYPTOCURRENCIES IN PRACTICE
  37. 37. • What if also a payment service is offered? • Apply for license at competent regulator • Prudential requirements • Capital requirements (between 20k and 120k, depending on service) • Documentation and accounting • Processing of personal data (limited and with explicit consent) • AML rules also applicable! 37 CRYPTOCURRENCIES IN PRACTICE
  38. 38. • Main opportunities? • Global remittance: migrants send over USD 600 billion home per year • Blockchain technology: so much more than cryptocurrencies • Trading and interbanking: could be used in trade finance • For merchants: first-mover advantage? But also risks! • But: we need to fix some things • Today, bitcoin is not a viable means of payment • Technical, governance and legal issues to be tackled 38 CRYPTOCURRENCIES IN PRACTICE
  39. 39. ANY QUESTIONS? Dr. Niels Vandezande Legal Consultant @ Timelex Research Fellow @ KU Leuven CiTiP 39