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eMoney vs. Crypto: Myths and Facts about Digital Currencies

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Fintech Camp and Twispay have organized a meetup to shed some much-needed light on the topic of digital currencies. This document is the full presentation used by the two speakers, Tudor Nistor and Cristi Gheorghe.
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Not all digital currencies are created equal. For financial and technology enthusiasts alike, the ability to understand the underlying principles of digital currency, such as eMoney and cryptocurrency, is crucial in the development of future banking services.

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eMoney vs. Crypto: Myths and Facts about Digital Currencies

  1. 1. eMoney vs Crypto Myths and Facts about Digital Currencies WiFi Info SSID: cnpg Password: twispay2017
  2. 2. Today’s Agenda Tudor Nistor – Payments Lawyer The regulatory environment surrounding digital currencies Cristi Gheorghe – Product & Marketing at Twispay Digital challenges of dealing with eMoney & crypto
  3. 3. The regulatory environment surrounding digital currencies Tudor Nistor - Payments Lawyer
  4. 4. Electronic Money – eMoney
  5. 5. Regulatory Framework 2nd eMoney Directive 110/2009 Payment Services Directive 64/2007 (soon, 2nd PSD 2366/2015) Law 127/2011 on eMoney issuing OUG 113/2009 on payment services Other regulations
  6. 6. Art. 2(1) of the eMoney Directive 110/2009 defines electronic money as “electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions […] and which is accepted by a natural or legal person other than the electronic money issuer.” Legal Definition
  7. 7. represents a claim on the issuer; stored electronically, including magnetically; issued on receipt of funds for the purpose of making payment transactions; accepted as a means of payment by persons other than the issuer. Basic Concepts – eMoney:
  8. 8. eMoney products can be hardware-based or software- based, depending on the technology used to store it. Hardware-based products: the purchasing power resides in a personal physical device, such as a chip card, with hardware-based security features. Software-based products employ specialized software that functions on common personal devices such as personal computers, phones or tablets. Schemes mixing both hardware and software-based features. Types of Products
  9. 9. A deposit involves the creation of a debtor-creditor relationship under which the person who accepts the deposit stores value for eventual return. eMoney, in contrast, involves the purchase of a means of payment. Not a Deposit!
  10. 10. eMoney issuers must issue eMoney at par value, when they receive the funds – the eMoney issued must be for the same amount as the funds received. It is not allowed to issue electronic money for a higher amount than that paid in exchange. It is not allowed for an eMoney issuer to decide to create new eMoney units at will. Issuing eMoney
  11. 11. eMoney holders have the right to redeem the monetary value of their e-money at any time and at par value. A link is always preserved between the value of eMoney and the funds (physical/scriptural money). Redeeming eMoney
  12. 12. All eMoney issuers are required by law to safeguard funds received in exchange for e-money that has been issued. If an eMoney issuer becomes insolvent, the claims of e-money holders are paid from the asset pool formed from these safeguarded funds, above all other creditors. Protection of Customer Funds
  13. 13. eMoney institutions are entities authorized to issue eMoney. All eMoney issuers are subject to the conduct of business rules. National Competent Authorities are supervising compliance with such rules. Authorization is obtained from these authorities (e.g. National Bank of Romania, FCA, BaFin, etc.). Competent Authorities
  14. 14. The initial capital requirement is one of the essential conditions when applying for authorization. Capital is required to be held as a buffer, to cover both unexpected losses that arise in the course of the business, as well as the first losses if it is wound up. Initial Capital of EUR 350,000
  15. 15. Cryptocurrencies
  16. 16. Closed system virtual currencies – generally, can not be obtained with legal tender, nor can they be exchanged for legal tender (e.g. World of Warcraft Gold). Unidirectional virtual currencies – can be purchased against legal tender, but they can’t be converted back into legal tender (e.g. Amazon Coins or the now abolished Facebook Credits and Microsoft Points). Bidirectional virtual currencies – can be obtained against legal tender, and can be exchanged back into legal tender (e.g. cryptocurrencies, such as Bitcoin). Types of Virtual Currencies
  17. 17. Virtual Currencies – digital representations of value (an asset), issued by private developers and denominated in their own unit of account. eMoney – digital representations of value for (and denominated in) fiat currency, issued by regulated entities. Both Are Digital Currencies
  18. 18. eMoney Bitcoin Issuer Issued by regulated e-money issuers Issued by the mining community Production Digitally-issued against receipt of fiat currency Mathematically generated (mined) by peer network Value Equal to the correspondent amount of fiat currency – backed by the creditworthiness of the central bank and the government Determined by supply and demand, and trust in the system – not backed by any source Oversight Regulated by a central authority None – regulators are still exploring Customer ID AML KYC applies Pseudo-anonymity eMoney vs. Bitcoin
  19. 19. eMoney is a pre-paid good. eMoney is to be issued on the receipt of funds. This is this element that poses difficulties regarding cryptocurrencies, which are by nature issued following the underlying algorithms, and are thus not subjected to the will of a central issuer (not in all cases). eMoney Directive not Applicable
  20. 20. European Central Bank report, 2012 European Banking Authority statements, 2012, 2014 ECJ ruled in 2015 that VAT does not apply to the exchange of traditional fiat currency and virtual currencies Resolution of European Parliament, 2016 Statement of the European Commission, 2016 Proposal for revision of the 4th Anti-Money Laundering Directive, 2017 Virtual Currencies Regulation Efforts in the EU
  21. 21. The greatest variety of approaches has been seen in taxation approaches to digital currency. Slovenia – Mining and businesses selling goods/services in Bitcoin are taxed. Norway – Bitcoin falls under the sales tax regulation. UK – Treated as private money, no VAT forex changing BTC to fiat. VAT applicable for goods/services sold for BTC or any other cryptocurrency. Relevant profits/losses are subject to capital gains tax. Finland – The Finish Tax Authority has issued instructions for the taxation of Bitcoin and other virtual currencies. Capital gains tax applies. Attention to Tax Treatment
  22. 22. An attempt to bring some form of oversight into the developing field of virtual currencies. Will subject virtual currency exchange platforms and custodian wallet providers to anti money laundering rules. Defines virtual currencies as a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically. 5th AML Directive
  23. 23. Bringing the virtual currency service providers (exchanges and custodian wallets) under the scope of AML rules – licensing/registration Defining the notion of virtual currency (same definition proposed by AML5). Addressing one of the risks emanating from virtual currency transactions – their higher degree of anonymity. Draft Law for the Implementation of AML4(5) in Romania
  24. 24. Thank You, FinTech Camp!
  25. 25. Digital challenges of dealing with e-money & crypto Cristi Gheorghe – Product & Marketing Director at Twispay
  26. 26. “Bitcoin will do to banks what email did to the postal industry” Nostradamus ☺ Rick Falkvinge
  27. 27. Bitcoin History 2008 August Bitcoin.org domain registered 2008 October Satoshi Nakamoto Whitepaper 2009 January Bitcoin network and client 2011 Many more cryptocurrencies 2014 Major players accepting BTC 2015 150.000 Merchants accepting BTC 2017 … eMoney History 1998 December PayPal established as “Confinity” 2001 X.Com terminated and renamed “PayPal” 2001 First eMoney Regulations in the EU and US 2005 Mobipay in Spain; Payoneer launched 2008 PayPal granted Luxembourg Banking License 2010, 2011 Venmo launched, BitPay 2015+ Revolut, N26
  28. 28. Digital Currency Asset in digital form Monetary Characteristics Denominated to a currency Issued by issuer Redeemed for “cash” Electronic Money Virtual Currency Digital representation of value Alternative to money Not issued by a bank Controlled by developers Closed Circuit use Cryptocurrencies
  29. 29. Crypto Transaction Decentralized Takes time (minutes) Associated Costs
  30. 30. eMoney Transaction Centralized (issuer) Instant Variable Costs
  31. 31. Benefits of a Crypto Transaction Anonymous? Refundable? Protected? Small fees? Fast? Scalable / micro Benefits of an eMoney Transaction Full KYC Trackable (and reversible) Safeguarded Lower fees Instant Limited by 3rd parties
  32. 32. eMoney Use Cases
  33. 33. Merchant Transaction exchange
  34. 34. Merchant Transaction
  35. 35. Merchant Transaction
  36. 36. Merchant Transaction
  37. 37. Merchant Transaction
  38. 38. Merchant Transaction
  39. 39. Crypto 2 eMoney exchange
  40. 40. Crypto 2 eMoney
  41. 41. Will Crypto disrupt banking and payment systems?
  42. 42. Crypto versus banks? Competition versus cooperation Healthy competition Opens new ways / possibilities Empowered by technology Benefits the consumer
  43. 43. Thank You, FinTech Camp!
  44. 44. Q&A

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