Le­gal as­pects of dig­i­tal cur­ren­cies

A leap into the un­known

Executive Magazine - - Contents -

In the vir­tual Wild West of the dig­i­tal econ­omy cre­ated by the in­ter­net rev­o­lu­tion, the emer­gance realm of cryp­tocur­rency rep­re­sents an im­por­tant le­gal fron­tier. The rise of cryp­tocur­ren­cies can be thought of as a dig­i­tal-money rev­o­lu­tion. Cryp­tocur­ren­cies have the po­ten­tial to trans­form the way peo­ple view money, how they trans­act, and even the over­all struc­ture of the fi­nan­cial sys­tem, start­ing from in­di­vid­u­als all the way up to cen­tral banks and sov­er­eign states.

In­di­vid­ual cen­tral banks and gov­ern­ments in dif­fer­ent coun­tries are con­sid­er­ing new reg­u­la­tions and le­gal frame­works to rein in the wild horses of Bit­coin and other dig­i­tal cur­ren­cies. In the new year, the reg­u­la­tory de­bate widened with re­marks from the Ger­man cen­tral bank when Joachim Wuer­mel­ing, a mem­ber of the board of Ger­many’s Bun­des­bank, said na­tional rules may strug­gle to con­tain a global phe­nom­e­non.

“Ef­fec­tive reg­u­la­tion of vir­tual cur­ren­cies would … only be achiev­able through the great­est pos­si­ble in­ter­na­tional co­op­er­a­tion, be­cause the reg­u­la­tory power of nation states is ob­vi­ously limited,” Wuer­mel­ing said at a Jan­uary event in Frank­furt, the Ger­man fi­nan­cial hub and seat of the Euro­pean Cen­tral Bank, ac­cord­ing to Reuters.

Roughly at the same time as the Ger­man banker’s state­ment, French me­dia re­ported that Bruno Le Maire, the French econ­omy minister, an­nounced the cre­ation of a work­ing group to de-

velop cryp­tocur­rency reg­u­la­tions. Ac­cord­ing to the French fi­nan­cial daily LesE­chos, he said the work­ing group would be re­spon­si­ble for propos­ing guide­lines and draft­ing a frame­work for cryp­tocur­rency reg­u­la­tions aimed at pre­vent­ing abuse of the tech­nol­ogy and curb­ing spec­u­la­tion.

Given that South Korea, Ja­pan, and China also sought to calm the wa­ters of cryp­tocur­rency spec­u­la­tion by talk­ing pub­licly about in­tro­duc­ing reg­u­la­tions, the num­ber of peo­ple seek­ing to sell their cryp­tocur­rency hold­ings has leapt up­ward, judg­ing from mar­ket de­vel­op­ments as well as me­dia re­ports. There ap­pears to be grow­ing as­sump­tions— which for some are mount­ing con­cerns—over the ac­cel­er­a­tion of glob­ally co­or­di­nated cryp­tocur­rency reg­u­la­tions: per­haps be­gin­ning with a meet­ing about the rise of Bit­coin planned for March, when the G20 fi­nance min­is­ters and cen­tral bank gov­er­nors will con­vene in Buenos Aires, Ar­gentina. Hosted for the sec­ond time by a Latin Amer­i­can nation since the in­au­gu­ral G20 sum­mit in 2008, G20 meet­ings this year are sched­uled to in­clude sev­eral meet­ings of fi­nance lead­ers and a dig­i­tale­con­omy work­ing group be­fore the G20 gen­eral sum­mit at the end of Novem­ber.


At present, cryp­tocur­rency is gov­erned mostly by fi­nan­cial-crimes reg­u­la­tions de­signed to cover money laun­der­ing, ter­ror­ist fi­nanc­ing, and other fi­nan­cial wrong­do­ings. Tax reg­u­la­tions on cryp­tocur­ren­cies and on dig­i­tal-cur­rency ex­changes are also im­por­tant fac­tors in this novel le­gal struc­ture.

The United States In­ter­nal Rev­enue Ser­vice de­fines cryp­tocur­ren­cies as a dig­i­tal rep­re­sen­ta­tion of value that func­tion as a medium of ex­change, a unit of ac­count, and a store of value, yet which does not have le­gal ten­der sta­tus in any ju­ris­dic­tion. The le­gal frame­work ap­pli­ca­ble to the buy­ers, sell­ers, and users of cryp­tocur­ren­cies is very ba­sic, and it re­lies on ex­ist­ing le­gal con­cepts per­tain­ing to com­modi­ties as well as value and ex­change.

The cen­tral ques­tion is whether in a spe­cific ju­ris­dic­tion a cryp­tocur­rency may be clas­si­fied as money or not. An­swers have been legally in­con­sis­tent due to the hy­brid na­ture of dig­i­tal cur­rency as a means of ex­change. Also, dif­fer­ent coun­tries have adopted con­flict­ing reg­u­la­tory and leg­isla­tive re­sponses, some sup­port­ive and oth­ers re­stric­tive, de­pend­ing on the clas­si­fi­ca­tion of the cryp­tocur­rency ei­ther as a com­mod­ity or a cur­rency.

Cat­e­go­riz­ing Bit­coin and other cryp­tocur­ren­cies from a le­gal per­spec­tive is com­plex be­cause un­like elec­tronic money, for ex­am­ple, a cryp­tocur­rency does not legally rep­re­sent a “claim” on the is­suer. It is a rather fluid and versatile con­cept, and its le­gal sta­tus is open to a broad in­ter­pre­ta­tion. Ar­guably, au­thor­i­ties and leg­is­la­tors have not fully come to grip with all of the ram­i­fi­ca­tions of cryp­tocur­ren­cies, and this lack of gov­er­nance has led to a gen­eral re­luc­tance to ac­cept cryp­tocur­ren­cies.


In the US, cryp­tocur­ren­cies are per­mis­si­ble. Bit­coin and cryp­tocur­ren­cies have been clas­si­fied as con­vert­ible de­cen­tral­ized vir­tual cur­ren­cies and the Com­mod­ity Fu­tures Trad­ing Com­mis­sion treats Bit­coin as a com­mod­ity like gold, judg­ing that it should be taxed on this ba­sis.

There have been some at­tempts to reg­u­late the cryp­tocur­rency mar­ket in the US. In 2014, Ben­jamin Lawsky, then the New York state fi­nan­cial ser­vices chief, took a con­ser­va­tive stance on cryp­tocur­ren­cies, mainly due to money laun­der­ing and ter­ror­ist-fi­nanc­ing con­sid­er­a­tions, and spear­headed the his­toric reg­u­la­tory frame­work for Bit­coin, re­ferred to as BitLi­cense.

A BitLi­cense is es­sen­tially a busi­ness li­cense for vir­tual-cur­rency ac­tiv­i­ties is­sued by the New York State De­part­ment of Fi­nan­cial Ser­vices for New York com­pa­nies and res­i­dents. Crypto-econ­omy startup Rip­ple, op­er­a­tor of a “dig­i­tal as­set” called XRP, the fastest and most scal­able dig­i­tal as­set en­abling real-time cross-bor­der pay­ments, and Coin­base, a cryp­tocur­rency ex­change plat­form head­quar­tered in the US, were both suc­cess­ful in ob­tain­ing BitLi­censes in 2016 and 2017, re­spec­tively. Mem­bers of the cryp­tocur­rency com­mu­nity have crit­i­cized New York’s in­ter­ven­tion­ist reg­u­la­tory pro­vi­sions, as many of them hold the view that the cryp­tocur­rency mar­ket should re­main un­reg­u­lated to avoid harm­ing the po­ten­tial for long-term in­no­va­tion.

The Euro­pean Union also lacks a solid cryp­tocur­rency and blockchain reg­u­la­tory regime. This is not sur­pris­ing, as the tech­nol­ogy is very new. How­ever, the le­gal sta­tus of dig­i­tal cur­ren­cies has been

At the core is the ques­tion of whether in a spe­cific ju­ris­dic­tion a cryp­tocur­rency may be clas­si­fied as money or not

an­a­lyzed and con­sid­ered by the Euro­pean Cen­tral Bank, the Euro­pean Par­lia­ment, and the Euro­pean Com­mis­sion. The Court of Jus­tice of the Euro­pean Union was asked to opine on ap­pli­ca­bil­ity of Val­ueAdded Tax (VAT) to Bit­coin, and it con­cluded that Bit­coin is a cur­rency and not a com­mod­ity (un­like the ap­proach adopted by the US Com­mod­ity Fu­tures Trad­ing Com­mis­sion) and hence it is ex­empt from VAT.

It ap­pears that for the mo­ment there is no clear con­sen­sus on whether Bit­coin should be treated as a cur­rency or as a com­mod­ity. This dis­tinc­tion is im­por­tant, be­cause if it is treated as cur­rency, it would fall un­der the ju­ris­dic­tion of a cen­tral bank, and if it is a com­mod­ity, it would fall un­der the rel­e­vant com­mod­ity author­ity and face tax im­pli­ca­tions such as VAT.

The emer­gence of cryp­tocur­ren­cies has caught markets un­pre­pared. In 2016, the Euro­pean Par­lia­ment voted for the es­tab­lish­ment of a task force to de­velop fi­nan­cial reg­u­la­tions de­signed to har­mo­nize the mar­ket. How­ever, un­til the har­mo­niza­tion process is in place, each coun­try is tak­ing its own mea­sures.

While the sit­u­a­tion is very much in flux and new dis­cus­sions on reg­u­la­tions may erupt ev­ery day, the gen­eral po­si­tion in Europe at the time of writ­ing is that cryp­tocur­ren­cies and an­cil­lary ac­tiv­i­ties that de­rive from it are le­gal. Le Maire, the French econ­omy minister, said that a work­ing group headed by Jean-Pierre Lan­dau, the for­mer deputy gov­er­nor, the coun­try’s cen­tral bank, had been estab­lished to pro­pose reg­u­la­tions and pa­ram­e­ters de­signed to en­sure that cryp­tocur­ren­cies are used within the lim­its of the law and not to abuse the tax and pay­ment sys­tems, LesE­chos re­ported re­cently.

France has been very ac­tive in this sec­tor, pass­ing reg­u­la­tions for Bit­coin mar­ket trans­parency in 2014 which re­quire Bit­coin dis­trib­u­tors to iden­tify their cus­tomers and the ap­pli­ca­bil­ity of cap­i­tal gains tax to dig­i­tal cur­ren­cies, ac­cord­ing to an of­fi­cial press re­lease. In the UK, dig­i­tal cur­ren­cies are treated as “pri­vate” money and they are sub­ject to tax­a­tion based on prof­its from sales.

Euro­pean and UK reg­u­la­tors have is­sued warn­ings against cryp­tocur­rency in­vest­ments and are push­ing for stricter reg­u­la­tions. Due to the se­crecy around cryp­tocur­ren­cies, the ex­pec­ta­tion is that the UK and the Euro­pean gov­ern­ments will pass leg­is­la­tion in 2018 to reg­u­late cryp­tocur­ren­cies, align­ing them anti-ter­ror­ism and money-laun­der- ing leg­is­la­tion. This might not be coun­ter­pro­duc­tive, as it is likely to cre­ate le­git­i­macy and cred­i­bil­ity for the dig­i­tal mar­ket.


Cen­tral banks and gov­ern­ments in the Mid­dle East have been very cau­tious in sup­port­ing cryp­tocur­ren­cies. Although the Saudi Ara­bia Mon­e­tary Author­ity has not banned Bit­coin specif­i­cally, it has en­cour­aged deal­ers not to use it due to its highly spec­u­la­tive na­ture. Banque du Liban, the cen­tral bank of Le­banon, has de­creed that banks and ex­changes can­not trans­act in vir­tual cur­ren­cies. In Jor­dan, the cen­tral bank has also dis­cour­aged the use of cryp­tocur­ren­cies, which it does not con­sider le­gal ten­der, and it for­bids fi­nan­cial in­sti­tu­tions, fi­nan­cial com­pa­nies, and ex­changes from deal­ing in cryp­tocur­ren­cies.

In the United Arab Emi­rates, trad­ing cryp­tocur­ren­cies is legally pro­hib­ited pur­suant to the Reg­u­la­tory Frame­work for Stored Value and Elec­tronic Pay­ment Sys­tems is­sued by the Cen­tral Bank of the UAE in Jan­uary 2017. A one-sen­tence pro­vi­sion in this reg­u­la­tion (Pro­vi­sion D.7.3) reads, “All Vir­tual Cur­ren­cies (and any trans­ac­tions thereof) are pro­hib­ited.”

In spite of this pro­hi­bi­tion, Bit­coin trad­ing, ac­cord­ing TheNa­tional, oc­curs on a reg­u­lar ba­sis, and it has be­come what ap­pears to be a “tol­er­ated prac­tice” ac­cord­ing to sev­eral le­gal ad­vi­sors. Sev­eral real-es­tate bro­kers and en­trepreneurs last fall an­nounced their will­ing­ness to re­ceive prop­erty pay­ments in Bit­coin. Strength­en­ing this view, lo­cal me­dia last year re­peat­edly cited Mubarak Al Man­souri, the gov­er­nor of the UAE cen­tral bank, as say­ing in Jan­uary 2017 that the afore­men­tioned new reg­u­la­tions do not cover dig­i­tal cur­rency, “de­fined as any type of dig­i­tal unit used as a medium of ex­change, a unit of ac­count, or a form of stored value,” and “do not ap­ply to Bit­coin or other cryp­tocur­ren­cies, cur­rency ex­changes, or un­der­ly­ing tech­nol­ogy such as blockchain.” He also stated that dig­i­tal cur­ren­cies are cur­rently be­ing re­viewed and new reg­u­la­tions will be is­sued in due course. How­ever, in re­marks made later in the year, Gov­er­nor Al Man­souri warned about volatil­ity risks re­lated

For the mo­ment there is no clear con­sen­sus on whether Bit­coin should be treated as a cur­rency or as a com­mod­ity

to trade in cryp­tocur­ren­cies. At present, it is not clear if Bit­coin can be used a form of pay­ment or for money transfers in the UAE.


Es­to­nia pre­sented a pro­posal back in 2013 de­signed to launch its own state-man­aged dig­i­tal cur­rency, est­coin, but this was strongly dis­missed by Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi. More re­cently, Venezuela, un­der tremen­dous fi­nan­cial pres­sure, an­nounced a plan for a sov­er­eign oil-backed dig­i­tal cur­rency that was crit­i­cized by many in­ter­na­tional ex­perts. How­ever, state­backed dig­i­tal cur­ren­cies could be in the cards in the GCC and the wider Arab re­gion. There has been on­go­ing dis­cus­sion that Saudi Ara­bia and UAE may cre­ate a cryp­tocur­rency for cross-bor­der trans­ac­tions un­der the um­brella of the two cen­tral banks via blockchain tech­nol­ogy.

In 2016, the Dubai Fu­ture Foun­da­tion estab­lished the Global Blockchain Coun­cil, in­di­cat­ing that the tech­nol­ogy is be­ing stud­ied and not dis­missed out of hand. The chal­lenge is sig­nif­i­cant. “Tech­nol­ogy ad­vances such as blockchain are caus­ing mas­sive shifts to the way we use fi­nan­cial ser­vices,” noted Ab­dul Ba­sitt Qayed, man­ag­ing di­rec­tor of pri­vate in­vest­ment firm Ghaf Cap­i­tal, “but reg­u­la­tions are strug­gling to keep pace with the rate of change in new tech­nolo­gies for the past decade, and by the time they build new laws and reg­u­la­tions for such tech­nol­ogy, [they] will be out- dated, be­cause a new tech­nol­ogy will ap­pear to re­place the old one. Since tech­nol­ogy [is] out­pac­ing hu­man de­vel­op­ment, reg­u­la­tors need to learn tech­nolo­gies faster and in­crease their abil­ity to adapt.”

Riad Salameh, the gov­er­nor of Le­banon’s cen­tral bank, has also sug­gested that the gov­ern­ment is look­ing at the pos­si­bil­ity of a state-backed cryp­tocur­rency (see over­view on page 14 and in­ter­view on page 44). These are highly sig­nif­i­cant de­vel­op­ments for the re­gion, although a time­line for im­ple­men­ta­tion has not been set. A dis­tinc­tion is be­ing made be­tween cen­tral bank trans­ac­tions and the use of cryp­tocur­ren­cies for in­di­vid­u­als. Cer­tainly, val­i­da­tion by UAE and Saudi cen­tral banks might in­flu­ence other coun­tries in the re­gion.

Many ob­servers are pre­dict­ing that it is only a mat­ter of time be­fore cen­tral banks across the world will launch their own cryp­tocur­rency and move to­ward a cash­less so­ci­ety. Banks are em­brac­ing blockchain tech­nol­ogy across dif­fer­ent sec­tors, in­clud­ing de­riv­a­tives.

In the next 18 months, a global reg­u­la­tory frame­work for the sec­tor must be de­vel­oped, but in or­der to be suc­cess­ful, it will need to bal­ance in­ter­ven­tion and in­no­va­tion. It ap­pears that there is no stop­ping the dig­i­tal fi­nan­cial econ­omy, and the play­ers who fail to as­sim­i­late and adapt to this new sys­tem risk be­com­ing ob­so­lete. NI­COLE PURIN is a le­gal and fi­nance ex­pert based in the United Arab Emi­rates. All views in this piece are her per­sonal opin­ion.

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