Electronic money and virtual currencies are expanding and reaching even more into our daily lives and transactions. We will explore the relevant legislation and take a closer look at the European Central Bank’s report, as well as the major virtual currency provider, Bitcoin.
To understand virtual currencies and electronic money better we must look at their elements and differences. The main differences are that, firstly, electronic money has a physical counterpart with a legal tender status, whereas virtual currencies do not. Virtual currency does not involve financial institutions such as banks. The owners of the virtual currency ‘institution’ and its issuer are most commonly private companies who influence the currency and its operation.
With regards to virtual currency, there is not yet a substantial legal framework set up which means there is more confusion and uncertainty. Also, as virtual currency does not have the same legal and monetary status as traditional currency it is harder to redeem or exchange funds. Additionally, there has not been wide enough development throughout Europe and a substantial proportion of the public are not aware of virtual currency. The concept of virtual currency is usually harder to grasp and there are more technicalities and differences about how things operate in comparison to electronic money.
There are three types of virtual currency. The first type is closed virtual currency, which is most commonly used in online games such as ‘League of Legends’ or ‘World of Warcraft’, which cannot be exchanged for a traditional currency, but used only for virtual goods and services. The second type is virtual currency with a uni-directional flow, which can be bought by traditional currencies, but not exchanged back for real money. Some examples are Nintendo Points, Facebook Credits and airlines’ frequent-flyer programmes. The user can use the virtual currency for both virtual and real goods and services. The third type is virtual currency with a bi-directional flow, which can be used to buy virtual and real goods and services as well as exchanged for real currency: for example, Linden Dollars and Bitcoins.
Electronic money is defined 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 as defined in point 5 of Article 4 of directive 2007/64/EC, and which is accepted by a natural or legal person other than the electronic money issuer.
Furthermore, according to Directive 2006/48/EC, electronic money institutions are deemed to be credit institutions even if they cannot receive deposits or give credit from publicly received funds.
It is stated that the purpose of the Directive 2000/46/EC, the first in regulating this field, was to create a legislative base which would both enhance and regulate electronic money. This was not accomplished as the Directive was deemed to have restricted the development of electronic money. Directives 2005/60/EC and 2006/48/EC are amended while Directive 2000/46/EC was repealed.
In general, Directive 2009/110/EC sets out a more detailed approach towards electronic money. The Commission are cautious to not over-regulate the field but a guardian role towards the public has been adopted in terms of the rules which will safeguard their interests. For example an electronic money holder is prohibited from receiving interest related to the time period he or she holds the electronic money. Other terms include having a specified amount of initial capital of no less than EUR 350,000 (which can prejudice newcomers as it is quite a large sum), not issuing electronic money through agents and requiring Member States to not treat more favourably an electronic money institution which has its headquarters outside of the Union than one that does, except if there are agreements in place with third countries which would then guarantee equal treatment.
An electronic money institution will have to adhere to the conditions of granting and maintaining authorisation, which are proportionate and sensible, but also take into account a range of risks from the issuer’s and the public’s side. Elements which will need to be present for positive results include a ‘level playing field’ between electronic money institutions and credit institutions so as to guarantee fair competition in the provision of the same service and benefits for electronic money holders.
It is pointed out that harmonisation with regards to the terms of Directive 2009/110/EC will be difficult and cannot be amply achieved due to different legal rules in the Member States’ legal systems and, arguably, it is also due to the varying economical development and progress, or even presence, of electronic money issuing institutions. It is considered that results will be better on a wider Union level as they will be encompassed by the principles of subsidiarity and proportionality.
In the European Central Bank’s ‘Virtual Currency Schemes’ October 2012 Report one can observe the developing interest of traditional money institutions in the ‘new age’ of virtual currency.
According to the report some of the benefits of virtual currency include float revenue for the owners, high levels of flexibility – especially with regards to the business model and strategy adopted – and also possible competition with traditional currencies.
The final conclusions of the Report (both positive and negative) must be examined in order to get an informed view. On the positive side, virtual currencies are considered to be unable to endanger financial stability as they are limited and contained to a smaller base of users and they do not pose a risk to price stability, provided money creation remains on the low. Beyond these points, the flexibility, innovation, creation of alternatives and the ease and the affordability of the transfer of funds must be pointed out.
On the negative side, virtual currencies are exposed to several problems. As mentioned previously, there is an under-regulation and lack of thorough supervision which is quite risky for users. There have also been concerns about the potential use of such currencies for criminal activities such as money laundering, but this is a probability that affects all financial institutions. The Report mentions the possibility of a negative impact on the reputation of central banks, as well as indirect responsibilities.
It is further predicted that virtual currency schemes will develop due to factors such as growing internet access, increasing development of electronic commerce and specifically digital goods for which virtual currencies are an ideal counterpart. What’s more, virtual currencies entail more anonymity and transactions are more direct, clear and faster to settle.
With around $654.9 million worth of Bitcoins in circulation in March 2013, according to a report made by Blockchain.info for The Wall Street Journal, this virtual currency titan is not slowing down.
Bitcoin is based on a peer-to-peer network and it does not have a central clearing house or involvement by financial institutions. The money supply is determined by ‘mining’ and depends mainly on the users. Its virtual currency can be used for virtual and real goods and services and there are certain products and services providers which accept Bitcoins, such as Reddit, OkCupid, OKPay, several gambling sites, Digital-Tunes and many more.
In 2012, Bitcoin registered itself as a payment services provider (PSP) through a French deal with Aqoba, an investment firm, and Crédit Mutuel Bank. Bitcoin-Central has now acquired an international bank ID number. This strategic move offers more reassurance and legality, especially for European users and boosts the overall appeal of Bitcoins.
Through Bitcoin other innovative processes have begun to develop. For example, Bitbills offers prepaid cards containing Bitcoins for use in shops and a Bitcoin point of sale system enables retailers to accept Bitcoins at the point of sale.
Regardless, by 2040 the number of Bitcoins is estimated to reach 21 million, although this will also depend on growth and number of users.
Statistics from June 2013 show the money supply for various virtual currencies; Bitcoin leads with $1.2 billion, followed by Litecoin with $55 million, Namecoin with $3.5 million and PPCoin with $2.6 million. An indication of the growing popularity and progress that will raise much more attention in the future. As with any technological or financial development the law will need to keep up in order to ensure that it has the means to deal with any situation that it will face. Beyond the technical issues or questions of jurisdiction, the chief focus of any legal development must be the public and how it will be affected by new legislation.
Future developments in this field will surely be of significant legal interest and they shall bring a wave of innovation to law internationally.