Electronic money and virtual currencies continue to expand and play a growing role in daily transactions.
To understand their legal and economic implications, it is important to examine the relevant legislation, the European Central Bank’s perspective and the development of major virtual currencies such as Bitcoin.
The elements of virtual and electronic moneyVirtual currencies and electronic money share similarities, but they differ in important ways.
Electronic money has a physical counterpart with legal tender status. Virtual currencies do not. Electronic money operates within the traditional financial system and involves regulated institutions. Virtual currencies are usually created and managed by private companies and operate outside the banking sector.
Virtual currencies lack a comprehensive legal framework, which creates uncertainty for users. They do not have the same monetary status as traditional currency, making redemption and exchange more difficult. Public awareness remains limited, and the technical nature of virtual currencies can make them harder to understand.
There are three main types of virtual currency.
Closed virtual currencies are used only within specific online environments, such as games like League of Legends or World of Warcraft. They cannot be exchanged for traditional currency.
Uni-directional virtual currencies can be purchased with traditional money but cannot be exchanged back. Examples include Nintendo Points, Facebook Credits and frequent flyer programmes.
Bidirectional virtual currencies can be exchanged both ways and used for virtual and real goods and services. Bitcoin and Linden Dollars fall into this category.
Electronic money and EU lawDirective 2009 110 EC provides the main legal framework for electronic money in the European Union.
Electronic money institutions are treated as credit institutions under Directive 2006 48 EC, even though they cannot receive deposits or grant credit from public funds.
Directive 2009 110 EC replaced Directive 2000 46 EC, which had attempted to regulate electronic money but was criticised for restricting its development. The new directive aims to balance innovation with consumer protection. It sets rules such as prohibiting interest on electronic money holdings, requiring a minimum initial capital of three hundred and fifty thousand euros and preventing electronic money from being issued through agents.
Member States must also ensure equal treatment between institutions based inside and outside the Union, unless specific agreements apply.
Electronic money institutions must meet authorisation and supervision requirements that consider risks to both issuers and consumers. The directive seeks fair competition between electronic money institutions and traditional credit institutions.
However, harmonisation across Member States remains difficult due to differences in national laws and levels of economic development. The directive relies on subsidiarity and proportionality to achieve workable results across the Union.
The European Central Bank’s perspectiveThe European Central Bank’s 2012 report on virtual currency schemes reflects growing interest in digital alternatives to traditional money.
The report identifies benefits such as flexibility, innovation, alternative payment options and efficient fund transfers. Virtual currencies do not threaten financial stability because they operate within small user bases and do not affect price stability as long as money creation remains limited.
The report also highlights risks.
Virtual currencies lack regulation and supervision, which exposes users to potential harm. Concerns include the possibility of criminal use, reputational risks for central banks and indirect responsibilities.
Despite these issues, the report predicts growth due to increased internet access, expanding electronic commerce and demand for digital goods. Virtual currencies offer anonymity and faster transactions, which appeal to many users.
BitcoinBitcoin is the most prominent virtual currency.
In March 2013, around six hundred and fifty million dollars worth of Bitcoins were in circulation.
Bitcoin operates on a peer-to-peer network without a central clearing house or financial institution involvement. Its supply is determined by mining and depends on user activity. Bitcoin can be used for virtual and real goods and services, and many companies accept it.
In 2012, Bitcoin registered as a payment services provider in France through a partnership with Aqoba and Crédit Mutuel Bank. Bitcoin Central obtained an international bank identification number, increasing confidence among European users.
Bitcoin has faced cyberattacks. In June 2011, a hacker accessed the system and stole Bitcoins and private information. Another attack in May 2012 resulted in the loss of nineteen thousand Bitcoins. Although serious, users reported that the impact was manageable and the issues were addressed.
Bitcoin has inspired innovations. Bitbills created prepaid cards containing Bitcoins for use in shops. A Bitcoin point of sale system allows retailers to accept Bitcoin payments.
By June 2013, Bitcoin led the virtual currency market with a supply valued at one point two billion dollars. Litecoin, Namecoin and PPCoin followed at much lower levels. Bitcoin’s supply is expected to reach twenty-one million by 2040, although this depends on user growth.
Race to progressVirtual currencies continue to grow and attract attention.
As with any technological or financial development, the law must evolve to address new challenges. Legal frameworks must focus on protecting the public while supporting innovation.
Future developments in this field will be of significant legal interest and will influence international law for years to come.
Not sure how close you are to qualifying?
The path-fit quiz reads your situation and shows you which routes you are ready for, and exactly what to do next. Four minutes, no account needed to start.
Check your readiness