Virtual Currencies: Better Without Regulation?

Bitcoin imageWe think so.

Virtual currency is a mode of exchange that operates like currency but lacks legal tender status in most jurisdictions except Germany – as of a few months ago.  Regulation has varied on a per state basis.

USA: In March this year, FinCEN, the US financial regulator, issued guidance on virtual currencies, stating that “administrators” or “exchangers” that accepts and transmits virtual currency or buys or sells it is money transmitter and needs to be licensed.  The US Treasury Department stated to apply money-laundering rules to virtual currency firms meaning that they have to implement AML policies and record-keeping including recording and report transactions exceeding US$10,000. In August 2013, Mt. Gox. reportedly lost over $5M when the US government seized US bank accounts since it failed to obtain the appropriate money transmitter license.  You can read the Gox-Wells-Fargo-Seizure-Warrant here.

Is this US crackdown pushing fin tech innovation to other jurisdictions?

We think so- take for example forex dealers in NY.  If you exchange foreign currency as a business in the State of NY you do not need a license.  Yet, if you exchange a virtual currency for a foreign currency in NY, you are a money transmitter under US federal law and require a money transmitter license.

GERMANY: In August, 2013 Bitcoin was recognized by the German Finance Ministry as a “unit of account”, meaning it is now legal tender and can be used for tax and trading purposes in Germany.  The German Ministry has stated that Bitcoins is not classified as e-money or a foreign currency, but is rather a financial instrument under German banking rules. It is more akin to “private money” that can be used in “multilateral clearing circles”, the Ministry has said.  This recognition by one of the world’s largest economies gives Bitcoin and cryptocurrenices some (legal) legitimacy.  A member of Germany’s Parliamentary Finance Committee commented that there is a need for competition in the production of money and that this development is the first step in the right direction.

UK: This week, Coinfloor, a self-regulated Bitcoin trading platform, launched in the UK.  It will allow customers to swap British pounds for Bitcoin.   In the UK, the Financial Conduct Authority (“FCA”) has stated that it is not currently regulating virtual currencies since they are not of legal tender and do not require formal regulation.  However, Coinfloor has adopted AML and KYC policies with a self-regulatory approach and to comply with Europe’s Payment Services Directive (PSD, 2007/64/EC).  Coinfloor states on its website that it “is registered with the HMRC for Anti Money Laundering and has received formal communication from the FCA (conferring with the European Commission) stating that as the Bitcoin market currently stands, they do not see Bitcoin as requiring of regulation. Coinfloor maintains a good relationship with the UK and EU authorities.” Coinfloor will be open to UK and EU customers but not the US.  Mark Lamb, founder of Coinfloor, is reported to have indicated intentions to move into the US eventually, but “legally it is not safe to open up to US customers in the beginning”.   Coinfloor states it looks “forward to a point in the future when the HMRC and FCA may choose to regulate Bitcoin as a currency as we would be ready and confident about our immediate compliance.”

SOUTH KOREA:  By the 2010 landmark decision of the South Korean Supreme Court, it was ruled that exchanging virtual currency for real money is legal, effectively legitimizing real money transfers in virtual worlds.  The court acquitted two individuals indicted of illegally making nearly 20 million won by selling 234 million won worth of virtual money in the online game Lineage.  The virtual money in Lineage, “Aden,” was traded at a ratio of one million Aden for 8,000 won.  Of course, 2 years later, the government banned the trade of online game items.

SINGAPORE:  The Monetary Authority of Singapore has stated that although it does not regulate virtual currencies, businesses may accept Bitcoin as a means of payment.  However, it Authority warns that since there is no counter party for Bitcoin, if they cease to be used they will lose their value.

CHINA: In 2007, China completely banned virtual currencies outside of online gaming.  PRC regulations provide that a virtual currency can only be used only within the game that created it, and that is cannot be redeemed for more that the original purchase price.  They regulations provide that the virtual currency should not be used to buy any real physical product or service from other companies.  However, enforcement of these regulations appear to be a real challenge with the practical reality of use and trade in virtual currencies severely contrasting the official legal position.

Benefits to Non-Regulation of Virtual Currencies?

There are certain benefits of non-regulation:

  • Peer-to-peer mobile payment applications that do not require permission from heavily regulated transaction carriers
  • no high-fee currency conversions for global remittances
  • wide merchant reach (in place where credit card and payment processors are not present)
  • and of course, innovation is not thwarted by heavy handed regulation and the “we don’t understand it so we must control it” mentality.

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