Niels Vandezande (https://twitter.com/NielsVandezande), from the niche law firm Time.lex discussed virtual currencies - What was the payment landscape when bitcoin started out (2008/2009) v what is it now? - What is bitcoin's place in the payment landscape? - What are alternatives (for the underbanked)? - What is money? - Does the e-money directive apply to virtual currencies? in principle, no - Does the payment services directive apply to virtual currencies (services)? in principle, no The context was the second (2019) edition of the Computational Law and Blockchain Festival (#CLBFest), Brussels' node.

1. CL+B FEST 2019
16 March 2019
Dr. Niels Vandezande
VIRTUAL CURRENCIES, A VIABLE
TRANSFER OF VALUE?

2. CRYPTOCURRENCIES
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3. • 2008: Bitcoin white paper Satoshi Nakamoto
• First blockchain use case
• 2009: genesis block
• 2010: First physical transaction
• 2 pizza’s @ BTC 10.000
• 2011: parity with USD
• 2013: first hype -> BTC 1 > USD 1.000
• 2014-2016: relative stability around USD 500
• 2017: second hype -> BTC 1 = USD 20.000
• 2018-2019: going down (BTC 1 around USD 4.000)
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BITCOIN

4. 4
BITCOIN AND CRYPTOCURRENCIES
• Other cryptocurrencies:
• Often imitations of bitcoin, but could also serve other purposes: Ethereum
• -> issue of network economics
• Bitcoin forks: seceding from the bitcoin blockchain
• Bitcoin Cash
• Bitcoin Gold
• Bitcoin Private
• Scalability issues
• Bitcoin can only process limited amount of transactions (4/s versus 25k/s Visa)
• consequence: confirmation delays and high transaction costs

5. PAYMENTS LANDSCAPE
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6. • No payment apps
• App Store only launched in 2008
• Slow processing time
• Often several working days
• High transaction fees
• Due to many parties involved in a typical transaction
• Network costs
• Particularly expensive before wider adoption of broadband
• Financial crisis
• Trust in financial system undermined
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PAYMENTS LANDSCAPE: SITUATION AT 2008

7. 7
PAYMENTS LANDSCAPE: ACTORS

8. 8
PAYMENTS LANDSCAPE: ACTORS
By Dyah N.K. Makhijani (2006) “An Introduction of Payment
Systems”, https://www.bi.go.id/en/sistem-
pembayaran/edukasi/Documents/1fe856cd22d04b9abfd4
4ab050545fefAnIntroductiononPaymentSystem.pdf.

9. 9
PAYMENTS LANDSCAPE: ACTORS

10. 10
PAYMENTS LANDSCAPE: COSTS
Accourt (2016) “Bank charges on international payments An analysis of the UK SME market”, report for MoneyMovers.

11. • Swift payments
• Cheap payments
• No reliance on intermediaries
• Anonymity
• Good for underbanked
• No seizure or theft
• No taxes
• No chargebacks
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PAYMENTS LANDSCAPE: PROMISES OF BITCOIN

12. • Swift payments
• Bottleneck due to scaling problem
• Cheap payments
• High transaction fees due to scaling problem
• No reliance on intermediaries
• Plethora of intermediaries mimicking traditional intermediaries
• Anonymity
• Not that hard to identify person behind the transaction
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PAYMENTS LANDSCAPE: PROMISES OF BITCOIN

13. • Good for underbanked
• No reliance on banks, but also alternatives
• No seizure or theft
• Keys can be seized or stolen
• No taxes
• False, can be subjected to VAT and capital gains tax
• No chargebacks
• But non-revocation can also be a bad thing
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PAYMENTS LANDSCAPE: PROMISES OF BITCOIN

14. • Benefits: who mines a block receives
new units of bitcoin (12,5 anno 2018)
• Costs:
• Equipment: specialized ASIC-miners
required
• Electricity: every transaction uses about
as much electricity as a median
household per month
• Data: bitcoin blockchain > 170GB
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BITCOIN: COSTS AND BENEFITS
By Marco Krohn (Own work) [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], via
Wikimedia Commons

15. 15
BITCOIN: TRANSACTION COSTS

16. 16
BITCOIN: INTERMEDIARIES

17. UNDERBANKED
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18. M-Pesa
• Mobile phone money transfer
• Available in Kenya, Tanzania, Afghanistan, South Africa, India,
Romania (and Albania)
• Allows users to deposit, withdraw, transfer money and pay for goods
and services
• Using account on mobile phone, operated by telecom provider
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ALTERNATIVES FOR UNDERBANKED

19. 19
ALTERNATIVES FOR UNDERBANKED

20. 20
ALTERNATIVES FOR UNDERBANKED

21. MONEY: THEORIES AND ORIGINS
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22. • Assets used to conclude payments?
• But: there is also money that doesn’t serve as means of payment
• And means of payment that aren’t money
• UCC: a medium of exchange currently authorized or adopted by a
domestic or foreign government
• In part refers to legal tender
• Black’s Law Dictionary: generally accepted medium of exchange – often
with the status of legal tender – that represents purchasing power, or
assets that can be easily converted into cash
• First part: legal tender
• Second part: but also not legal tender (see M1 and M2)
MONEY: DEFINITION
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23. • State theory: State determines means of payment, unit of account and
denominations -> Not just legal tender, but what is accepted by State
• Societal theory: what has confidence of the people
and is used in commerce
• Functions: medium of exchange, unit of account,
store of value
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MONEY: ECONOMIC THEORIES

24. • Popular opinion: bartering theory
• Money was created to solve the issues of bartering
• However:
• no perfect bartering society ever existed
• Money as unit of account came before physical circulation
• First money: money as credit
• Oldest law codes noted debts in weights of silver (even before 2000 B.C.)
• However, that silver did not circulate, it only serves as common unit of account to settle debts
• See also Yap stones: stone served as money, but did not have to circulate
• => centralized or even decentralized ledgers!
• Next step: money as physical unit
• First coins found in Lydia (700 B.C.)
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MONEY: ORIGINS
By Bartek.cieslak (Own work) [CC BY-SA 3.0
(https://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia
Commons

25. E-MONEY AND PAYMENT SERVICES
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26. E-MONEY: SECOND DIRECTIVE (2009/110/EC)
• E-money
• Definition refined (see next slide)
• E-money institutions
• Lighter regime (no longer credit institutions, but still no deposit-taking)
• Operational requirements: EUR 350k initial capital, own funds rules
• Prudential rules: see PSD
• Broader activities (limited credit-granting relating to payment services)
• Safeguarding requirements
• Waivers and redeemability maintained
• Review: should have coincided with review PSD
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27. E-MONEY: SCOPE
• Electronically, including magnetically, stored value
• Technology neutral
• Funds must be available to bearer
• Represented by a claim on the issuer
• Question of ownership
• Reimbursement -> redeemability
• Issued on receipt of funds
• Protection against over-issuing (though EMD1 failed here)
• Creation of new units must correspond to funds received hereto (prepaid)
• Accepted by institutions other than their issuer
• Distinction from single- or limited-purpose instruments
• See limited network scope exemption
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28. PAYMENT SERVICES: SECOND DIRECTIVE
(2015/2366)
• Scope: addition of third parties, tightening of scope exemptions
• Authorization and operational requirements largely the same
• Tighter rules regarding execution of transactions (e.g. focus on strong user
authentication, limitation of payer’s liability for unauthorized transactions to EUR 50)
• Quid EMD2?
• Applicable since January 2018
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29. PAYMENT SERVICES: SCOPE
• Provision of payment services as main business
• Funds: could include VC, though not universally accepted
• Focus on payment accounts
• Services:
• Cash withdrawal and placement
• Transactions funded by payment account or credit line
• Issuing payment instruments
• Money remittance (cash-based, without account)
• Payment initiation and account information services
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30. PAYMENT SERVICES: SCOPE EXEMPTIONS
• Cash transactions, document-based transactions, cash transport, etc.
• Technical service providers
• Added value exemption
• Those not acting as mere intermediary are exempted
• PSD2: more clearly limited to electronic communications services and for limited value
• Limited networks exemption
• Services within limited network or limited range of goods/services exempted
• PSD2: limited network around issuer, limited range of goods/services, services limited to one MS
for social or tax purposes
• Money exchange exemption
• Only covers cash-to-cash operations
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31. VIRTUAL CURRENCIES: E-MONEY?
• Closed scheme virtual currencies
• No exchange between VC and legal tender -> no e-money
• Unidirectional scheme virtual currencies
• Could theoretically fulfill all criteria
• However: differentiation needed in practice
• Bidirectional scheme virtual currencies
• Also here: possible in theory, need for differentiation in practice
• E.g. cryptocurrencies: issuing (in the sense of creation) controlled by algorithm, not by receipt of
funds
• E.g. Second Life Linden dollar: can only be used in Second Life
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32. VIRTUAL CURRENCIES: PAYMENT SERVICES?
• Closed scheme and unidirectional scheme virtual currencies
• Not included under scope (and would benefit from scope exemption anyway)
• Bidirectional scheme virtual currencies
• Scope exemption could apply to services with limited acceptance
• Differences between MS: FR and LU in favor of inclusion; BE, DE and UK not
• However: also here case-by-case approach needed
• Consequence: if EMD2 and PSD2 cannot be applied -> resort to regular
contract law
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33. VIRTUAL CURRENCIES: LICENSED SERVICE
PROVIDERS?
• Several cases in BE, LU and UK of virtual currency service providers being
licensed
• Need to distinguish between what the license is for and what not
• Positive development
• Could help foster trust
• Can be competitive advantage
• Could lead to transitory measures
• Negative development
• Divergence between MS does not facilitate harmonization of this framework -> passporting?
• False perception of trustworthiness of other service providers
• Burden for market entrants
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34. CONCLUSIONS
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35. CRYPTOCURRENCIES: APPLICABILITY CURRENT
LAW
• Can we apply some of the current frameworks in EU financial law?
• E-money and payment services: principally not applicable
• Can we make these frameworks applicable?
• E-money and payment services: e-money is in need of overhaul, list of payment services can be
extended

36. • No legal tender: can be accepted at own risk, but not mandatory
• User: bears the risk of loss, theft, value fluctuations, etc.
• Service provider:
• No payment service of e-money: so no license required
• but: could be coupled to offering payment services (e.g. Circle)
• ->need to investigate whether other services offered are bound to license
duty
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CRYPTOCURRENCIES IN PRACTICE

37. • What if also a payment service is offered?
• Apply for license at competent regulator
• Prudential requirements
• Capital requirements (between 20k and 120k, depending on service)
• Documentation and accounting
• Processing of personal data (limited and with explicit consent)
• AML rules also applicable!
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CRYPTOCURRENCIES IN PRACTICE

38. • Main opportunities?
• Global remittance: migrants send over USD 600 billion home per year
• Blockchain technology: so much more than cryptocurrencies
• Trading and interbanking: could be used in trade finance
• For merchants: first-mover advantage? But also risks!
• But: we need to fix some things
• Today, bitcoin is not a viable means of payment
• Technical, governance and legal issues to be tackled
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CRYPTOCURRENCIES IN PRACTICE

39. ANY QUESTIONS?
Dr. Niels Vandezande
Legal Consultant @ Timelex
Research Fellow @ KU Leuven CiTiP
niels.vandezande@timelex.eu
www.timelex.eu
be.linkedin.com/in/nvandezande
twitter.com/nielsvandezande
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