Today the European Union includes 28 countries, each of which has its own national legislature. The classification of the EU regarding legal structure lies somewhere between a confederation and a federation, tilting towards federation as member states are slowly surrendering their sovereignty as time progresses. This has interesting ramifications for cryptocurrency regulation in the EU.
How is Bitcoin Defined within the EU?
Back in 2012, the European Central Bank (ECB) released a report stating that traditional financial regulation may not apply to Bitcoin. Bitcoin was defined as a convertible decentralized virtual currency and from that moment after legislators in the EU use the term virtual currency rather than cryptocurrency or digital currency. The ECB criticized this approach four years later stating: “The definition of a cryptocurrency as a virtual currency is inaccurate. According to the ECB Opinion, virtual currencies are a means of exchange, not a means of payment, and are neither money nor currency.” However, the European Court of Justice begs to differ, as it ruled that Bitcoin should be treated as currency for tax-related purposes.
What is the Overall Attitude of the EU Towards Cryptocurrencies?
In December 2013, the European Banking Authority (EBA) issued a warning regarding the use of cryptocurrencies as they fall outside of any regulatory framework and therefore the users are not protected from financial losses. It also addressed the high volatility of virtual currencies as a potential risk factor to users.
In July 2014, the EBA published an opinion addressed to the European Council, European Commission and European Parliament advising the national financial institutions to refrain from buying, holding or selling virtual currencies until a further regulatory approach is developed and established.
In early January 2016, the European Commission announced that it was going to toughen reporting rules applied to exchanges and companies providing cryptocurrency wallets to users. In particular, the European Commission was going to require European cryptocurrency exchanges and cryptocurrency wallet providers to verify the identities of their users.
In late February 2016, the European Parliament's Committee on Economic and Monetary Affairs (ECON) released a draft report suggesting a creation of a special Task Force DLT (TF DLT) under the leadership of the Commission to deal with cryptocurrency-related issues. In May, the European Parliament approved the proposal. The mandate of the DLT-TF expires on 31 December 2017, and it can be renewed by the HSG if deemed necessary.
The 5AML Directive
Following the proposal for Directive of the EP and of the Council for the amendment of Directive 2015/849 (4AML Directive) on 7.5.2016 the European Parliament and the European Council agreed to a new set of rules on 12.15.2017 informally called the 5AML Directive, which targets relevant virtual currencies market players: exchange platforms, wallet providers, and other representative groups of virtual currency stakeholders.
According to the proposal: "Gaps still exist in the oversight of the many financial means used by terrorists, from cash and trade in cultural artifacts to virtual currencies and anonymous pre-paid cards. This proposal seeks to address those gaps while avoiding unnecessary obstacles to the functioning of payments and financial markets for ordinary, law-abiding citizens and businesses, balancing the need to increase security with the need to protect fundamental rights, including data protection, and economic freedoms."
The biggest issue with virtual currencies according to the proposal is the fact that the transactions cannot be linked to identified persons. The 5AML Directive essentially requires exchanges and wallet providers that hold cryptocurrencies for clients to identify users and it gives national investigators more access to information, including national bank account registers. This is thus far the biggest attempt to regulate cryptocurrencies from a supranational legal point of view in the EU.
However, keep in mind that a directive is a legal act of the EU that is not self-executing, but instead it requires that the EU member countries achieve a particular result, without dictating the means of achieving that result. Thus, the regulatory approach of separate countries within the EU may differ. We will have to wait and see how each country goes about firming up their regulations.
