The term “virtual currency scheme” includes two important components; one of them being that these currencies bear a resemblance to money and the other that they automatically come with their own dedicated retail payment systems. With the growing increase of the internet, virtual currency schemes have become prevalent in most areas having to do with the financial sector and therefore, they are of interest to central banks. The modern world – with the increased use of the internet and rising technological developments – has allowed virtual communities to flourish in recent years.
A virtual currency is a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community. It is sometimes also referred to as ‘cryptocurrency’.
It is important to understand that the issuer of the currency and scheme owner is usually a non-financial private company therefore typical financial sector regulation and supervision is not applicable. In fact, people all over the world are trading hundreds of thousands of dollars worth of virtual currencies every day with no middle man and no credit card companies. This is because virtual currency platforms allow issuing companies to lower costs by eliminating the need for a third-party company, such as a bank or PayPal, to process each payment transaction. Moreover, the fact that the currency is denominated differently (i.e. not Euro or the US Dollar) means that complete control of the virtual currency is given to its issuer, who governs the scheme and manages the supply of money at will.
There are around hundred virtual currencies in the world; the most common form of crypto-currency being bitcoin, but alternatives—or altcoins for example Litecoins and PPCoins—are emerging, seeking to improve upon perceived shortcomings in bitcoins. Bitcoin was introduced in 2009 by a pseudonymous developer “Satoshi Nakomato” and cost then, $0.05 per unit. It is the first digital currency and decentralized electronic company not controlled by a single organization or government. It operates at a global level and can be used for all kinds of transactions (both virtual and real goods and services).
On the 13th of December, 2013, the European Banking Authority remarked that crypto-currencies exchanges are of considerable risk to users because consumers are not protected through regulation when using virtual currencies as a means of payment and may be at risk of losing their money. In addition, there is no guarantee that currency values remain stable.
There should be an increased awareness amongst consumers on the idea that exchange platforms tend to be unregulated and are not banks that hold their virtual currency as a deposit. Currently, there exist no specific regulatory protections in the EU that would protect consumers from financial losses if a platform that exchanges or holds virtual currencies fails or goes out of business. Moreover, ‘digital wallets’ (containing consumers’ virtual currency stored on computers, laptops etc.) may be easily hacked. Cases have been reported of consumers losing significant amounts of virtual currency, with little prospect of having it returned. Also, when using virtual currency for commercial transactions, consumers are not protected by any refund rights under EU law. The EBA also outlined that as transactions in virtual currency provide a high degree of anonymity, they may be misused for criminal activities, including money laundering. This misuse could lead law enforcement agencies to close exchange platforms at short notice and prevent consumers from accessing or retrieving any funds that the platforms may be holding for them.
Nevertheless, as the popularity of digital currency grows and more businesses and people make use of it, it may become part of mainstream society. In particular, Bitcoin is said to be more efficient than all competing currencies and it is this which will drive its adoption in the same way computers or online shopping were adopted. It is clear that fiat currencies as we know them will be radically changed. It is therefore up to the governments to safeguard fundamental principles intended to preserve financial stability while the development of these alternative forms of money takes place.
At WDM International we can provide advice in relation to the setup of Bitcoin operations in Malta. We have also advised numerous clients wishing to obtain banking and investment services licenses in Malta.
For more information kindly contact Dr. Jonathan De Giovanni, Director of Legal and International Tax.