Virtual Currencies in the Eurosystem: Challenges Ahead

• Author: Rosa Maria Lastra - Jason Grant Allen
• Position: LLB, MA (Valladolid), LLM (Harvard), PhD (Madrid); Sir John Lubbock Chair in Banking Law, Professor in International Financial and Monetary Law at the Centre for Commercial Law Studies (CCLS), Queen Mary University of London. - BA & LLB (UTas), LLM (Augsburg), GDLP (College of Law), PhD (Cantab.); Alexander von Humboldt Foundation Post-Doctoral...
• Pages: 177-232

Virtual Currencies in the Eurosystem:

Challenges Ahead

R

OSA

M

ARIA

L

ASTRA

*

AND

J

ASON

G

RANT

A

LLEN

∞

This article is the slightly modified version of a policy contribution that

was prepared for the Committee on Economic and Monetary Affairs of the

European Parliament (ECON) as an input for the Monetary Dialogue of 9

July 2018 between ECON and the President of the European Central Bank

(http://www.europarl.europa.eu/committees/en/econ/monetary-dialogue

.html). Copyright remains with the European Parliament at all times.

I. Introduction

Since the launch of Bitcoin in 2009, Virtual Currencies (VCs) utilizing

Distributed Ledger Technology (DLT), particularly ‘blockchain’ data

structures, have moved into mainstream awareness and onto the regulatory

agenda.

1

While VCs were not, in the early years, considered much of a risk

to either the financial or real economy or to monetary policy, developments

since 2017 have heightened central banks’ and regulators’ sense of

vigilance—particularly (i) Bitcoin’s (brief) rise to nearly US $20,000 per

bitcoin, and (ii) the unprecedented volume of early venture capital raised in

Initial Coin Offerings (ICOs) outside the regulated financial services

industry.

2

At the time of writing, 1,604 VCs were listed on one prominent

website, with a nominal total market capitalization of US $419 billion.

3

These are startling numbers because they have risen from zero since the

launch of Bitcoin in 2009, because a massive explosion in number and value

* LLB, MA (Valladolid), LLM (Harvard), PhD (Madrid); Sir John Lubbock Chair in

Banking Law, Professor in International Financial and Monetary Law at the Centre for

Commercial Law Studies (CCLS), Queen Mary University of London.

∞BA & LLB (UTas), LLM (Augsburg), GDLP (College of Law), PhD (Cantab.); Alexander

von Humboldt Foundation Post-Doctoral Fellow, Humboldt-Universit¨at zu Berlin

Großbritannien-Zentrum; Visiting Fellow, UNSW Centre for Law Markets and Regulation;

Adjunct Research Fellow, University of Tasmania Faculty of Law; Member of the NY Bar and

Australian Lawyer (non-practicing).

1. See Dirk A. Zetzsche, Ross P. Buckley, Douglas W. Arner, & Linus Fohr, The ICO Gold

Rush: It’s a Scam, It’s a Bubble, It’s a Super Challenge for Regulators 2-4 (European Banking

Institute, Working Paper Series 2017-011, 2018), https://papers.ssrn.com/sol3/papers.cfm?ab

stract_id=3072298&download=yes.

2. See id. at 19. Bitcoin and Ether are of particular importance. See B

ITCOIN

, https://bitcoin

.org/en/ (last visited Oct. 30, 2018); see also E

THER

, https://www.ethereum.org (last visited Oct.

30, 2018).

3. See C

OIN

M

ARKET

C

AP

, https://coinmarketcap.com/, (last visited May 11, 2018). This

figure changes daily.

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has occurred in the past three years, and because, despite significant

volatility in the VC markets, these figures continue to grow.

The development of the VC market to date has largely been a matter of

private initiative, often motivated by a techno-libertarian ideological outlook

that stresses the private creation of money and adopts a skeptical position

towards state interference in economic arrangements generally, which

translates into a skeptical position towards central banks in particular.

4

More recently, however, central banks around the world have begun to

explore the affordances of DLT as a source of new tools in monetary policy.

Questions exist about VCs’ status, their role in the Eurosystem, and the

proper approach for regulators and central bankers to take. To date, most

regulators have adopted a ‘watch and wait’ strategy as the market develops

5

in order not to stifle beneficial innovation—and bearing in mind that VCs

are a cross-border phenomenon. Certain jurisdictions have been more

proactive than others. The US Securities and Exchange Commission (SEC),

for example, has adopted a proactive but fairly permissive strategy focused

on applying the requirements for the valid issue of securities to these new

financial instruments; regulators in China and South Korea, on the other

hand, have placed a moratorium on ICOs.

6

Thailand recently approved a

decree on digital assets.

7

Generally, the first wave of regulatory action has

been to warn consumers and to apply existing regulations to VCs. In the

next wave, we expect to see express regulation of VCs (and their related

technologies) directly, through various means; for example, the draft of

legislation currently slated in Malta.

8

In this paper, we explore the challenges VCs might raise for central banks

in the Eurosystem, both in their money creation and oversight roles. The

structure of the paper is as follows: Section II defines VCs and the

technology on which they rest, differentiates VCs from more familiar

financial instruments such as cash, book-money, and e-money, and sets out

4. See generally Jon Baldwin, In digital we trust: Bitcoin discourse, digital currencies, and

decentralized network fetishism, P

ALGRAVE

C

OMMC

’

N

(2018), https://www.nature.com/articles/

s41599-018-0065-0.pdf.

5. See Marco Dell’Erba, Marco, Initial Coin Offerings. A Primer. The First Response of

Regulatory Authorities, N.Y.U J.

OF

L. & B

US

. 3, (July 7, 2017), https://ssrn.com/

abstract=3063536.

6. See, e.g., [C

HINA

B

ANK

I

NSURANCE

S

UPERVISION AND

A

DMINISTRATION

C

OMMISSION

], (Nov. 4, 2018) http://www.cbrc.gov.cn/chinese/newIndex

.html (China), translated in Wolfie Zhao, China’s ICO Ban: A Full Translation of Regulator

Remarks, C

OINDESK

(Sept. 7, 2017 2:17 PM), https://www.coindesk.com/chinas-ico-ban-a-full-

translation-of-regulator-remarks/.

7. 135 Raadchakidjaa [Royal Thai Gov’t Gazette] pt.33a p. 43-70 (B.E. 2561, May 13, 2018),

translated in Emergency Decree on Digital Asset Businesses, L

INKLATERS

, https://www.sec.or

.th/EN/SECInfo/LawsRegulation/Documents/actandroyal/digitalasset_decree_2561_EN.pdf.

The Decree was published in the Government Gazette on 13 May 2018 and came into force on

14 May 2018. See Thailand enacts emergency decrees on digital assets, EY (May 21, 2018), https://

www.ey.com/gl/en/services/tax/international-tax/alert—thailand-enacts-emergency-decrees-

on-digital-assets.

8. See, e.g., Virtual Financial Assets Act 2018, C778 (2018) (Malta).

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2019] CHALLENGES AHEAD 179

the features that differentiate VCs from each other in legally relevant ways.

This section is designed to highlight the legally-relevant features of VCs and

set the stage for a more detailed examination of VCs and monetary law in

Section III. We emphasize that it is more accurate to talk about ‘crypto-

assets’ than about ‘cryptocurrencies.’ Further, we introduce in this section

the ‘border problems’ that VCs may raise as alternative financial instrument,

issued by new kinds of entities, which exist in a virtual realm that challenges

regulatory frameworks based on territorial jurisdiction. Finally, we explain

the ideological project that has driven the creation and early growth of VCs

and provide a sketch of earlier regulatory responses around the world.

Section III then explores the main challenges raised by privately issued

VCs. These are: (i) a direct challenge to the monetary sovereignty of central

banks in their money creation role, (ii) the threat of a vector of financial

contagion of systemic relevance to central banks in their oversight role, and

(iii) conceptual challenges to definitions (i.e. of categories such as ‘money,’

‘currency,’ and ‘security’) that are presupposed in the distribution of

regulatory competence—but are, both as a matter of legal and economic

theory, contentious. Finally, we examine the challenges inherent in

regulating a revolution in financial technology, including the distribution of

regulatory tasks and combatting financial crime and tax evasion, and explore

the need for central banks to adopt technological tools themselves in order

to control new forms of technologically-mediated financial activity.

While the bulk of our analysis is concerned with privately issued VCs, in

Section IV we briefly address the challenges raised in the Eurosystem by the

prospect of central bank issued virtual currencies (CBVCs).

9

Our

provisional analysis explores the reasons for which central banks might wish

to issue VCs, sets out the most important design features for central banks to

consider when doing so, and argues that national central banks (NCBs) in

the Eurosystem lack the competence to issue VCs unilaterally.

We conclude in Section V that VCs require a proactive regulatory

response and that certain VCs could warrant prohibition now or in the

future. Ideally, a harmonized European approach to the regulation of VCs is

desirable to prevent regulatory arbitrage by market participants and a ‘race

to the bottom’ by national regulators.

II. Definition and Focus

Although it is reflexive to ask whether VCs are properly seen as ‘currency’

or ‘securities,’ as further discussed below, it is not desirable to attempt to

place VCs into such legal categories at the outset. Legal categories are not

merely descriptive of reality, but prescribe what objects are legally

cognizable, often by means of a numerus clausus.

10

The assignment of an

9. The term ‘central bank digital currency’ (CBDC) is more established in the literature, but

we use VC in keeping with the ECON Committee’s terms of reference.

10. This begins at a fundamental level. For example, a Japanese court has ruled that bitcoins

are not cognizable as ‘things’ capable of ownership under Art. 85 of the Japanese Civil Code,

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