Virtual currencies are the outcome of multiple technological advancements, especially in computer science (P2P networking), cryptography (cryptographic hash functions, digital signatures) and economics (game theory). They can be defined as digital tokens of value, which are transacted within schemes of exchange based on blockchain ledger technologies.
Services related to virtual currencies have gradually developed into a full-blown industry with more than two thousand employees. The combined market capitalisation (i.e., market price multiplied by the number of existing currency units) of all virtual currencies has increased more than threefold since early 2016 and has reached $27 billion in April 2017 (Hileman and Rauchs 2017 : 14). The number of unique active users of virtual currency wallets is estimated to be between 2.9 million and 5.8 million.
Four key virtual currency industry sectors today :
- payment services, and
The exchanges sector has the highest number of operating entities and employs more people than any other sector of the virtual currency industry. It was the first to have emerged in the virtual currency industry and remains the largest sector in terms of the number of both companies and employees. Exchanges provide services to buy and sell virtual currencies and other digital assets for national currencies and other virtual currencies. 17% of the sector’s budget is spent on security.
Virtual currencies and the blockchain technology, which underpins them, already have or may have in the future important applications, among others, in the following fields of activity :
- Transfers of Value – The decentralised structure of blockchain technologies has the capacity to deliver secure, verifiable transactions among entities online without the need for intermediaries. For example, in May 2015, Nasdaq, one of the world’s largest suppliers of exchange, clearing house and depository services and technology, announced that it planned to use the blockchain to run its Private Market, with a view to incorporating blockchain technology into the other offerings that it provides to its clients.
- Micropayments – Virtual currency schemes make transfers of very small sums of money feasible. For instance, a start-up called Streamium offers micro-payment services through virtual currencies in the provision of broadcasting services, transferring value every second the viewer watches a video.
- Asset Management – Blockchain technologies can be utilised to securely manage trustworthy registers of valuable assets. For instance, Everledger uses the blockchain to establish the provenance of more than 1.6 million diamonds.
- Smart contracts – Smart contracts are computer programmes that can automatically execute the terms of a contract. The idea of a smart contract has been around since Nick Szabo proposed them in the 1990s. Still, the capacity of blockchain ledgers to enable secure contract provides the technological base for smart contracts. Ethereum, Orisi, Hedgy, Symbiont and Eris are some of the companies working on projects in this area.
The Legal Status of Virtual Currencies
The legal definition of virtual currencies tends to vary depending on the context, e.g. taxation, the registration and licensing of market participants or anti-money laundering (ECB Report 2015 : 25).
A useful working definition of virtual currencies describes any virtual currency as a digital representation of value that can be digitally traded and functions as a medium of exchange, a unit of account and/or a store of value, but does not have legal tender status in any jurisdiction (Allen & Overy 2015 : 3).
Furthermore, the term “virtual currency scheme(s)” also refers to the aspects of both the value and the inherent or in-built mechanisms ensuring that value (ECB Report 2015 : 4, 25).
Are Virtual Currencies Money?
From an economic perspective, money is identified by reference to the role it plays in society, in particular, the extent to which it serves the following purposes :
- A store of value with the ability to buy goods and services;
- A medium of exchange for the execution of payments; and
- A unit of account with which to measure the value of all other commodities.
From a legal point of view, virtual currencies which are held to fulfill the foregoing criteria are considered as money lato sensu. Such a characterisation is not without a legal impact. If accepted as money lato sensu, bitcoin acquires the legal status of a legitimate contractual means of payment (Simsive & Archontaki 2014).
According to the European Central Bank virtual currencies do not currently fulfill the three economic roles associated with money in their entirety. As a result, the ECB does not regard virtual currencies, such as Bitcoin, as full forms of money as defined in economic literature (ECB 2015 : 4). In its own report, the International Monetary Fund excludes virtual currencies from the scope of money on the grounds that “the current small size and limited acceptance network of VCs significantly restricts their use as a medium of exchange” (IMF 2016 : 17). Along the same lines, the Bank of England (BoE) considers that virtual currencies “fulfill the roles of money only to some extent and only for a small number of people” (BoE 2014).
On the contrary, the US Internal Revenue Service (IRS) has characterized virtual currencies as money on the basis that they operate like “real” currency, i.e. circulates, and is customarily used and accepted as a medium of exchange in the country of issuance (US IRS 2014 : 1). Furthermore, the Swiss Federal Council has accepted that bitcoins are a means of payment which in turn can be used to acquire goods or services (Swiss Federal Council 2014 : 12). Accordingly, in a relevant report the OECD has considered that virtual currencies could be thought of as meeting the social roles of money, i.e. as potential store of value, unit of account and a medium of exchange (OECD 2014 : 7). Bitcoin has also been equated with money in recent US jurisprudence1.
Are Virtual Currencies Legal Tender?
Money stricto sensu or money as legal tender is any mobile asset, which is legally recognized as means of payment within the jurisdiction of a state (Komninos 2015). Since 1.1.2002 the Euro is the main legal tender in the Greek jurisdiction by virtue of article 10 the 98/974/EC Regulation. Hence, the main difference between money lato and money stricto sensu is the fact that it is only the payment of the latter form of value, which amortizes debt.
A virtual currency is not issued or guaranteed by any government, and fulfils the functions of money lato sensu only by agreement within the community of users of the virtual currency (ECB Report 2015 : 4, 25). Hence, virtual currencies are distinct from fiat currency or “real currency”, which is the physical money that makes up a country’s legal tender, and distinct from e-money, which is a digital representation of fiat currency (Allen & Overy 2015 : 3).
Therefore, the Court of Justice of the European Union has ruled that the ‘bitcoin’ virtual currency is a contractual means of payment between the entities which accept it and cannot be regarded as a current account or a deposit account, a payment or a transfer (CJEU, Case C‑264/14, para. 42).
Are Virtual Currencies Financial Instruments?
In the context of finance law, the Court of Justice of the European Union has ruled that the ‘bitcoin’ virtual currency cannot be considered as debt, cheques and other negotiable instruments referred to in Article 135(1)(d) of the VAT Directive, because it actually constitutes a contractual means of payment (CJEU, Case C‑264/14, para. 42).
Furthermore, the CJEU has ruled that the ‘bitcoin’ virtual currency is neither a security conferring a property right nor a security of a comparable nature (CJEU, Case C‑264/14, paras. 54-56).
Is the For-Profit Exchange of Virtual Currencies a Service?
The Court of Justice of the European Union has ruled that the exchange of traditional currency for units of the ‘bitcoin’ virtual currency and vice versa, in return for payment of a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he sells that currency to his clients, constitute services for consideration (CJEU, Case C‑264/14, para. 31).
Is the For-Profit Exchange of Virtual Currencies a Financial Service?
According to the Court of Justice of the European Union, transactions involving non-traditional currencies, that is to say, currencies other than those that are legal tender in one or more Jurisdictions, in so far as those currencies have been accepted by the parties to a transaction as an alternative to legal tender and have no purpose other than to be a means of payment, are financial transactions (CJEU, Case C‑264/14, para. 49).
E-money services in Greece are regulated by the 4021/2011 act, which transposes Directive 2009/110/EC into Greek law. Both the EU and the Greek legislation on e-money do not explicitly refer to virtual currencies and, therefore, it is a matter of interpretation whether virtual currencies and relevant service providers fall under their scope.
According to article 2 § 1 of the 4021/2011 Act, ‘electronic money’ means electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions as defined in article 4 § 5 of the 3862/2010 Act, and which is accepted by a natural or legal person other than the electronic money issuer. Virtual currencies fall outside the scope of this definition, because they do not represent monetary value, i.e. traditional currencies which have legal tender status in any jurisdiction (Metaxakis 2017 : 37).
In particular, e-money can be issued only in exchange for the transfer of corresponding funds in real currency at par value (article 2, n. 2, and article 11, Directive 110/2009/EC). Furthermore, e-money must be redeemable into real currency at any moment and at par value upon request of the electronic money holder (article 11 Directive 110/2009). Since virtual currencies are not electronic representations of national currencies, they do not fulfil the foregoing provisions (Kazazakis 2015, Komninos 2015).
Along the same lines, the Court of Justice of the EU has ruled that “[v]irtual currencies differ from electronic money, as defined in Directive 2009/110/EC of the European Parliament and the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC (OJ 2009 L 267, p. 7), in so far as, unlike that money, for virtual currencies the funds are not expressed in traditional accounting units, such as in euro, but in virtual accounting units, such as the ‘bitcoin’ (CJEU, Case C‑264/14, para. 12).
In addition, according to article 10 § 2 of the 4021/2011 act e-money presupposes its issuance by a single entity, i.e. the e-money issuer. Article 11 § 1 of the Αct contains a list of entities eligible to issue e-money. Bitcoin exchange providers and other virtual currency intermediaries do not issue bitcoins themselves, whereas the major virtual currency schemes have a decentralized structure, thus lacking a single entity under control. Finally, bitcoin exchange providers are not included in the exhaustive list of the law concerning e-money issuers (Igglezakis 2016, Tasca 2015 : 27).
In conclusion, Greek e-money law cannot be applied to virtual currencies, given that:
- Virtual currencies are not e-money, i.e. electronic representations of real currency.
- Major virtual currency schemes, such as bitcoin, lack the existence of a central authority, which could be characterized as e-money issuer.
Payment Services Regulation
Payment services in Greece are regulated under the 3862/2010 Payment Services Act, which transposes Directive 2007/64/EC into Greek law. A new payment services bill is currently under public consultation, which will annul the 3862/2010 act and will transpose the latest Payment Services Directive 2015/2366/EC4 (PSD2) into Greek law. Both the EU and the Greek legislation on payment services do not explicitly refer to virtual currencies and, therefore, it is a matter of interpretation whether virtual currencies and relevant service providers fall under their scope.
Virtual currency exchange services do not qualify as “payment services” under article 4 § 3 of the 3862/2010 act, because none of the business activities included in this paragraph encompasses exchanging virtual currency for traditional currency or vice versa. The underlying terms in the 3862/2010 act, such as “payment account,” “money remittance,” and “payment instrument” are too narrowly defined to leave virtual currencies outside their scope.
In this context, the Court of Justice of the European Union has characterized the ‘bitcoin’ virtual currency as means of payment, which “cannot be regarded as a current account or a deposit account, a payment or a transfer” (CJEU, Case C‑264/14, para. 42).
The newer Directive 2015/2366/EC seems to leave some scope through the broadening of the definition of “payment services”, as laid down in article 4 of the Directive, so as to include notions such as “third party payment service provider” and “payment initiation service”, and may comprise some of the activities carried out on platforms for the exchange of virtual currencies, yet not the primary service of buying and selling virtual for traditional currencies and vice versa. Hence, if virtual currency intermediaries are included under the scope of the expected Greek transposition act, this shall only be possible through the issuance of relevant administrative decisions by the Central Bank of Greece.
In conclusion, Greek payment services law cannot be applied to virtual currencies, given that virtual currency exchange services do not fall under the definition of payment services.
Financial services in Greece are regulated under the 3606/2007 Financial Instruments Act, which transposes the MIFID Directive and its amending Directives (primarily Directives 2004/39/EC and 2008/10/EC) into Greek law. Both the EU and the Greek legislation do not explicitly refer to virtual currencies and, therefore, it is a matter of interpretation whether virtual currencies and relevant service providers fall under their scope.
Article 5 of the 3606/2007 act enlists the typologies of financial instruments under Greek law. In this list, the category of financial instruments, which could relate to virtual currencies, is the category of transferable securities. Nevertheless, article 2 § 13 of the act explicitly excludes any means of payment from the definition of transferable securities. Therefore, the legal status of virtual currencies as means of payment, as recognized by the Court of Justice of the EU, excludes the latter from the scope of the 3606/2007 Financial Instruments Act (Kollias 2015 : 501).
In general, virtual currencies are means of payment not oriented towards investment purposes. Therefore, they cannot be classified as financial securities. Furthermore, the forms of securities in Greek law are restrained only to the numerous clausus of forms stipulated under the law. Since they are not included within such a numerous clausus, virtual currencies cannot be considered to attain the legal status of financial securities under Greek law (Metaxakis 2017 : 129-130).
In addition, article 8 of the 3606/2007 act enlists the financial institutions, which constitute investment service providers subject to authorization by the Central Bank of Greece. As in force today, this list does not directly or indirectly include virtual currency exchange providers.
In conclusion, Greek financial instruments law cannot be applied to virtual currencies, given that:
- Virtual currencies are not financial instruments, because they are characterized as means of payment, which are explicitly excluded from the scope of Greek and EU financial instruments law.
Virtual currency exchange providers are not included in the list of financial institutions, which constitute investment service providers.
Anti-Money Laundering Regulation
Anti-money laundering [AML] and the Countering the Financing of Terrorism [CFT] are regulated in Greece under the 3691/2008 Anti-Money Laundering Act, as amended by the 3932/2011 and 4389/2016 Acts, which transpose the Third Anti-Money Laundering Directive 2005/60/EC7 (3rd AMLD) into Greek law. Both the EU and the Greek AML / CFT legislation do not explicitly refer to virtual currencies and, therefore, it is a matter of interpretation whether virtual currencies and relevant service providers fall under their scope.
Article 4 § 1 of the 3691/2008 Act defines ‘property’ as assets and income of every kind, whether corporeal or incorporeal, movable or immovable, tangible or intangible, and legal documents or instruments in any form including electronic or digital, evidencing title to or an interest in such assets. Furthermore, article 4 § 13 of the 3691/2008 Act defines “Suspicious Transaction or Activity” the transaction or transactions or activities from which it is believed that material evidence exists or suspicion of possible attempt or commission of the offenses referred to in the 3691/2008 Act or of involvement of the trader or the beneficial owner in criminal activities, based on the assessment of transaction data (nature of the transaction, type of financial instrument, frequency, complexity and amount of the transaction, usage or not) and the person (occupation, financial status, transactional or business conduct, reputation, the level of transparency of the customer, other characteristics). According to article 26 § 1 of the 3691/2008 Act, credit and financial institutions with AML / CFT obligations are obliged to report any suspicious transactions to the Greek Financial Intelligence Unit.
Virtual currencies may be considered to fall within the scope of property, as defined in article 4 § 1 of the 3691/2008 Anti-Money Laundering Act. Therefore, transactions involving virtual currencies may constitute suspicious transactions under the Act, which have to be reported by obliged entities to competent authorities.
Currently, bitcoin exchange providers are not explicitly characterised as obliged entities in the relevant exhaustive list of article 5 § 1 of the 3691/2008 Act (Metaxakis 2017 : 223-227). Only in cases, in which the bitcoin exchange provider itself commits money laundering offences, can the representatives of the latter be persecuted under article 45 § 1 e’ of the 3691/2008 Act.
In case that virtual currency intermediaries are to be included under the scope of the 3691/2008 Act, this can only be rendered possible through the issuance of a relevant ministerial decision on the scope of obliged AML / CFT entities, including virtual currency intermediaries to such entities. Such a ministerial decision is currently pending and expected soon to be published.
Tax Law Issues
Article 2 § 1 of the VAT Directive provides that “[t]he following transactions shall be subject to VAT : […] (c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such”
In addition, article 135 § 1 e of the VAT Directive provides that “[m]ember States shall exempt the following transactions : […] (e) transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors’ items, that is to say, gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest”
In its Skatteverket v. Hedqvist decision the Court of Justice of the European Union has interpreted article 2 § 1 c of the Directive 2006/112/EC [VAT Directive] as meaning that transactions, which consist of the exchange of traditional currency for units of the ‘bitcoin’ virtual currency and vice versa, in return for payment of a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he sells that currency to his clients, constitute the supply of services for consideration within the meaning of that article (CJEU, Case C‑264/14, para. 23-30).
Following that, the Court of Justice of the European Union has interpreted article 135 § 1 e of the VAT Directive as meaning that the supply of the foregoing bitcoin exchange services are transactions exempt from VAT, within the meaning of that provision (CJEU, Case C‑264/14, Ruling no. 2).
Apart from the exemption from VAT, virtual currencies are also not explicitly characterised as property in Greek tax law and are, therefore, not subject to income tax (Metaxakis 2017 : 234-236).
Key Regulatory Bodies
By virtue of article 59 of the 3606/2007 Act the Bank of Greece is established as the national supervisory authority of the financial system, with supervisory powers both on credit and financial institutions and on insurance and reinsurance undertakings. It is a public limited company incorporated under private law and an integral part of the Eurosystem, enjoying the functional independence foreseen in the EU Treaties. The Bank has a wide range of responsibilities, which among other things includes the licensing of all types of credit institutions, such as e-money and payment service institutions.
The Hellenic Capital Market Commission (HCMC), established by virtue of the 1969/1991 and 2324/1995 Acts, supervises the Greek capital market. It is, among others, competent for the supervision of Greek and foreign firms offering investment services, undertakings of collective investments, their Managers, new investment undertakings, as well as the listed companies in respect of their transparency obligations, takeover bids, corporate events, prospectuses in case of rights issues, financial statements, the shareholders and their obligations on major holdings change notification.
The competent authority supervising the AML / CFT compliance in Greece and the Greek Financial Intelligence Unit is the Anti-Money Laundering, Counter-Terrorist Financing and Source of Funds Investigation Authority. According to the 3691/2008 Act, its mission is the collection, investigation and analysis of suspicious transactions reports (STRs), forwarded by obliged entities, as well as every other information that is related to the crimes of money laundering and terrorist financing and the source of funds investigation.
Sectoral Financial Intelligence Units supervising the AML / CFT compliance of obliged entities are : a) the Bank of Greece for : credit institutions; leasing companies; factoring companies; bureaux de change; intermediaries in funds transfers; credit companies; the undertakings of point jf of paragraph 3 of Article 4 of the 3691/2008 Act; and postal companies, only to the extent that they act as intermediaries in funds transfers; insurance companies; insurance intermediaries. (b) the Hellenic Capital Market Commission for portfolio investment companies in the form of a societe anonyme; management companies of mutual funds; management companies of mutual funds investing in real estate; management companies of mutual funds for venture capital; investment firms and investment intermediary firms.
Top Regulatory Risks
In its 2014 Paper on virtual currencies the OECD has distinguished two potential policy issues: (a) consumer protection issues: e.g. electronic theft; a collapse in value of crypto coins say due to the emergence of substitutes; the use of government plenary powers to ban them, etc.; and (b) anonymity features permitting an expansion of socially unacceptable activities such as tax evasion and money laundering (OECD 2014 : 7).
In its 2014 Report on virtual currencies the Financial Action Task Force (FATF) has also concluded that “convertible virtual currencies that can be exchanged for real money or other virtual currencies are potentially vulnerable to money laundering and terrorist financing abuse” (FATF 2014 : 9). In its 2015 Guidelines the FATF has further recommended to countries to identify, understand, and assess ML/TF risks of virtual currencies and to develop AML/CFT policies for virtual currency financial activities aimed at effectively mitigating those risks (FATF 2015 : 8).
Along the same lines, the European Banking Authority (2014) has identified several risks in connection to virtual currencies and has called for short and long term regulatory responses. Its short-term proposals include the declaration of virtual currency exchanges as ‘obliged entities’ that must comply with anti-money laundering and counter terrorist financing requirements set out in the EU Anti Money Laundering Directive. Long-term proposals include the introduction of a common legal framework for the regulation of virtual currencies across the European Union.
In its 2016 Action Plan to strengthen the fight against the financing of terrorism1 the European Commission has included several recommendations for conforming AML/CFT laws with virtual currencies. According to the Commission, “[v]irtual currencies are currently not regulated at EU level,” virtual currency exchange platforms do not currently fall under the 4th AML Directive, and “there is no reporting mechanism [applicable to virtual currency exchange platforms] equivalent to that found in the mainstream banking system to identify suspicious activity”. The Commission’s plan, “as a first step,” is to amend the Directive to cover virtual currency exchange platforms so that customer due diligence requirements would apply whenever virtual currency is exchanged for “real” currency, and vice versa. Hence, since July 2016 the Commission has proposed a revision of the Fourth AML Directive, which includes virtual currency exchange platforms and virtual wallet providers among obliged entities.
In this way, the European Union currently leaves it to member-states to bring virtual currency exchanges and custodians within the scope of the European-wide anti-money laundering and counter-terrorist finance regime classifying them as ‘obliged entities’. The Fourth Anti-Money Laundering Directive 2015/849/EC2 (4th AMLD), the latest AML/CFT legislation in the EU, was adopted May 20, 2015 and has a transposition deadline of June 26, 2017 for member-states. The provisions of the 4th AMLD can be transposed by member-states in such a way as to include transactions involving virtual currencies within the scope of EU anti-money laundering laws and impose anti-money laundering regulations to a certain extent to virtual currency exchanges and intermediaries. The Greek state has not yet transposed the 4th AMLD into Greek law.
Prospective Financial Regulation
In relation to virtual currencies, the European Central Bank has commented that “safer, more efficient and more reliable VCS will be developed in the future, which will be more usable as form of money […] virtual currencies do not have the nature of a highly liquid asset and have not reached the level of acceptance commonly associated with money (ECB 2015 : 25).
In its 2016 Action Plan to strengthen the fight against the financing of terrorism3 the European Commission has stated that it would seek to apply the Payment Services Directive (PSD2) licensing and supervision rules to virtual currency exchange platforms in order to have “better control and understanding of the market”. It has also mentioned that virtual currency “wallet providers” might be regulated in the future as well.
Along these lines, the EU Commission, the Bank for International Settlements, the World Bank, the United Nations, Europol, ESMA, the UK Treasury, the Bank of England, Nasdaq, as well as startups Blockchain and Epiphyte, hosted a non-commercial roundtable on cryptocurrencies and blockchain in mid-April 2016 to educate MEPs and set the stage for future regulatory initiatives4.
Following that, on 26 May 2016 the European Parliament has adopted a resolution on virtual currencies5. This is the very first opinion of the European Parliament on the issue. In this resolution, which is however not legally binding, the Parliament has requested from the European Commission to set up a working group to monitor virtual currencies and also to develop, in cooperation with Member States, guidelines that will provide complete information to users of virtual currencies. Furthermore, in its resolution the European Parliament has encouraged for the monitoring of the development of virtual currencies. In general, the EU Parliament appears to abstain from regulation for the time being in order to monitor technological development in a “do no harm” approach.
Finally, on 5 July 2016 the European Commission adopted proposals for the amendment of the 4AMLD, which bring virtual currency exchanges and wallet providers under its scope. According to the new proposals, virtual currency exchange and wallet providers are bound to be included in the list of obliged entities required to carry out “Know Your Customer” procedures, monitor transactions and report suspicious transactions.
In overall, other than in respect of laws to combat money laundering and terrorist financing risks, consensus at the European Union level in the near future on virtual currency intermediaries licensing seems unlikely.
Blockchain technologies have the potential to provide social access to alternative currencies, global markets, automated and trustless transactions systems, self-enforcing smart contracts, smart property and innovative models of governance. In terms of currency policy, blockchain technologies question the role of centralized gatekeepers, such as national central banks, raise issues of decentralised liability and, thus, necessitate the reform of [trans-]national regulations. In the decentralized environment of virtual currencies, transnational organisations and nation-states may need to adopt a different approach to shape markets.
The European Union has generally taken a cautious regulatory approach towards the emerging phenomenon of bitcoin, in order not to supress innovative business models in the field. As the bitcoin industry grows, national and transnational regulation on virtual currency-related services will deepen and multiply, especially in the fields of AML / CFT and financial regulation.
In Greece, the penetration of virtual currency usage is limited compared to other EU member-states. This fact in combination with the slow adaptability of Greek legislators leads to the assumption that the regulation of virtual currency – related services may be delayed in comparison to the core countries of the EU. In this uncertain regulatory environment, a virtual currency exchange business needs to safely navigate away from risks related to possible criminal offences and administrative authorities.