Corporate Finance, DeFi, Blockchain, Web3 News
Corporate Finance, Fintech, DeFi, Blockchain, Web 3 News

As Bitcoin’s Market Grows in Europe, Increased Concerns for Rational Regulation

By Judith Rinearson and Joseph Smallhoover.


A recent Bitpay report indicates that bitcoin transaction volumes in Europe reached an all-time high in the first two quarters of 2015 (1). This uptick in European bitcoin transactions has not gone unnoticed, particularly by regulators and law enforcement. And it is causing concerns.

For one thing, the link between digital currencies such as bitcoin and criminal activity has been well documented. With high profile arrests of bitcoin executives, plus the notorious use of bitcoin for illicit purchases on the “dark web”, law-enforcement has long been concerned about how this global currency can be misused by criminal elements. More recently, concerns have also been raised by the US Treasury department regarding the use of digital currencies by terrorists. A report released in June 2015 noted: “terrorist groups may use these new payment systems to transfer funds collected in the United States to terrorist groups and their supporters” (2).

Similar concerns were raised by French Finance Minister Michel Sapin, who penned a Decree that entered into force on 1st September 2015 regulating “the use of cash in France”, and “cash” extended to digital currencies. The Decree limits the payment of debts by cash or digital currencies to (i) €1,000 when the debtor is a tax resident in France or is acting in his commercial or professional capacity, and (ii) €15,000 when the debtor is a foreign tax resident and is not acting in his commercial or professional capacity.

Are these concerns valid? Somewhat, though many note that the blockchain technology which records every bitcoin transaction, makes true anonymity virtually impossible – especially when compared to the most ubiquitous and anonymous payment product: cash.

Recently, regulators have focused on another risk posed by digital currencies: the risks presented to consumers and investors. There is no question that bitcoin and other digital currencies are volatile, and that their value can increase or decrease suddenly with little warning. The quandary facing many regulators is not whether bitcoin and other digital currency should be regulated, but how to do so without squelching its innovative and beneficial aspects.

This concern, to avoid over regulation of digital currencies, has been heard around the world. It comes not only from anti-government libertarian groups that have endorsed bitcoin as a way to avoid “big brother” oversight, but by regulators and academics alike who recognize the long-term potential benefits of having a fast, secure way to move value around the world.

So where do regulators turn to in order to provide reasonable regulation, without compromising innovation? Some have proposed licensing of bitcoin dealers, exchanges, or online wallets, so that those who wish to transact business in digital currencies will have the comfort of knowing that they are working with a company whose leadership has been fully vetted, who has established procedures for ID verification, and who are subject to regulatory oversight. While this approach makes sense, it must be done with a light touch.

The European Union has implemented a sophisticated “passport” system that allows an entity that is licensed in one jurisdiction to do business in other jurisdictions subject to reasonable guidelines. On the other hand, in the United States, any non-bank financial service company that does business nationally must obtain requisite licenses on a state-by-state basis (currently 49 jurisdictions).

Many have raised concerns that these state money transmitter licenses are a true barrier to entry for creative and innovative start-ups. When New York State recently implemented a “bitlicense” requirement for businesses that sell, exchange or hold bitcoin, the state included a well-regarded provision that allowed start-ups to obtain a two-year temporary license, without necessarily fulfilling all of the more onerous licensing requirements. Despite this, many New York digital currency businesses opted to depart from the New York marketplace because of the difficulties and constraints placed by the New York regime.

In Europe, regulators have been reluctant to regulate bitcoin (while still issuing warnings regarding the perils of virtual currencies)(3). But that appears to be changing. We are seeing renewed calls for more regulation, perhaps in light of terrorist concerns (clearly the case in France), or perhaps based on a concern that the growth of bitcoin might threaten the euro. In April 2015, the European banking authority announced it was going to consider bitcoin regulation. And as earlier noted, French Finance Minister Michel Sapin is responsible for the Decree increasing cash controls, including digital currency controls.

In our view, it is a laudable goal to establish regulatory controls on bitcoin and digital currencies that will provide some sanity to the ever-confusing network of laws and regulations. We are concerned, however, about the proliferation of conflicting regulatory approaches to this nascent industry. Just this week, the US Commodities Futures Trading Commission determined that bitcoin is a “commodity.” (4). And in France, the tax authorities have concluded that digital currency profits are to be treated as non-commercial profits (bénéfices non commerciaux)(5). We urge rational regulation that provides the protections consumers need, but with just a single, appropriate regulator that works with the industry, and is not seeking to shut the industry down.

Judith Rinearson, Partner at the global law firm of Bryan Cave LLP, is the leader of the firm’s Prepaid & Emerging Payments Team. She has been resident in the New York office until this month when she officially relocated to London in order to expand the firm’s Payments Practice in Europe.

Joseph Smallhoover is a Partner in the firm’s Paris office, specializing in, inter alia, financial industry regulation and compliance and related transactional matters.

(1) https://blog.bitpay.com/bitcoin-a-new-global-economy/
(2) http://www.treasury.gov/press-center/press-releases/Pages/jl0072.aspx
(3) https://www.eba.europa.eu/-/eba-warns-consumers-on-virtual-currencies
(4) http://www.cftc.gov/PressRoom/PressReleases/pr7231-15
(5) cf. bulletin officiel des finances publiques - Impôts dated 11 July 2014 regarding the taxation system applicable to bitcoins

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Vendredi 16 Octobre 2015




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