Bitcoin and other digital currencies are becoming increasingly popular. This has focussed the attention of governments and regulators on these non-traditional forms of payment that are increasingly being used by consumers but have also had associations with illegal activities such as money laundering and trade in illegal goods.
The Oireachtas, Ireland's national parliament, recently published a note on 'Virtual Currencies - The Regulatory Challenges Ahead'. It outlines three key challenges that are of particular interest for policymakers:
- Anti-money laundering
- Consumer protection
- Monetary sovereignty
But what are the advantages of virtual currencies? How are they currently regulated in Ireland? And what are the legal challenges of this innovative new technology?
What is a virtual currency?
Commentators often use the terms 'virtual currencies' and 'cryptocurrencies' interchangeably. This can be confusing for user as the terms are different.
A virtual currency is a "digital representation of value, not guaranteed by a central bank, which can be transferred, stored and traded electronically and which is accepted as a means of exchange."
Cryptocurrencies, like bitcoin, are a "subset of virtual currencies, which are mathematics-based, decentralised, convertible, and protected by cryptography".
The theoretical advantages of virtual currencies include:
- Lower transaction costs and vastly faster to execute as they remove the need for a traditional central authority, such as a bank
- More secure and harder to hack as there is no one point of failure in the network
- More transparent as they operate using a permanent record of transactions that is very difficult to tamper with
As a result of these perceived benefits, there are around 2,400 virtual currencies in existence today. In response to this rapid growth, the Irish Government has started to evaluate the best way to deal with the risks virtual currencies pose.
Current position in Ireland
There is currently no specific regulation of virtual currencies in Ireland. That's not surprising as it is rare that new laws and regulations are introduced in direct response to a technology. There are also no virtual currencies that are backed by either the Irish Government or the Central Bank of Ireland.
The competent authorities in Ireland have not been silent on virtual currencies and their related risks. They have issued the following guidance and set up the following working groups:
- The Central Bank has published an alert on the dangers associated with virtual currencies as well as an alert for investors on the dangers of Initial Coin Offerings (ICOs).
- The Department of Finance has issued a discussion paper on virtual currencies and blockchain technology. The paper's view is that a collaborative approach is needed from various government agencies to comprehensively deal with the risks and opportunities this area presents.
- The Department of Finance has set up an inter-departmental working group on cryptocurrencies and blockchain to monitor developments and consider policy recommendations.
- The Revenue Commissioners has confirmed that while there are no specific rules in Ireland dealing with virtual currencies, basic taxation principles govern virtual currency transactions.
Three key challenges to overcome are:
Ireland does not have specific laws and regulations dealing with the legality or regulation of virtual currencies. However, this position will change with the implementation of the EU's fifth Anti-Money Laundering Directive (AMLD5). One of the aims of AMLD5 is to increase the regulation of virtual currencies. It will remove a level of anonymity from virtual currency transactions and make their use more transparent by introducing obligations for virtual currencies exchange providers and wallet providers to carry out customer due diligence, monitor transactions and to report any suspicious activity to the relevant national authorities.
A consumer using a virtual currency has to navigate risks like trusting a third party 'wallet' platform that holds the currency, price volatility and cyber-threats such as hacking, identity theft and incurring unauthorised debits. The anonymity that many virtual currencies provide and the lack of specific consumer protection laws in this area exacerbate these risks.
Anonymity also provides allows criminals to use virtual currencies as a mechanism for tax evasion, theft, trafficking, counterfeiting, money-laundering and funding terrorism.
Central banks across Europe have traditionally controlled sovereign currencies and monetary policy. Some global authorities are worried that virtual currencies pose a risk to tradition financial systems and their stability orientated approach. They point to the historic volatility of the value of virtual currencies such as bitcoin that arise from their speculative nature and the fact that some large technology companies are creating their own virtual currencies. This has resulted certain central banks developing their own 'central bank digital currency' in response.
What the future holds for virtual currencies
Given the rapid rise of virtual currencies and their inherently borderless nature, a coordinated pan-national effort is required to restrict money laundering and terrorist financing, create reliable and predictable standards, and protect consumers. This aligns with the recommendations of the International Monetary Fund which recently called for formal global coordination on the regulation of virtual currencies. This desire for cross-border harmonisation has been echoed at an EU level. We expect to see further guidance from the Central Bank over the coming 12 months.
That said, it is difficult to directly regulate 'a technology' itself. Technology is the enabler - it is better to think in terms of regulating the providers and use cases. Increasingly, the intention of policymakers is therefore to try to propose laws and regulations that are technology-neutral.
It remains to be seen whether governments and regulators will address virtual currencies under existing laws and regulations, by adopting new laws and regulations, or through a combination of both. In any event, policymakers need to adopt a balanced and proportionate approach to ensure an onerous regulatory regime does not unduly stifle technical innovations. It is clear that a creative approach to regulatory oversight is needed to effectively address the challenges and risks associated with virtual currencies.
Originally published July 28, 2020.
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