The First “Country” with a Clear Definition of a Virtual Currency

The amendment sets out the following definition:

“virtual currencies” means a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency, and does not possess a legal status of currency or money, but is accepted by natural or legal persons, as a means of exchange, and which can be transferred, stored and traded electronically.

The amendment makes it explicitly clear in the preamble that virtual currencies should not to be confused with electronic money (Article 2(2) of Directive 2009/110/EC) nor with the term funds (meaning banknotes and coins, scriptural money or electronic money, point (25) of Article 4 of Directive 2015/2366/EU). The legislator made it equally clear that virtual currencies are not in-games currencies, which can be used exclusively within the specific game environment.

What is interesting to me is that the preamble also makes it clear that virtual currencies may also be used for other different purposes and find broader applications such as “means of exchange, investment purposes, store-of-value products or uses in online casinos.”

If we now try to analyse the content of the definition, we would break it down in the following:

a) digital representation of value — A lot of experts in finance, including some Nobel award winners, are discussing the value of Bitcoin and other virtual currencies. This part can be argued two ways — one is that every token on the blockchain represents some value. Blockchain is a value driven system where nothing happens without fuel. In practice, every token represents some value, monetary or functional. It will be very difficult to argue that there is a token, which value is zero. The other way is that this digital representation of value needs to be direct — namely that the value of token is directly evident (but not linked) in EUR or linked to a known scope and type of service.

b) not issued or guaranteed by a central bank or a public authority — For this element all tokens, known to me, match. Let’s wait and see what Estonia does.

c) not necessarily attached to a legally established currency — In its essence, no tokens are attached to a legally established currency as of today. It is true that for the most popular and biggest ones there is a direct trading pair either in EUR or USD, but this should not be considered as “being attached”. Project Tether (and similar ones) was however different. Legally wise, this element is somehow irrelevant — it says that a token either is or is not attached to a currency and that does not have effect on whether such token is a virtual currency or not.

d) does not possess a legal status of currency or money — This criterion is met with all known tokens as of today. No tokens, to my knowledge, possess such status.

e) is accepted by natural or legal persons, as a means of exchange — Again, it will be hard to argue that any token is not means of exchange. They are designed to be exchangeable and this is their main feature. In practice, it might happen that some tokens will not be accepted by anyone (for some reason), but such perhaps only temporary condition, might not be enough to exempt a particular token from the virtual currency definition.

f) can be transferred, stored and traded electronically — Tokens are by design transferable, storable and tradable. There might be certain rare exceptions to this, but in principle all tokens match this criterion.

In other words — it seems that most of the tokens known and existing today may fall within the “virtual currency” definition. This could not be an error in the concept or a mere coincidence, the EU must have wanted to design a definition, which would cover as many tokens as possible. This is also evident from the preamble, which clearly reads that “The objective of this Directive is to cover all the potential uses of virtual currencies.”

This makes the EU the first “country” in the world (to my knowledge, but please feel free to correct me), which introduced a clear and legally binding definition of anything on blockchain.

The issue, however, might occur that the definition is too wide and that practically all cryptographic tokens will for the purpose of EU law be considered as virtual currencies. Is this really what the commission wanted and is this beneficial to the industry? As long as only the gateways to fiat are subject to AML regulation, such definition is probably not an issue. But most likely is that in addition to virtual currency definition, we might also need a definition of cryptographic token. In any case, legislators should be careful with using this definition of virtual currencies, because it seems it covers practically all blockchain tokens.