Bitcoin and the road to regulation: what approach should
the European Union and its Member States take to legally
recognise it as a means of payment?
Alexandra Schneiders
29 July 2016
LLM European & International law (European law track),
2015-2016
Supervisor: Professor René Smits
Abstract
This Masters thesis seeks to answer the question of how Member States and the European Union should legally recognise the virtual currency Bitcoin, in light of its potential as an alternative means of payment. This young technology, the aim of which is to become a new electronic cash system, is today’s most widely used virtual currency. Consumers and merchants alike have enjoyed its advantages such as the speed, low costs and global reach of Bitcoin transactions. Meanwhile, the European Union has watched Member States take a State-centric approach when debating how Bitcoin should be recognised. The issue of whether it can be legally recognised as constituting ‘money’, in light of the aim behind the currency’s creation, has featured highly in these debates. This thesis concludes that no consensus can be found at national level on the questions of how and if Bitcoin should be recognised. Furthermore, the reality of its use does not match that of how we use and trust legal tender such as the euro. Therefore, it should be legally recognised as a payment system and not ‘money.’ EU institutions have advised the European Commission to look at whether there are gaps in EU payment laws to include virtual currencies within their scope. After analysing the Payment Services Directive (PSD(2)) and Electronic Money Directive (EMD), this thesis concludes that Bitcoin as a technology cannot fall under their scope. However, Member States could interpret the PSD(2) as including actors playing an important role in Bitcoin payments, such as exchange businesses. This should be done in a harmonised way, with or without EU guidance, in order to avoid fragmentation between Member States and forum shopping by companies.
Table of contents
I. Introduction ... 4
II. The Bitcoin technology and its EU treatment so far ... 7
III. Should Bitcoin be legally recognised as ‘money’? ... 14
IV. Recognition in EU legal instruments ... 26
V. Conclusion ... 38
VI. Bibliography ... 41
I. Introduction
The virtual currency Bitcoin has been taking the payments and financial services sectors by storm ever since 2009. Its innovative system of payment transactions carried out without the intervention of a third party, thereby challenging the status quo of the ‘trusted middleman’ in financial services, allows for fast, cheap and global payments. Despite media coverage of the currency being mostly negative due to its anonymity being favoured by criminals, its user base continues to be the largest out of the hundreds of (copycat) virtual currencies that have been created since Bitcoin’s establishment. This has not gone unnoticed by European Union (EU) institutions, such as the European Central Bank (ECB), which have published their views on Bitcoin’s potential impact on the European payments landscape.
However, the European Union has so far adopted a hands-off approach and not taken any steps towards legally recognising the technology as a payment system. This is because a debate on whether Bitcoin should be legally recognised as ‘money’, in light of its creator’s intention, is currently taking place at Member State level. This is particularly apparent in the Netherlands, one of the few EU countries in which a ruling on the legal status of Bitcoin has taken place. The first sub-question that will be asked by this thesis is whether national courts and legislators should recognise Bitcoin as legally constituting ‘money.’ This will be done in two parts. The first one will look at what the legal debate on this question has been in the Netherlands, by analysing interviews conducted for this thesis with several Dutch lawyers working with Bitcoin-related clients. The second part will look at the reality of Bitcoin use and compare it with the use of legal tender, such as the euro.
Furthermore, in their published opinions on Bitcoin, EU institutions such as the European Parliament urged the European Commission to assess whether virtual currencies like Bitcoin can fall under existing EU payment laws, such as the Payment Services Directive (PSD(2)) and Electronic Money Directive (EMD).1 Since the Commission has not yet expressed an opinion on the matter, the second sub-question asked by this thesis is to what extent Bitcoin could fall under these Directives’ scope. The aim will be to find the most realistic way of recognising the potential of Bitcoin
as a payment means under existing EU law. A legal analysis of the Directives and a ruling by the Court of Justice of the European Union (CJEU), as well as a critical look at opinions having been expressed on the matter, will support the answer to this question.
1.1 Problem statement and research question
Legal recognition usually precedes regulation, and the fact that no EU level position has been taken on the question of Bitcoin’s recognition due to a lack of consensus between Member States is an issue that needs to be resolved by policymakers. Discussions on its legal recognition at both Member State and European Union level have mostly centred on its potential as a new form of money or payment system. Therefore, this thesis aims to answer the following research question:
‘How should the European Union and its Member States legally recognise Bitcoin as a means of payment?’
1.2 Hypothesis
Bitcoin cannot be legally recognised as constituting money or a payment system. It cannot be legally recognised as constituting ‘money’ since it does not satisfy the three roles fulfilled by money: medium of exchange, store of value and unit of account. Bitcoin is rather a medium of exchange, since it seeks to provide a solution to the exchange of goods and services in daily life. This was the conclusion of the District Court of Overijssel2 in the Netherlands in its ruling on whether Bitcoin
can be legally recognised as constituting ‘money.’ Furthermore, the author agrees with the European Central Bank’s conclusion that there is no place for Bitcoin within the scope of EU payments legislation such as the Electronic Money Directive (EMD) and the Payment Services Directive (PSD(2)).3 Therefore, Member States and the EU should consider Bitcoin as an unregulated payment means used for the exchange of goods and services by a particular virtual community.
2 Rechtbank (District Court) Overijssel, 15 May 2014, Case C/08/140456 3 European Central Bank, “Virtual Currency Schemes”, October 2012, p. 43
1.3 Methodology
This thesis will be based on an analysis of court rulings, legal opinions, as well as national and EU laws. Its overall aim is to have a legal focus, since the main research question concerns the legal recognition of Bitcoin. Economic theories will help shape the analysis, since the subject has monetary aspects. Due to the topic being extremely practical and constantly evolving, a limited amount of legal literature has been published on it. Therefore, five interviews were conducted as part of the data collection. Two interviews took place with Dutch lawyers working with Bitcoin clients, one interview took place at the University of the West of England (Bristol, UK) with a PhD student researching the legal regulation of Bitcoin, another interview was made with a payments expert in the Netherlands, and finally the last interview took place with the CEO of a Bitcoin company. The latter has been anonymised for confidentiality reasons (the name is known by the thesis supervisor).
The thesis as a whole will be written from an external perspective and will have as its final aim an advisory answer. The second chapter, on the technology and the EU’s efforts to recognise it so far, will be descriptive. The third and fourth chapters, setting out the main legal analysis, will be evaluative. Finally, the conclusion will provide an advisory answer to the main research question.
II. The Bitcoin technology and its EU treatment so far
This chapter describes the origins and innovative features of the Bitcoin technology. It also analyses the main EU efforts made so far to recognise its impact on the payments industry. The aim of this chapter is to provide a backdrop for the legal analysis in the subsequent chapters.
2.1 Birth and life
Bitcoin’s first sign of life was on 31 October 2008 at 14:10 pm New York time, when ‘Satoshi Nakamoto’ sent an e-mail introducing his revolutionary technology to a group of cryptography experts and enthusiasts. In his brief email, Nakamoto (an alias for an individual/group of individuals whose real identity is still a mystery to this day) stated that he had been “working on a new electronic cash system
that’s fully peer-to-peer, with no trusted third party”, and invited recipients to have a
look at the White Paper detailing his invention.4 In it Nakamoto expressed his frustration with today’s system of over-dependence on third-party financial intermediaries and criticised the fact that “commerce on the Internet has come to rely
almost exclusively on financial institutions serving as trusted third parties to process electronic payments.” This “trust-based system” has its weaknesses, such as financial
institutions having to mediate “disputes.” By disputes he meant issues such as transaction reversals (e.g. money having to be paid back when a purchase is cancelled or fraudulent). Nakamoto states that the third party’s task of carrying out transaction validity checks deepens the “need for trust” in this party. He sees this trust as coming at a price, since consumers are made to compensate for it by being burdened with higher payment transaction fees as well as an inability to make “small casual
transactions.” Nakamoto laments the absence of a mechanism “to make payments over a communications channel without a trusted third party”, in order to avoid the
problem of trust and the accompanying burdens endured by consumers. He therefore designed an “electronic payment system based on cryptographic proof instead of
trust”, which would allow two parties to “transact directly with each other without
4 Paul Vigna & Michael J. Casey, The Age of Cryptocurrency, (New York: St. Martin’s Press, 2015), p.
the need for a…third party.”5 Nakamoto kickstarted the system at the beginning of 2009, by generating the first ever bitcoins, the currency underlying his newly designed technology.6
Bitcoin is the first successful implementation of a concept called
cryptocurrency, or cryptographic money.7 ‘Crypto’ refers to the system being run and verified solely by cryptography (pre-written codes run by computers), rather than by a central entity or third party.8 As to the ‘currency’ part of the word, it refers to the fact that a ‘bitcoin’, the Bitcoin system’s own token of value (i.e. currency), is ‘denominated in its own units of account.’ Each bitcoin (BTC) is ‘subdivided into 100 million smaller units’ named Satoshis.9 Bitcoins only exist in digital format.10 It is also useful to note that Bitcoin with a capital B refers to the technology as a whole, while bitcoin with a lower case b refers to the token of value traded by users within the Bitcoin network.11
The concept of cryptocurrencies is not new and was first pitched in 1998 by a group of Internet cryptography activists (which included Julian Assange) called
cypherpunks.12From then until 2008 there were several attempts to develop cryptocurrencies, whose failures stemmed from consumers’ lack of confidence with conducting transactions online as well as computer systems being less developed at the time.13 However, while cryptocurrencies failed to make an impact in the 90s, at the same time virtual currencies were being developed for closed virtual gaming environments, such as the online game World of Warcraft. Bitcoin can also be called a ‘virtual currency’ due to its online nature. However, as a virtual currency, it defies the trend of all virtual currencies so far having been centralised (i.e. controlled by an
5 Satoshi Nakamoto, “White Paper: Bitcoin: A Peer-to-Peer Electronic Cash System”, November 2008,
p.1
6 Paul Vigna & Michael J. Casey, p. 44
7 A.W. Jongbloed, “Bitcoins: virtueel geld, beslag op gebakken lucht?”, Tijdschrift voor de
Procespraktijk No. 3 (2015), p. 77
8 Computer Business Review, “What is cryptography?”, 8 June 2016
9 Rhys Bollen, “The Legal Status of Online Currencies: Are Bitcoins the Future?”, Journal of Banking
and Finance Law and Practice (May 2013), pp. 3-4
10 The Consultative Group to Assist the Poor- CGAP (World Bank), “Brief: Bitcoin versus Electronic
Money”, January 2014, p.2
11 Paul Vigna & Michael J. Casey, p. 8 12 Idem, p. 42
13 J. Anthony Malone, Bitcoin and Other Virtual Currencies for the 21st Century, (Toluca Lake:
entity). Its aim is the same as that of previous cryptocurrencies, which is to challenge the status quo in the payments sector by launching a virtual currency into wider society and presenting itself as a new form of money.14
Despite the fact that it has not yet managed to change this status quo and that the media has so far portrayed it as a currency primarily used by criminals, for such a young technology its success cannot be ignored. After all, even Bill Gates took note of it when calling Bitcoin a ‘technological tour de force.’15 The figures underlying its use are impressive: up to 221,000 transactions per day take place with bitcoins, while 8 million Bitcoin wallets (the equivalent of a Bitcoin bank account) have been opened so far.16 The industry is also estimated to be worth more than 10 billion dollars, with countless Bitcoin businesses having been set up to facilitate the obtaining and exchanging of bitcoins.17 In order to see how a Bitcoin payment transaction takes place, a description of the procedure is included in the Annex.
2.2 What makes it so different?
Bitcoin’s main revolutionary aspect is that it presents a direct challenge to the ‘middleman’ (i.e. bank clerk) playing a key role in verifying the validity of financial transactions ever since the beginning of banking, and basically proposes to replace this function with a group of computers maintaining an online record of all Bitcoin transactions (Bitcoin’s blockchain). This allows for cheap and quick payment transactions to take place all over the world, since there are no banks or central entities approving Bitcoin transactions. Payment validations that usually take days (in the case of international bank payments) are done within minutes by computers running the cryptographic Bitcoin protocol written by Satoshi Nakamoto.18
It is also very easy to become part of the Bitcoin network. Anyone can download the protocol programme free of charge and run it on their personal
14 Gareth W. Peters et al., “Trends in crypto-currencies and blockchain technologies: A monetary
theory and regulation perspective”, Ernst & Young- The Journal of Financial Perspectives (winter 2015), pp. 4-5
15 Jason Leibowitz, “Bitcoin: A 21st Century Currency Explained by a Wall Street Veteran”, Coindesk,
7 February 2016
16 Blockchain.info, “Charts”, accessed on 23 July 2016
17 Coinmarketcap, “Crypto-Currency Market Capitalizations”, accessed on 23 July 2016
18 John Gapper, “Bitcoin is far more than a currency for speculators”, Financial Times, 5 February
computer. By voluntarily contributing computational computer (i.e. electricity) to the Bitcoin network, the computer owner (who is called a ‘miner’ within the Bitcoin community) helps maintain it. The clever part of the Bitcoin system is that it incentivises users to provide computational power by making them wealthier. This is because when one connects their computer to the network by running the Bitcoin protocol, he/she has a chance of earning 25 bitcoins worth thousands of euros every 10 minutes (the time that a transaction is approved). Furthermore, at the same time as competing to earn new bitcoins, users’ computers complete important tasks such as updating and verifying the records of all past Bitcoin transactions, compiled into the
blockchain.19 The blockchain represents all valid Bitcoin transactions ever made, which are grouped into blocks representing the payment transactions completed every 10 minutes.20
Consensus and transparency are keywords characterising the Bitcoin system.
It is based on the principle of ‘governance by consensus’, since only when a majority of computers in the race to earn new bitcoins find consensus on the validity of a transaction, after checking all previous transaction records and verifying whether the latest transaction is not a bogus one (i.e. bitcoins having already been previously spent), will a payment be accepted.21 Therefore, the monetary rewards given to computer owners incentivise them to contribute to the network and keep the system honest by weeding out invalid transactions. The Bitcoin blockchain is also transparent in the way it is publicly available online for anyone to see.22
Another aspect making the Bitcoin system transparent is the fact that, according to a preordained algorithm that is part of the Bitcoin protocol, every 10 minutes a batch of 25 bitcoins is released into the network. This algorithm, programmed by Nakamoto, only plans to release a maximum of 21 million bitcoins, with the last bitcoin to be released by 2140. Therefore, there is no monetary authority deciding how many bitcoins should be issued. There are also no Bitcoin ‘banks’, and users can only obtain them by participating in the network and competing to win a batch of 25 bitcoins. Other options are purchasing them through an exchange platform
19 Paul Vigna & Michael J. Casey, pp. 123-133
20 Bitcoin.org, “How does Bitcoin work?”, accessed on 7 June 2016 21 Gareth W. Peters, p.10
(i.e. exchanging euros for bitcoins) or accepting them as payment for a good or service.23 Furthermore, there is no authority determining the price of a bitcoin, since it is dictated by supply and demand. Although this could be described as a transparent aspect, it has also led to the currency’s instability so far. Due to the fact that the global number of Bitcoin users is relatively small, its price is prone to significant exchange rate fluctuations. For instance, one bitcoin was worth less than one US dollar in 2011, while on 23 July 2016 it was worth 654 dollars.24 However, it is expected by the
Bitcoin community that as the number of users will increase and the bitcoin supply will remain fixed, its price will rise and become more stable over time.25
Last but not least, Bitcoin is innovative since it satisfies the demand for fast, digital and global payments of our increasingly connected world, in which the majority of people own a smartphone. The proof is not only in the number of users Bitcoin has so far attracted, but also in the fact that more than 1000 copycat cryptocurrencies have been created ever since Bitcoin was launched.26 Just as the Internet made 24/7 messaging a possibility with e-mail, cryptocurrencies like Bitcoin make 24/7 payments available to a global audience. Anybody can make a payment in bitcoins to a recipient anywhere in the world at any time of the day by downloading an (anonymous) Bitcoin wallet within a matter of seconds on their smartphone/computer. Bitcoin also fits into the current trend of the peer-to-peer or
P2P (i.e. person to person, without any intermediary) sharing of services and goods
having taken the Internet by storm. This phenomenon, known as the sharing economy, is mostly visible to us today through popular websites/mobile apps such as Airbnb (renting out a room in one’s home) and Uber (using one’s own car as a taxi service). In the same way, Bitcoin payments can be made directly from person to person without any intermediaries, and the managing of the network is in the hands of computer owners contributing computational power to the Bitcoin network.27
23 Jason Leibowitz
24 Coindesk.com, “Bitcoin price index”, accessed on 24 July 2016 25 Bitcoin.com, “Things you need to know”, accessed on 7 June 2016 26 Cryptocoincharts.info, “Crypto Coins List”, accessed on 24 July 2016 27 Jason Leibowitz
2.3 The EU approach so far
The European Union has so far adopted a hands-off approach, only showing initiative when it comes to the immediate risks presented by the currency, such as its use in money-laundering operations.28 However, it has not taken any action to
recognise Bitcoin as money or as a payment system. Its institutions and advisory bodies have only given it vague definitions, while still observing the potential it can bring to the European payments sector. The Court of Justice of the European Union gave its first ruling on the fiscal regulation of Bitcoin in October 2015, which will be analysed in chapter four of this thesis.
The first EU institution to have started noticing Bitcoin is the European Central Bank (ECB). In October 2012 it released a first report on virtual currencies, describing Bitcoin as ‘the most successful…virtual currency scheme to date.’ It concluded that despite virtual currencies such as Bitcoin providing advantages to consumers in the form of additional payment alternatives, they also clearly entail risks such as a lack of consumer protection.29 In February 2015 it published a follow-up report, in which it described virtual currencies as ‘a digital representation of value…which in some circumstances can be used as an alternative to money.’ It stated that they pose a challenge to other ‘retail payment instruments and innovative payment solutions’ due to its speed of settlement, global reach, payer anonymity and lower costs. The ECB even predicted that if virtual currencies were to overcome the current barriers hindering their more widespread use, they could turn out to be ‘more successful’ than existing payment systems, particularly when it comes to cross-border payments. The ECB stated that it would continue to monitor developments around the use of virtual currencies for payments.30
The European Banking Authority (EBA) has also expressed its views on Bitcoin. It first issued a public warning in December 2013 warning consumers that there are risks attached to ‘buying, holding or trading…Bitcoin’, since the currency is
28 European Parliament, “Resolution on virtual currencies”, par. 19 29 European Central Bank (October 2012), p. 21
not regulated.31 In July 2014 it published a full Opinion in which it stated that some of the benefits brought about by virtual currencies are ‘less relevant in the European Union’, in light of the ‘existing and pending EU Regulations and Directives that are explicitly aimed at faster transactions speed and costs.’ Finally, it recommended that the immediate response to the risks brought about by virtual currencies should be that ‘national supervisory authorities discourage credit institutions, payment institutions and e-money institutions from buying, holding or selling’ them.32
One of the latest developments at EU level was when on 26 May 2016 the European Parliament voted in favour of a non-binding resolution on virtual currencies drafted by the Member of the European Parliament (MEP) Jakob von Weizsäcker. The resolution, sent to the European Commission for consideration, calls for the creation of a taskforce at Commission level charged with building expertise on the subject and proposes ‘precautionary monitoring rather than pre-emptive regulation’, in order not to stifle the innovation brought by the technology.33 It further stresses that virtual currencies ‘have the potential to contribute positively to citizens’ welfare and economic development’, by for instance lowering the operational and transaction costs of payments to ‘well below 1%, compared to the traditional 2-4% for online payment systems.’ Lastly, it recognises that a ‘universally applicable definition’ of virtual currencies such as Bitcoin has not yet been established, but that it is sometimes ‘referred to as digital cash.’34
31 European Banking Authority, “Warning to consumers on virtual currencies”, 12 December 2013 32 European Banking Authority, “EBA Opinion on ‘virtual currencies’”, 4 July 2014, pp. 5-6
33 European Parliament News, “MEPs call for virtual currency watchdog to combat money laundering
and terrorism”, 26 May 2016
III. Should Bitcoin be legally recognised as ‘money’?
The aim of Bitcoin is to represent a new kind of digital money, as made clear in the last chapter. However, EU bodies have not yet given a concrete opinion on the form in which it should be legally recognised. There is also a lack of consensus between the European Union’s Member States on this issue. For instance, Luxembourg has labelled Bitcoin as electronic money35, while Germany recognises it as a financial instrument.36 Furthermore, many Member States have not given the currency any formal definition yet.37 The failure to legally recognise Bitcoin at national or EU level presents an obstacle to consumers and businesses wishing to sell, issue or transact with bitcoins. Debates on its legal recognition have mostly taken place at national level and, in light of the intention behind the virtual currency’s creation, centred on the question ‘Is Bitcoin money?’38 This chapter will address this question by focusing on the Netherlands, since it is one of the few Member States in which legal rulings concerning the recognition of Bitcoin have been made.
3.1 The Dutch Ruling
The first Bitcoin ruling in the Netherlands, decided by the District Court (‘Rechtbank’) of Overijssel on 14 May 2014, demonstrates the creativity of national judges when assessing the question of whether Bitcoin is money. The case was brought forward by ‘Party A’, who on 8 August 2012 had signed a contract to buy 2,750 bitcoins from ‘Party B.’ A claimed that B failed to meet part of the contract by only delivering 990 bitcoins, and wanted the court to recognise this by ruling that their contract had been ‘partially dissolved’ in October 2012 when only part of the bitcoins were delivered. A therefore claimed 14,168 euros back from B for the bitcoins he never received. Secondly, A stated that he had sustained additional damages of 132,792 euros due to the change in the bitcoin to euro exchange rate (more than 800%!), from the moment the remaining bitcoins had not been delivered to the time of the court case. To support this claim, A relied on Section 6.1.11 regarding
35 Josée Weydert & Jad Nader (Nauta Dutilh), “The brave new world of Bitcoin”, 3 July 2015
36 Emily Spaven, “Germany officially recognizes bitcoin as “private money””, Coindesk, 19 August
2013
37 US Library of Congress, “Regulation of Bitcoin in Selected Jurisdictions”, accessed on 24 July 2016 38 Anita Ramasastry, “Is Bitcoin money? Lawmakers, regulators, and judges don’t agree”, Verdict, 9
Obligations for the payment of money in the Dutch Civil Code (‘Burgerlijk Wetboek’,
BW), and more concretely on Article 6:125 therein.39 The latter provision allows for the compensation of ‘exchange rate change damages’ (‘koerswijzigingsschade’) caused by the change in the exchange rate (from the moment the contract is no longer being met) of the currency denominating the ‘money payment’ compared to a ‘foreign’ currency. B agreed to give back the money for the undelivered bitcoins, but did not agree to pay any ‘exchange rate damages’, since he believed that bitcoins do not fall under the term ‘money’ (‘geld’) found in Article 6:125 BW.40
Since there is no concrete definition of what constitutes ‘money’ in Dutch law41, the court went into an extensive analysis of whether bitcoins could fall under the term ‘money’ found in Article 6:125 BW. It outlined the three types of money transactions recognised in Section 6.1.11 BW, namely cash transactions (‘chartaal’, in the sense of 6:112 BW), giro transactions (‘giraal’, in the sense of 6:114 BW) and electronic money transactions (‘elektronisch geld’, in the sense of the Act on Financial Supervision (‘Wet op het Financieel Toezicht’, Wft)). On the question of whether Bitcoin transactions can be considered as constituting giro transactions, the court assessed whether the relationship between a holder of bitcoins and his/her Bitcoin wallet can be compared to that between a bank account holder and a bank. It concludes that despite Bitcoin wallets and bank accounts sharing similar characteristics (e.g. a number), there is no contractual relationship between the wallet provider and the wallet holder, in the same way as there is between an account holder and a bank (i.e. the holder has a claim on the bank and the bank has an obligation towards the holder).42
As to the question of whether Bitcoin transactions fall under the concept of cash transactions, the court looked into the clarifications previously made to Dutch Parliament on Article 6:112 BW. In a Memorandum of Reply (‘Memorie van
Antwoord’) regarding this Article, it was clarified that the legislator had chosen to use
the term ‘accepted money’ (‘gangbaar geld’) instead of ‘legal tender’ (‘wettig
betaalmiddel’). This was so that currencies distributed by private persons
39 Dutchcivillaw.com, “Dutch Civil Code- Book 6 The law of obligations”, accessed on 24 July 2016 40 Rechtbank Overijssel, pars. 2.1-3.3
41 Menno Weij (SOLV Advocaten), “Bitcoin geen gangbaar geld”, 23 June 2014 42 Rechtbank Overijssel, pars. 4.6-4.7
(‘particulieren’), that are not recognised yet tolerated by the State, can still fall under
the Article’s scope. Therefore, based on this- very wide (since bitcoins have no physical form)- interpretation of this provision, bitcoins could fall under the ‘accepted money’ notion of Article 6:112 BW.43
However, following this conclusion, the District Court made an odd flip turn. It returned to the Memorandum of Reply on Article 6:112 BW and noted that it states that whether a currency may be considered as being ‘accepted money’ depends on its status as legal tender. The court then refers to Articles 10 and 11 of the EU’s
Regulation 974/98 on the introduction of the euro when pointing out that the euro is
the only legal tender in the Netherlands. Furthermore, it refers to an answer given by the Minister of Finance to Parliament in 2013 that Bitcoin does not fall under the ‘electronic money’ notion, and that it cannot be seen as legal tender but rather as a ‘medium of exchange’ between private persons. Therefore, on the basis of these arguments, the court ruled that Bitcoin cannot be considered as constituting ‘accepted money’ under 6:112 BW. It also compared the way bitcoins are exchanged to how precious metals are traded, the latter neither being considered as ‘accepted money.’ In conclusion, the court rules that Party B does not need to pay back any damages for the rise in the exchange rate as of the contract’s dissolution in October 2012.44 Party A’s
lawyers appealed the Overijssel court’s decision and a second ruling in response to the appeal took place on 31 May 2016. However, the Appellate Court (‘Gerechtshof’) of Arnhem-Leeuwarden set aside the request to reconsider the Overijssel court’s analysis of whether Bitcoin is money, and focused instead on the damages paid to Party A.45
3.2 Critical reactions: an intertwining of law and economics
Since the ruling, many lawyers have given their opinion on the District Court’s reasoning. For instance, the Dutch lawyer Pim Rank agrees with the court’s conclusion but finds its reasoning to be weak. He thinks that it should have focused instead on whether bitcoins are perceived as ‘accepted money’ by looking at societal
views. In his opinion Bitcoin is not a widely accepted payment form in the
43 Idem, par. 4.8 44 Idem, pars. 4.8-4.9
Netherlands, despite the country spearheading Bitcoin activity in Europe, since it is only possible to pay with bitcoins on a few websites and in several establishments. Therefore, it does not fulfil an important characteristic of ‘accepted money’: the ability to be used as a payment form in many places.46
Rank also provides an interesting analysis of the conditions he believes fulfil the legal definition of ‘money.’ First of all he argues that money should be government-backed to give it legitimacy and facilitate its society-wide acceptance as a payment form. A payment means created by a ‘private institution’ that is not supervised by the government is not, in his view, ‘money in the legal sense.’47 His views echo those of the International Monetary Fund (IMF), which argued in its latest report on Bitcoin that the credibility and value of a currency are ‘intrinsically linked with the ability of the State to support that currency.’48 In his analysis of the Overijssel ruling, Rank bases his arguments on the views of two opposing schools of economics: Chartalism (or the ‘Chartalist School’) and the Austrian School of
Economics.49 A brief look into the theories underlying these is crucial to understand
the legal arguments brought forward by lawyers interviewed for this thesis. In fact, they all used arguments from both schools even without being aware of it.
According to Chartalist School contemporaries such as Georg Friedrich Knapp, money is primarily a government-formulated unit of account meant for the ‘legal structuring’ of social debt obligations (i.e. taxes). The Chartalists believe that money’s introduction into the economy does not depend on its acceptance in the form of granting it legal tender status but instead on its ‘place in the hierarchy order of social debt relationships.’ In this sense, it isn’t a question of whether fiat currency is in ‘direct competition’ with cryptocurrencies, but instead whether there will be ‘sufficient demand from the public’ that will push the state to ‘accept such currency forms as means of payment of liabilities owed to the government.’ However, as long as fiat currency (i.e. legal tender) remains to be chosen as the go-to currency to pay taxes, it will always remain at the ‘top of the hierarchy of social order in terms of debt
46 W.A.K. Rank, “Bitcoins: civielrechtelijke en toezichtrechtelijke aspecten,” in Bitcoins- civiele en
fiscale aspecten in beeld, (Deventer: Wolters Kluwer, 2015), p. 42
47 Idem, p. 32
48 Dong He et al., (International Monetary Fund), “IMF staff discussion note- Virtual currencies and
beyond: initial considerations”, January 2016, p.16
relationships.’ Therefore, only in case a majority of the population were to protest on the streets for Bitcoin to replace fiat currency as the currency used to pay their taxes, would Bitcoin be accepted as ‘money’ by the State.50
On the other hand, economists from the Austrian School of Economics such as Carl Menger think that money’s validity comes primarily from societal acceptance, a theory that is dubbed the ‘traffic theory.’51 According to Menger, it is not the
government’s edicts that define what is money but rather the marketplace, since individuals decide themselves what is the ‘most marketable good for use as money.’ In Menger’s own words: “money has not been generated by law. In its origin it is a
social, and not a State institution.”52 In his influential work Denationalisation of
Money (1976), Friedrich Hayek also argues against a State monopoly on the issuance
of money and suggests that the solution would be for currencies issued by private banks to compete against one another with the ‘most stable’ currencies surviving.53
As recognised by the European Central Bank, the ideals underlying Bitcoin are similar to those of the Austrian School of Economics.’54 For instance, Bitcoin’s website states that ‘all that is required for a form of money to hold value is trust and adoption.’55 Interestingly, some members of the Austrian School of Economics disagree with Bitcoin being called ‘money.’ This is because they do not consider it as constituting a ‘final means of payment’, since most merchants accepting Bitcoin payments end up immediately converting the bitcoins they receive into fiat money (in order to avoid exposure to Bitcoin’s volatile exchange rate). These economists see it as primarily being a ‘medium of exchange’, which does not make it ‘money’56, since it does not fulfil all three roles of money: store of value, medium of exchange and a unit of account. Firstly, as a medium of exchange, money can be used to intermediate the exchange of services and goods. Secondly, it should be a unit of account in the sense of being a ‘standard numerical unit of measurement of the market value’ of services, goods and other transactions (in order to formulate commercial agreements).
50 Gareth W. Peters, pp. 18-19 51 W.A.K. Rank, p. 30 52 J. Anthony Malone, p. 9
53 European Central Bank (October 2012), pp. 22-23 54 Idem
55 Bitcoin.org, “Frequently asked questions”, accessed on 8 June 2016
Lastly, money must also be able to be saved, stored and retrieved in a reliable way in order to act as a ‘store of value.’57
3.3 What do the lawyers think?
When speaking with Dutch lawyers working with Bitcoin clients, and a legal scholar researching the subject, it is clear that there is no unified answer to the question: ‘Is Bitcoin money?’ As stated earlier, their views echo the arguments used by both the Chartalist and Austrian Schools of Economics. Furthermore, their arguments also reflect the split within the Bitcoin community between those against and in favour of legal recognition. Therefore, as we will see below, there isn’t even consensus within the national legal community on whether Bitcoin should be recognised at all.
Lawyers from the Amsterdam-based law firm SOLV Advocaten, which represented ‘Party A’ in the Dutch Bitcoin case, use arguments reflecting the views of the Austrian School of Economics. They do not agree with the argument that currencies need to be government-backed in order to be considered ‘accepted money’, since foreign currencies such as US dollars are accepted for many international transactions in the Netherlands and the government simply tolerates this. They also believe that Bitcoin is used to a sufficiently wide extent in the Netherlands for it to be called ‘accepted money’ in the sense of 6:112 BW. Proof of this is the fact that ‘thuisbezorgd.nl’- one of the main food delivery websites in the Netherlands- accepts payments in bitcoins58, with rumours of it processing hundreds of Bitcoin payments
per day (although no official figure is available).59 SOLV Advocaten are therefore
convinced that bitcoins are being used in the Dutch market to pay for goods/services in the same way as fiat money is being used.60 Of relevance is the fact that the list of
restaurants and shops accepting Bitcoin payments seems to be growing.61
57 J. Anthony Malone, pp. 6-8
58 Interview with SOLV Advocaten, Amsterdam, 28 April 2016
59 Bitcoinbelgie.be, “Bitcoins in uw webshop accepteren”, 12 December 2013 60 Bitcoinisgeld.org, “FAQ”, accessed on 26 April 2016
Interestingly, SOLV Advocaten is part of the ‘Bitcoin is geld’ (‘Bitcoin is
money’) campaign, which is a crowdfunding movement set up to fund the costs of
legally appealing the Overijssel District Court ruling. The campaign’s overall aim is for the Dutch judge to legally recognise Bitcoin as ‘money’, in order for consumer and business interests to be better protected. They argue that legal recognition would provide more clarity for businesses wanting to deal in bitcoins (i.e. fiscal consequences) and remove obstacles for those Bitcoin businesses wanting to operate in the Netherlands (i.e. license granting). Furthermore, if Bitcoin were to be recognised as money, the trust in the currency (which has been low so far due to negative press), would increase and as a consequence its user base would grow. Therefore, the campaign’s message is, in a nutshell: legal recognition would facilitate the movement of bitcoins between hands.62 This message, which implies government approval, does not fit with the Austrian School’s views. What is interesting to note is that the ‘Bitcoin is geld’ campaign ruffled feathers within the Dutch Bitcoin community. Some of the more ardent Bitcoin supporters reacted angrily at the court case and campaign, maintaining that regulation (triggered by legal recognition) would go against Bitcoin’s decentralised identity.63
Ironically, the lawyers who took a Chartalist approach in their interviews echoed the counter-arguments expressed by members of the Bitcoin community towards the Dutch court case and ‘Bitcoin is geld’ campaign; namely that legal recognition would go against Bitcoin’s nature as a decentralised technology. Furthermore, as argued by the lawyers Pim Rank and Jelmer Baukema, Bitcoin is not sufficiently widely accepted for governments to pay attention to it.64 Baukema, an
Amsterdam-based lawyer, thinks that the ‘escape clause’ included by the legislator in Article 6:112 BW (mentioned by the Overijssel District Court in its ruling) is meant for exceptional cases of private currencies ‘considered as being widely accepted on the basis of societal views.’ The fact that popular websites such as thuisbezorgd.nl accept bitcoins for payments does not mean that they are widely accepted by Dutch
62 Bitcoinisgeld.org
63 Aaron van Wirdum, “Court Appeal divides Dutch bitcoin community”, Coin Telegraph, 1 March
2015
society.65 It is interesting to note that thuisbezorgd.nl’s acceptance of Bitcoin payments has been criticised as a publicity stunt by critics.66 According to Baukema, the real test determining whether it is ‘accepted money’ is if one can just agree with any person or merchant on the street to make a payment in bitcoins. This is not the case today, as one cannot simply choose to pay with them in the supermarket, nor easily find a counterparty that would be willing to settle a payment transaction in bitcoins. Rather, euros and dollars are the go-to currencies to settle transactions.67
Henry Hillman, a PhD student at the University of the West of England writing his thesis on the legal regulation of Bitcoin, agrees that the question of whether Bitcoin is money is best answered by looking at how society treats it, and also thinks that its adoption is limited.68 Baukema and Hillman both conclude in their interviews that Bitcoin shouldn’t be regulated, since this would be contrary to its decentralised philosophy.
3.4 Should the Overijssel and other national courts recognise Bitcoin as money?
The legal interviewees for this thesis were not only split in their views as to
how and if Bitcoin should be legally recognised, but also on whether it could just be a
‘fad’ whose popularity will decrease over time. Their comments reflect realities that are crucial to take into account when answering the question of whether Bitcoin should be recognised as money by national courts and legislators- such as its high volatility, small user base and close competitors.
Bitcoin’s volatility was clear in the Overijssel District Court case, where an 800% raise in exchange rate had taken place over the space of a year. This characteristic does not make Bitcoin a good short-term store of value, since it renders its value uncertain to users, something that in the case of fiat currency would get in the way of ‘money doing its job.’ Fiat currency such as euros may be a terrible investment in the long-term, but this is in return for being a ‘good short-term store of
65 Reinvent.money (youtube channel), “Is bitcoin geld? Jelmer Baukema over bitcoinregulering in EU
en NL (video)”, 2 October 2014
66 Olaf van Miltenburg, “Thuisbezorgd accepteert betalingen met Bitcoin”, Tweakers.net, 5 November
2013
67 Interview with Jelmer Baukema (Amsterdam-based lawyer), Amsterdam, 2 May 2016 68 Interview with Henry Hillman (University of the West of England), Bristol, 27 May 2016
value.’69 Critics have therefore argued that Bitcoin does not properly fill the ‘store of value’ function of money.70 As concluded by the ECB, the high volatility of Bitcoin’s exchange rate to other currencies, and therefore in terms of most services and goods, renders it ‘useless’ as a store of value in the short term.71 This flaw hinders its wider
adoption and inhibits its ability to fill the ‘medium of exchange’ role of money. However, as Henry Hillman points out, Bitcoin’s volatility (which is caused by speculation) has subsided in the past months, thereby leading it to better fulfil these roles.72
On the other hand, as indicated by Jelmer Baukema, Bitcoin users tend to hoard the currency to take advantage of its volatility, thereby (from that perspective) leading it to fulfil first and foremost the ‘store of value’ role rather than the ‘medium of exchange’ and ‘unit of account’ roles of money.73 The CEO of a US-based Bitcoin business (whose activities partly take place in Europe), who was interviewed for this thesis but whose name is withheld for confidentiality reasons, agrees that one of Bitcoin’s strongest roles today is that of a ‘store of value’, since users frequently employ it as a form of savings.74 His claim reflects earlier research done on users’ intentions. Glaser et al. have found that many of the currency’s new users are not really interested in Bitcoin as an alternative payment means but rather as a chance to participate in an ‘alternative investment vehicle.’ Therefore, they primarily acquire the currency in order to ‘accumulate returns when the exchange rate rises’ (i.e. sell it when the exchange rate is favourable).75
Furthermore, as recognised by the European Banking Authority, adoption in Europe has not been as widespread as in other continents.76 The CEO of the US-based
Bitcoin business also considers user numbers as being low in the EU, while they have considerably expanded in countries subject to capital controls such as Venezuela and
69 Noah Smith, “Maybe Bitcoin will grow up to be a currency”, Bloomberg View, 8 March 2016 70 Eli Dourado, “Bitcoin as a medium of settlement: don’t think of it as a way to buy coffee”,
Medium.com, 14 June 2015
71 European Central Bank (February 2015), p. 23 72 Interview with Henry Hillman
73 Interview with Jelmer Baukema
74 Interview with CEO of a US-based Bitcoin business (name withheld for confidentiality reasons),
Hilversum, 1 May 2016
75 Florian Glaser et al., “Bitcoin - Asset or Currency? Revealing Users' Hidden Intentions”, 22nd
European Conference on Information Systems (Tel Aviv, 2014), p. 2
Argentina. In fact, the low adoption in Europe can be explained by the limited advantages perceived by consumers, such as only saving 1-2% on online purchases with Bitcoin payments.77 Jelmer Baukema echoes this claim when stating that the increasing speed of existing payment systems in Europe and the promising changes that will be brought about by SEPA (Single Euro Payments Area) could rival the advantages of Bitcoin transactions.78 SEPA promises to make cross-border payments
as simple as domestic payments, such as being able to pay with debit cards for small purchases in SEPA countries (which include all EU Member States and several peripheral countries), as well as prompt timeframes and no extra fees for cross-border payments.79
Bitcoin has also had limited adoption as a payment means, with a relatively low number of merchants accepting Bitcoin payments (despite increases in the last months). However, this is not the case for sectors having the most difficulty operating in the current financial system, such as the online gambling and pornography industries. Merchants in these sectors are having a difficult time finding a merchant processor (i.e. VISA/Mastercard) to work with due to the high amount of customer ‘chargebacks’ they face.80 A ‘chargeback’ is when a customer having bought something with a credit card decides to ‘reverse the purchase’ and asks the credit card company for his/her money back. Credit card companies can label merchants receiving too many chargeback requests as ‘fraudulent.’81 Furthermore, the 10-20% charge that merchant processors ask for in case of chargebacks has to be paid by the merchant. This makes the acceptance of credit cards a liability to them.82 The fact that Bitcoin does not allow for chargebacks makes it an ideal currency for these industries, thereby leading them to use it widely as a payment means.
Additionally, there are more than 1000 copycat cryptocurrencies on the Internet.83 Bitcoin may be the biggest thanks to its ‘first-mover’ advantage (it’s the oldest), but internal cracks within the Bitcoin community that are appearing on the
77 Interview with CEO of a US-based Bitcoin business 78 Interview with Jelmer Baukema
79 European Commission (website), “Questions and answers on SEPA”, accessed on 24 July 2016 80 Interview with CEO of a US-based Bitcoin business
81 Dalpay.com, “Understanding Chargebacks”, accessed on 24 July 2016 82 Jason Leibowitz
surface may lead to other virtual currencies becoming more successful and Bitcoin users losing trust in the currency, as suggested by Henry Hillman.84 Lately, internal splits within the Bitcoin community have been covered by the press, such as the one regarding the question whether to expand blockchain capacity to ‘accommodate the increasingly large number of transactions on the network.’85 Due to the blockchain’s
blocks not having enough capacity to accommodate these, doubts have been publicly cast over the durability and reliability of the Bitcoin system.86 Gys Hough, a payments
expert at the Amsterdam-based payment services consultancy Innopay, thinks that other virtual currencies such as Ether could overtake Bitcoin’s number of users due to perceived disadvantages in the Bitcoin protocol, such as its relatively slow 10-minute-per-transaction validation timeframe.87
However, many virtual currencies such as Bitcoin and Ether are continuously improving their own infrastructures by learning from their flaws. Millions are being invested to make them user-friendlier.88 The ultimate goal of these improvements is to
earn users’ trust, just as money was able to earn our trust throughout the past centuries.89 The CEO of the US-based Bitcoin business compared Bitcoin to the
evolution of the Internet: when it was just starting out in the 90s it used to be a shell of what it is now, due to heavy investment over the years.90 These improvements will likely increase interest in the currency and the advantages it brings about as an alternative payment means, such as the ease, speed and cost of cross-border payments.91 A wider adoption of the currency is also facilitated by the mushrooming of Bitcoin exchange businesses (described in the next chapter), used by merchants to exchange the bitcoins they receive into euros in order to avoid the volatile exchange rate.92
84 Interview with Henry Hillman
85 Cade Metz, “The schism over Bitcoin is how Bitcoin is supposed to work”, Wired.com, 11 February
2016
86 Henry Farrell, “Bitcoin is losing the Midas touch”, Financial Times, 9 March 2016 87 Interview with Gys Hough (Innopay), Amsterdam, 18 May 2016
88 Olusegun Ogundeji, “Bitcoin vs. Ether: We will invest in and transact with Ether differently, here is
why”, Coin Telegraph, 30 May 2016
89 Yuval Noah Harari, Sapiens: A Brief History of Humankind, (New York City: Harper, 2014), p. 207 90 Interview with CEO of a US-based Bitcoin business
91 European Central Bank (February 2015), p. 23 92 John Gapper
In light of these positive developments, governments should welcome Bitcoin as an alternative payment system. It should not (yet) be welcomed as constituting ‘money’, since it does not play the role nor enjoy the trust that fiat currencies such as the euro do. Clashing perspectives on the realities of Bitcoin use are reasons why there is a lack of consensus at national level on whether it should be legally recognised as ‘money.’ This might change in the long term, as its value stabilises and infrastructure is improved. In the meantime, Dutch and other national judges should simply adopt the European Banking Authority’s view that virtual currencies such as Bitcoin are a ‘form of unregulated digital money, not issued or guaranteed by a central bank, which can act as a means of payment.’93 National authorities should therefore recognise it as a payment system that is not competing (yet) with fiat currencies, as argued by legal authors such as J. Anthony Malone.94 This should be done in a way that enhances Bitcoin’s potential to improve ‘competition in the European payment services’ sector.95 The next chapter will look into the question of legally recognising Bitcoin as a payment system in an innovation-friendly way. This would take place at European Union level, since the core of payment service regulation originates from EU legal instruments such as the Payment Services Directive and Electronic Money Directive.
93 European Banking Authority, “EBA Opinion on ‘virtual currencies’”, p. 11 94 J. Anthony Malone, p. 31
95 Adrian Blundell-Wignall, “The Bitcoin Question: Currency versus Trust-less Transfer Technology”,
IV. Recognition in EU legal instruments
Not only have European Union institutions such as the European Central Bank recognised the potential innovation brought by Bitcoin to the payment services industry, but they have also urged for the revision of EU payments legislation to accommodate virtual currencies, as done by the European Parliament.96 External figures have echoed this advice, such as Patrick Murck, a lawyer and fellow at the
Berckman Center for Internet and Society at Harvard University. According to him,
the right approach for the EU would be to let the technology grow and apply existing EU payment laws once it has been investigated ‘if there are any gaps’ in which virtual currencies could be included.97 This chapter seeks to answer the question of whether EU laws regulating payment services, such as the Payment Services Directive (PSD(2)) and the Electronic Money Directive (EMD), could be interpreted as including virtual currencies such as Bitcoin. Furthermore, how can this be achieved without stifling the innovation brought about by the technology?
4.1 CJEU ruling
Before answering these questions, an interesting ruling to look at is the one by the Court of Justice of the European Union (CJEU). On 22 October 2015 the CJEU delivered its first ever Bitcoin-related ruling98, when responding to a request for a preliminary reference by the Swedish Administrative Court. The Swedish court’s referral originated from a difference in views between a Swedish national, Mr. Hedqvist, and the Swedish Tax Authority. Mr. Hedqvist had obtained permission from the Swedish Revenue Law Commission to operate an online Bitcoin exchange service. The Commission considered that his services should be exempt from VAT (value-added tax) under Swedish law, since bitcoins are used in a ‘similar way to legal means of payment.’ The Swedish Tax Authority disagreed with this reasoning and appealed it to the Swedish Administrative Court.99
96 European Parliament, “Resolution on virtual currencies”, par. 20
97 Jorge Valero, “Bitcoin expert: EU should ‘wait and see’ before regulating blockchain”, Euractiv, 21
April 2016
98 Julie Maupin, “The ECJ’s First Bitcoin Decision: Right Outcome, Wrong Reasons?”,
Verfassungsblog, 4 November 2015
The Swedish court’s first question to the CJEU was whether the exchange of traditional currency for virtual currency and vice versa could fall under the EU’s VAT Directive, and more specifically under Article 2(1)(c) regarding the “supply of
services.” The second question was, if the first question is answered positively,
whether this type of transaction can be considered a VAT-exempt activity100 under
Article 135(1)(e) VAT Directive, which exempts “transactions, including negotiation,
concerning currency, bank notes and coins used as legal tender” from the Directive’s
scope.101
The CJEU answered the first question affirmatively, by concluding that there is a direct link between the service Mr. Hedqvist aims to provide and the consideration he would receive for it, namely the margin of price difference between the purchased and sold bitcoins. Interestingly, in its first answer the CJEU argued that Bitcoin is a ‘virtual currency with bidirectional flow’, that should not be characterised as ‘tangible property’ since it has ‘no purpose other than to be a means of payment.’102
In its answer to the second question, the CJEU looked at Article 135(1)(e) through the legal analysis method of purposive interpretation, taking advantage of the different ways in which Member States transposed the VAT Directive into their national laws. It noted for instance that the German version of Article 135(1)(e) required all transacted currencies to be legal tender, while the Italian version did not attach any importance to the currencies’ legal status.103 The Court argued that where there are linguistic differences in the Directive’s transposition it could not adopt an ‘exclusively textual approach.’ It went on by reasoning that transactions involving ‘non traditional currencies’ (i.e. those not being qualified as legal tender by a country) are ‘financial transactions’ insofar as these types of currencies are accepted by the transaction parties as an ‘alternative to legal tender and have no purpose other than to be a means of payment’, as is the case with Bitcoin. The CJEU concluded that interpreting Article 135(1)(e) as including only transactions ‘involving traditional
100 Idem, par. 21
101 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax
(‘VAT Directive’)
102 CJEU, pars. 22-31 103 Julie Maupin
currencies’ would deprive it ‘of part of its effect.’ The Court therefore ruled that the Bitcoin exchange services offered by Mr. Hedqvist’s business should be VAT-exempt under Article 135(1)(e).104
This ruling is relevant for several reasons. First of all, the CJEU considers Bitcoin as strictly being a ‘means of payment.’ Secondly, it is interesting to note that the CJEU followed the Advocate General’s (AG) advice to circumvent the legal obstacle of Member States not having recognised Bitcoin as legal tender by using the purposive interpretation method. Thirdly, the Court failed to adopt the AG’s argument regarding the ‘general principle of equal treatment’, found in Article 20 of the EU Charter of Fundamental Rights. The AG uses this provision to argue for equal treatment for similar transactions, in the interest of ‘realising neutrality in competition in the VAT system.’105 The CJEU and AG’s creative legal reasoning provides food for thought: can the scope of the EU’s payment-related Directives be extended to include virtual currencies such as Bitcoin, in the same way as the CJEU did with the VAT Directive? The answer is only to an extent, as we will see below in the analysis of the Payment Services Directive and Electronic Money Directive.
4.2 EU Legal Instruments
4.2.1 Payment Services Directive
The Payment Services Directive (PSD) aims to provide a legal framework for payment services provided throughout the EU.106 Out of all the types of service
providers the PSD covers (set out in Article 1), ‘payment institution’ is the only possible category applicable to Bitcoin, since by its nature it can neither represent a credit nor an e-money institution (as will be explained in section 4.2.2. of this thesis). Article 4(4) of the PSD describes a payment institution as a “legal person that has
been granted authorisation (…) to provide and execute payment services throughout the Community.” Since Bitcoin is neither a legal entity nor is it owned or controlled
104 CJEU, pars. 32-57
105 Opinion of Advocate General Juliane Kokott, 16 July 2015, Case C-264/14, par. 41
106 Council Directive 2007/64/EC of 13 November 2007 on payment services in the internal market
by one, it cannot be classified as a payment institution. Therefore, the whole concept of Bitcoin as a technology cannot be included within the PSD.107
However, a Bitcoin exchange platform, which is the most common type of Bitcoin business nowadays, could potentially be classified as a ‘payment institution’ under the PSD. These businesses connect persons interested in buying bitcoins with those wishing to sell theirs. Exchange platform members (buyers and sellers) will each set limits as to the amount of bitcoins they wish to buy or sell for a certain price. The exchange will then match the sellers up with the buyers whose conditions are compatible.108 In many exchange platforms, users transfer money from their bank account into their exchange account, in order to buy and sell bitcoins in exchange for fiat currency. Once this is done they can then place their ask/bid price on the exchange platform, and the company automatically buys/sells their bitcoins for the best price it can find on the market.109 Since many Bitcoin users do not ‘mine’ bitcoins (i.e. earn them by connecting their computers to the Bitcoin network), they make use of Bitcoin exchanges to acquire new bitcoins. Furthermore, in many cases those merchants ‘accepting’ Bitcoin payments do not actually accept them but use an exchange business to do so for them. An example is the American online retailer Overstock, which has partnered with the company Coinbase so that it can accept bitcoins on its behalf. Coinbase ‘then pays Overstock in US dollars’, even though it keeps some bitcoins. This is a solution that allows Overstock to avoid the risk of holding bitcoins, particularly in light of their volatility.110 The rise in the number of exchange businesses such as Coinbase has led to an increase in merchants accepting Bitcoin payments.111
The first step in verifying whether Bitcoin exchanges have a place in the PSD is checking whether they fall under the definition of a ‘payment institution’, which as seen earlier is one of the categories of payment service providers covered by the
107 Sergii Shcherbak, “How should Bitcoin be regulated?”, European Journal of Legal Studies Vol
7:No 1 (2014), p. 56
108 Stack Exchange (online forum), “How do Bitcoin exchanges work?”, accessed on 5 June 2016 109 Bitstamp, “How to buy Bitcoins?”, accessed on 27 July 2016
110 Richard MacManus, “Bitcoin, Online Payments, and the Scourge of PayPal”, CoinDesk, 6 February
2016
111 Primavera de Filippi, “Bitcoin: a regulatory nightmare to a libertarian dream”, Internet Policy
Directive (Article 1(d)). This is the only possible category applicable to exchange businesses, since the latter are neither credit institutions (their main occupation is to facilitate exchange transactions), nor are they e-money institutions (as we will see in section 4.2.2 of this thesis). The definition of a payment institution in Article 4(4) PSD is relevant, which describes it as “a legal person that has been granted
authorisation…to provide and execute payment services throughout the Community.”
Article 4(3) PSD directs us to the Annex for a list of payment services. When looking at the Annex, there are two main categories of services that Bitcoin exchange transactions could fall under: services comprising the “issuing and/or acquiring of
payment instruments” and services for the “execution of payment transactions.”112
Let’s first have a look at the “execution of payment transactions” option. The first question to ask here is whether transactions taking place within an exchange platform fulfil the PSD’s definition of a ‘payment transaction’, found in Article 4(5) PSD. This provision describes it as “an act, initiated by the payer (i.e. the buyer of bitcoins) or by the payee (i.e. the seller of bitcoins), of placing, transferring or
withdrawing funds, irrespective of any underlying obligations between the payer and the payee.” In most exchange platforms, a member of the exchange tops up his/her
exchange account, which is used to sell and purchase bitcoins, with fiat currency by means of a bank transfer.113 The fiat money actively placed into exchange accounts can be considered as fulfilling the ‘funds’ notion defined in Article 4(15) PSD: “banknotes and coins, scriptural money and electronic money as defined in
Article 1(3)(b) of Directive 2000/46/EC (note: the E-Money Directive).”114
The next step is examining the notions of ‘payer’ and ‘payee’ in Article 4(5). In Article 4(7), a ‘payer’ is described as a “natural or legal person who holds a
payment account and allows a payment order from that payment account.” The notion
of ‘payment account’ mentioned in the latter provision, defined in Article 4(14) as “an
account held in the name of one or more payment service users which is used for the execution of payment transactions”, is applicable to a Bitcoin exchange account, since
the account is held under the member’s name and used for the execution of
112 Sergii Shcherbak, pp. 56-58
113 Coindesk.com, “How can I buy bitcoins?”, 28 October 2015 114 Sergii Shcherbak, pp. 56-58
