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  • Benjamin de Waal

“Virtual Currencies” according to the EBA

Updated: Dec 27, 2020

In July of 2014, the European Banking Association (EBA) published EBA/Op/2014/08, “EBA opinion on ‘virtual currencies’“. This was intended as a general guideline for the management of systems like Bitcoin and other systems that fall under the general concept of cryptocurrency or virtual currency. The guidelines are not universally adopted but the definition of a “Virtual Currency” is referenced by many other organisations including Germany’s BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht / Federal Financial Supervisory Authority) and therefore serves as the basis for determining whether or not any regulations placed on virtual currencies applies to a particular system or not.

Unfortunately, the definition provided within this document is abysmal. Utterly and completely abysmal. It is so vague as to be meaningless. Aware of this, they themselves admit on page 10 that:

Finally, it must be noted that VCs existed long before the more recent emergence of the decentralised VCs that this report focuses on. Early examples of centralised VCs that were not convertible to FCs (such as World of Warcraft Gold or frequent flyer miles), unidirectional convertible VCs (such as the former Facebook Credits or Linden Dollars) and bidirectional convertible centralised VCs (E-gold or Liberty Reserve)

By doing so, they point out that virtual currencies can be either centralised or decentralised and while the report focuses on decentralised varieties, the centralised ones are still considered to be virtual currencies of a kind.

They then begin to list the properties that define a virtual currency:

1. A digital representation of value

Bitcoin and nearly all similar virtual currencies can exist in various forms that are not digital. They are mathematical constructs that are easily implemented in digital form, in the same way that “E-Money” (an official EBA term) is a digital representation of fiat money despite not all fiat money being digitally represented.

This is then immediately followed by the statement:

This does not exclude the possibility that it may also be physically represented, such as through paper printouts or an engraved metal object.

Oh, so it doesn’t need to be “a digital representation of value“. This addition makes it clear that it’s “a digital or physical representation of value“. Obviously this can be contracted quite simply to “a representation of value“.

2. Not issued by a central bank or a public authority, nor necessarily pegged to a fiat currency

The first half of the sentence is clear, but the second is meaningless in narrowing the scope, as the phrase “nor necessarily” tells us that it could or could not be pegged to a fiat currency.

3. Used by natural or legal persons as a means of payment

In other words, “money”. Okay, clear.

4. Can be transferred, stored and traded electronically

Seems to be almost the same as the first… and then the same exception is made:

However, it does not exclude physical transfers, the storage of copies in other forms (e.g. paper, minting and engraving) or that the VC is traded in other ways.

So again, we find ourselves with an overly broad definition that it: “can be transferred, stored and traded electronically or physically, or in other ways” or more simply reduced to “can be transferred, stored and traded“.

Putting these four points together, we find that a “Virtual Currency” is: “A representation of value, not issued by a central bank or a public authority, used by natural or legal persons as a means of payment, that can be transferred, stored and traded“.

This definition covers everything from Pokémon cards to seashells to Bitcoin to Disney Dollars.

The document continues – without clarification of reasoning – by listing several properties that a virtual currency might have but doesn’t have to:

No legal tender status: Currently, no VC has legal tender status in any jurisdiction, but it is theoretically possible that a VC might be declared legal tender in some jurisdictions in the future. Central versus decentralised scheme: Some VCs are issued and controlled by an individual or a group of individuals, while other VC schemes are issued and operated in a decentralised manner. Convertibility: Some VCs are convertible (or open) and, therefore, can be exchanged back-and-forth for fiat money at an exchange rate, whereas others are non-convertible (or closed). Non-redeemable: This refers to the observation that, unlike electronic money, a VC, particularly in its decentralised variant, does not represent a claim on the issuer.

For the final of these, it’s noteworthy that this is a deliberate property of Bitcoin. Bitcoin is a “commodity currency” and therefore is the representation of value itself instead of representing a claim to value such as with a gold certificate or similar.

From these further properties, we could now say that the EBA’s definition of a virtual currency is: “A representation of value, not issued by a central bank or a public authority, used by natural or legal persons as a means of payment, that can be transferred, stored and traded; that has no legal tender status (but might in the future); might be centralised or decentralised; might be convertible to fiat or might not be; and does not represent a claim on the issuer.

Or simplified by removing the unnecessary might-or-might-not components: “A representation of value, not issued by a central bank or a public authority, used by natural or legal persons as a means of payment, that can be transferred, stored and traded, and does not represent a claim on the issuer.

This still leaves us with a definition that covers almost anything and is therefore useless in determining what is and is not covered by laws designed to regulate virtual currencies. This may of course be deliberate, since with such a broad definition, it becomes possible to apply laws and regulations anywhere that benefits the lawmakers and regulators.

The remainder of the document contains significant problems, misunderstandings, and meaningless phrases but nothing that adds any further to the definition.

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