National Research University

Higher School of Economics

Law Faculty

Master’s dissertation on:

“Establishing a legal framework for cryptocurrencies”

Student group № МПС - 161

Yates Adam Paul

Advisor: prof. Bogdanovskaya I.Y.

Moscow, 2018


Table of contents 


Page
Introduction 1
1 Current legal landscape: applicability of certain currency laws 4
1.1 The technology and its socio-economic implications 4
1.2 Theoretical application of currency regulation 7
1.3 Problems in regulating cryptocurrency; existing laws 16
2 Proposal of legal framework for cryptocurrency regulation 27
2.1 Self regulation as a model for cryptocurrency 27
2.2 Cryptocurrency legal classification 32
2.3 Legislator reaction to cryptocurrency 36
2.4 Literature analysis and legal framework proposal 51
Conclusion 57
Sources 60
Laws 62
Court practice 63
Other literature 64
Appendices 83

 %1
Introduction
This dissertation aims to explore the current legal landscape for cryptocurren-
cies, which have rose to prominence in society as an innovative technology for value
transfer without the need for third parties or centralised authorities. This topic is cur-
rently of importance since, in an increasingly decentralised world, such technologies
pose challenges to state apparatus as they take away an element of control from the
state and give it to citizens. The subject of cryptocurrency has gained significant at-
tention in the media and throughout society over the past several years as a new
method of value transfer that could potentially revolutionise the way payments sys-
tems work by eliminating third party, intermediary financial institutions. Whilst its
implications seem to be wide reaching, without proper legislation in the form of na-
tion state regulation, widespread adoption is unlikely. Legislative measures will offer
subjects clarity on whether to buy into this idea and could be active, passive or re-
strictive.

However, since technologies such as cryptocurrencies represent societal de-

velopment through advances in technology, legislators need to take a suitable stance
that strikes a balance between protecting the interests of their citizens and preventing
illicit usage, whilst fostering further advances in technology development. This work
will assess the current legal framework in place and propose a mechanism to resolve
the issues that arise from states taking a de lege lata approach. As such the work will
debate whether existing legislation can be applied to regulate its circulation and us-
age, or whether new, specific, sui generis legislation should be introduced to regulate
this technological phenomenon.

Since this topic and its debate are a recent development, the author has chosen
to consider various jurisdictions that have acted to clarify a legislative approach with
regards to the appearance of cryptocurrency in order to create a general framework
that could be applied as a template to certain jurisdictions and the specific legislation

 2%
in place there. To do so, a wide range of literature in various languages been used and
analysed so as to illustrate the author’s points. Authors who have put forward rep-
utable frameworks will be assessed in this work, including American studies such as
Marian’s proposal of identifying cryptocurrency users and incentivising users that
choose to identify themselves, in addition to Hewitt’s proposal of creating a new asset
class in law for cryptocurrency. In addition, theoretical works from authors such as
Hayek and his proposal of a private system of monies are discussed, whilst Lim’s fa-
cilitative model and Lansky’s proposal for integration for state service payments is
also considered. This dissertation relies much on US based research due to the ab-
sence of much solid research from Russian authors, although Dostov and Shust’s
work on the anti-money laundering and terrorist financing via cryptocurrency is con-
sidered, whilst Saveliev’s analysis of Belarus’ approach to cryptocurrencies has also
been used by this work; moreover, European financial agency reports are used
throughout. Moreover, an assessment of US case law will be used to show how legal
tender doctrines with regards to private currencies are not being applied to cryptocur-
rency in order to foster technological development and the opportunity for such de-
velopment that this phenomenon demonstrates.

The methodology of this work provides a new look at how legislators can ap-
proach this technological phenomenon. The author’s methodology is cross discipli-
nary and transjurisdictional, whilst assessing historical and theoretical aspects of
cryptocurrency regulation. Moreover, the author of this work has applied socio-legal
methodology, coupled with critical and fundamental analysis of the current legal cli-
mate. Such methodological application lends to this work’s conclusive outcome on a
topic that has thus far been little explored. Furthermore, a cross-jurisdictional ap-
proach has been chosen by the author due to cryptocurrency lacking boundaries and
therefore requiring an international solution that seeks to harmonise and coordinate
regulators across the globe.

 3%
Since traditional payment and monetary systems are legitimised through the
use of statutes, such legislation will be assessed in a way that highlights how there
currently exists no specific basis in law for the definition of the obligations of parties
in the resolution of disputes, settlement and supervision of cryptocurrency payments.
In addition, the author notes that legal regulation can be categorised in law as civil,
administrative or criminal. As such, a discussion will take place as to whether cryp-
tocurrency can be recognised in each area uniformly and without conflict. The work
will outline the difficulties in unifying across each legal framework due to the differ-
ences in interpretation for each. Throughout the work the author will use a cross-dis-
ciplinary approach to demonstrate how a balance should be struck to foster and en-
courage the underlying technology behind cryptocurrency.

This work offers a composite suggestion to the establishment of a legal classi-

fication by combining theoretical theories of money with assessment currently ap-
plicable legislation and the propositions of other authors for the regulation of cryp-
tocurrency. The author of this work has differed in approach from others regarding
the chosen topic via not only considering the pitfalls of current legislation, but by
merging regulatory approaches with applicable theories that view money not as a
state institution, but a as a social one. This, together with the relevant court decisions,
brings about a more complete picture for how legislators can take steps to implement-
ing working legislation that achieves the aims of society as a whole. As such, the au-
thor proposes a sui generis approach that pairs the industry with the state via the cre-
ation of self-regulatory organisations with state legislation. The author advocates a
classification of cryptocurrency that provides vendors with the choice of whether to
accept it, thereby declining to propose that it should be classified as legal tender. The
regulative steps proposed in this work centre around the promotion of further adop-
tion via the provision of legal safeguards that bring about user protection.

 4%
The legal uncertainty that currently revolves around cryptocurrency will be
outlined in this work via the author first exploring the theoretical aspects of what sig-
nificance money bears in society, implementing socio-legal methodology together in
historical perspective with challenges to the doctrine of the governmental monopoly
over legal tender. The author will then use these theoretical positions to form a pre-
cise definition of cryptocurrency. In its discussion of theories of money, this paper
does not advocate the implementation of theoretical propositions, but rather brings
them into the discussion socio-ontologically as a way to better understand how a reg-
ulatory standpoint can be taken with regards to cryptocurrency. Subsequently, the
work will assess the current problems that exist in attempts to form a regulatory
stance towards the object in question, taking into account existing legislation and
how it could be applied with regards to current laws in force across several jurisdic-
tions. The legal challenges in light of the intangibility of cryptocurrency will then be
discussed, before moving on to a proposition of a framework for regulation which
will involve a three step approach that includes the use of soft norms in the form of
self regulation. In this section, firstly an expository analysis of black letter law will
take place, also using fundamental methodology of critical legal study and current
doctrines. The work will aim to define and solve the legal uncertainty that currently
surrounds cryptocurrency due to the lack of legislation in place, whilst offering a
fresh and up to date view in an area which has been thus far little explored.

 5%
1 Current legal landscape: applicability of certain currency laws
1.1 The technology and its socio-economic implications
The progression of technology, along with the emergence of new markets and
the actors that accompany them has forever posed a challenge for regulation. It is
noted that innovation in technology causes disruption to markets and industries as a
whole, but this also has a knock-on effect on the legal landscape in which these in-
dustries exist and the regulatory spheres which exert a measure of control over mar-
kets. The legal questions posed and the uncertainty that comes with technology dis-
rupting an industry usually revolve around whether existing regulation can be applied
and whether new regulations need to be introduced in order to foster the development
of the technology, to restrict its usage or ban it outright. Such regulatory uncertainty
acts as a barrier which deters institutional capital from being invested and the techno-
logy becoming more prevalent in society.

The advent of cryptocurrency in 20091 following the seminal paper written by

the mysterious Satoshi Nakamoto in 20082 belongs to this category of disruptive in-
novation. Written under a pseudonym, to this day no-one knows the real identity of
the inventor. The concept was the first “solution to the double-spending problem us-
ing a peer-to-peer network”,3 thus decentralising and de-intermediating asset transfers
in the form of a digital payment system where the currency is a “chain of digital sig-
natures.”4 Many names have been assigned to this system: cryptocurrency, digital
currency, virtual currency, crypto assets, tokens, crypto, etc. For the purpose of this
paper, the term cryptocurrency - as the most widely used - will be employed to mean

1 Marr B., A Short History Of Bitcoin And Crypto Currency Everyone Should Read // Forbes, 2017 [accessible: https://
www.forbes.com/sites/bernardmarr/2017/12/06/a-short-history-of-bitcoin-and-crypto-currency-everyone-should-read/
#2fc9ff2e3f27] (accessed: 23/11/2017)

2 Nakamoto S., Bitcoin: A Peer-to-Peer Electronic Cash System // 2008 [accessible: https://bitcoin.org/bitcoin.pdf] (ac-
cessed: 08/10/2017)

3 Ibid.

4 Ibid.

 6%
all of the above, whilst the author asserts that the most pertinent and appropriate term
is “crypto assets”.

Crypto assets vary in their usage: some are fungible and may be used similar
to currency, whilst others offer a kind of utility such as voting rights, much like
shares in a company. Still others provide access to goods or a service much like a gift
card and here we should note that the EU Directive 2009/110/EC does not apply to
“monetary value stored on specific pre-paid instruments, designed to address precise
needs that can be used only in a limited way, because they allow the electronic money
holder to purchase goods or services only in the premises of the electronic money is-
suer or within a limited network of service providers under direct commercial agree-
ment with a professional issuer, or because they can be used only to acquire a limited
range of goods or services,”5 thereby furthering the argument of the author that many
cryptocurrencies are not currencies. This work, however, will only assess those that
possess the requisite properties to be considered currency.

Elsewhere, in Japan the Act on Control of Securities Similar to Money Bills6

gives the country’s finance minister the power “to prohibit the issuance and distribu-
tion of certain securities with effects similar to money bills (Shihei) issued to multiple
parties, has been considered. However, the Act only concerns securities (Shoken), a
legal concept that does not include electronic or magnetic records, and, therefore,
provides no legal basis for its application.”7 The executive branch of the Japanese
government stated in 2014 that it would be unable to assign cryptocurrency with the
same legal status as foreign currencies unless a foreign state declares cryptocurrency

5 Directive 2009/110/EC of the European Parliament (16 September 2009) on the taking up, pursuit and prudential su-
pervision of the business of electronic money institutions, 2009

6 Shihei-Ruiji-Shoken-Torishimari-Ho

7 Izuchukwu M., Designing Virtual Currency Regulation in Japan: Lessons from the Mt Gox Case, Journal of Financial
Regulation, Volume 3, Issue 1, 1 March 2017, Pages 125–131, [accessible: https://academic.oup.com/jfr/article/
3/1/125/2838368] (accessed: 28/02/2018)

 7%
as legal tender. The country subsequently assigned cryptocurrency as a “means of
payment that is not a legal currency.”8

The hesitancy in legitimising cryptocurrency comes with the fact that crypto-
currencies compete with legal tender and so threaten the incumbent money issuance
system, whilst they also bring the role of banks and financial institutions into ques-
tion since cryptocurrencies disintermediate in the process of digitally transferring
value. Moreover, since cryptocurrency is not a widely accepted method of payment it
does not fit within widely accepted definitions of money. This fact also impacts on
another of money’s functions: to serve as a unit of account. Cryptocurrency cannot
currently be used as a unit of account due to large fluctuations in value and the fact
that its use is minimal for transactions in society. However, its rise to prominence
means that society is beginning to consider that it could be widely used as a method
of payment and there are several high-profile retailers that already accept various
cryptocurrency as payment.9 As cryptocurrency use expands, there is a growing need
for regulators to protect users.

The governance of cryptocurrency at present is also cause for concern since

source codes for currencies are held in Git repositories.10 As such, only a small, select
amount of people can alter the source code and the peer review process involved in
amendments and this makes the governance of cryptocurrencies “opaque and vulner-
able”.11 This runs contra to central bank governance which is laid out explicitly in
legislation , whilst cryptocurrency governance is not subject to the same checks and

8 Japan Payment Services Act (PSA), Article 2-5, 25 May 2016

9 For example, Microsoft accepts payment in Bitcoin. Microsoft, Add money to your Microsoft account with Bitcoin //
Microsoft Corp. [accessible: https://support.microsoft.com/ru-ru/help/13942/microsoft-account-add-money-with-bit-
coin] (accessed: 30/03/2018)

10 A system for tracking changes in files used for source code management.

11 Velde F., Bitcoin: A primer // Essays on Issues, The Federal Bank of Chicago, No. 317, 2013 [accessible: https://
www.chicagofed.org/~/media/publications/chicago-fed-letter/2013/cfldecember2013-317-pdf.pdf] (accessed:
22/02/2018)

 8%
balances on developer behaviour. Moreover, cryptocurrency’s distributed quality
makes it difficult and complicated for regulators to step in. Distributed ledger tech-
nology is central to cryptocurrency and provides for its decentralised nature. In turn
this technology is built on asymmetric cryptography (use of public and private keys
to ensure data integrity) and hashing algorithms (turning data into a brief representa-
tion of itself) to encrypt data exchanges between subjects.12

1.2 Theoretical application of currency regulation

In his acclaimed essay, Austrian economist Karl Menger argued that money
comes about from barter,13 whereby trader A aims to swap what they have in their
possession for X that seems ultimately more desirable to the trader B who holds
goods which trader A wants. Traders begin then to experiment with various goods as
a medium of indirect exchange to comprehend which good is is the most sellable and
this good Y becomes widely used as a medium of exchange. When this happens, there
is a shift from a barter economy to one in which there is money which is the product
of the market: good Y. In this situation, the coincidence of wants is solved in a man-
ner in which "money has not been generated by law. In its origin it is a social, and not
a state institution. Sanction by the authority of the state is a notion alien to it.”14 This
follows the concept that money is a social construct in which value is attributed so
long as it is accepted by everyone, with legal status hence being insignificant.15

This facilitation of exchanges means that money becomes a store of value and
can be saved for use at a later date. The fact that it holds value and can be saved for a

12 European Union Agency for Network and Information Security, ENISA Opinion Paper on Cryptocurrencies in the
EU Status // ENISA, 2017 [accessible: https://www.enisa.europa.eu/publications/enisa-position-papers-and-opinions/
enisa-opinion-paper-on-cryptocurrencies-in-the-eu] (accessed: 18/04/2018)

13 Menger K., On the Origins of Money (trans. C.A. Foley) // The Economic Journal 2, 1892, pp. 239– 55

14 Ibid.

15 Lagerspetz E., Money as a Social Contract // Theory and Decision 17, No.1, 1984 [accessible: https://link.springer.-
com/content/pdf/10.1007%2FBF00140051.pdf] (accessed: 03/01/2018)

 9%
later date means that it can be used to invest which, in turn, brings about growth. So-
ciety has developed in such a way that it cannot exist without money. However, mon-
ey is meaningless when removed from its social context: its value derives from soci-
etal acceptance that it is a legitimate medium of exchange and society gives legitima-
cy to it because it benefits as a whole from its existence.16

Initially, currency came in the form of coins that were minted to certain speci-
fications such as quality and weight and the right to issue/mint the currency gradually
became a monopoly controlled by the state. In assuming this monopoly, governments
have been able to profit from seignorage17 and debasement18 when commodity mon-
ey was in use and, in modern times, governments have been able to profit from infla-
tionary monetary policy; confiscating an important part of the wealth of their
citizens.19 With cryptocurrency, however, a community of miners20 are rewarded with
new units of currency for offering their computing resources. Without a central au-
thority profiting from its monopoly over the currency, use of cryptocurrency is free
and so fits within the Mengerian paradigm outlined above.

With the advent of more and more cryptocurrencies, a competition begins in

which there is a bidding for each cryptocurrency, the basis of which forms its value.
This was advocated over 40 years ago by Friedrich Hayek in The Denationalisation
of Money, in which Hayek put forward a monetary system of competitively issued
private monies where financial institutions mint their own currencies that sub-

16 Collard B., Money Is the Real Social Contract // Foundation for Economic Education, 2017 [accessible: https://
fee.org/articles/money-is-the-real-social-contract/] (accessed: 18/02/2018)

17 The difference between the assigned value of a currency and the cost of producing and distributing it.

18 Lowering the value of a currency

19 Keynes M., The Economic Consequences of the Peace // 1919, pp. 235-248 [accessible: https://socialsciences.mc-
master.ca/econ/ugcm/3ll3/keynes/pdf%26filename%3Dpeace3.pdf] (accessed 15/11/2017)

20 Those that “mine”: the process of adding new transactions to the distributed ledger. Previous transactions are placed
in “blocks” that form a “chain”, hence the technology: “blockchain”.

 1% 0
sequently compete for acceptance.21 Hayek takes the position that stability in the
value of a particular currency is key to it being accepted by society since inflation
harms creditors and deflation harms debtors. Moreover, the Nobel Prize winning aca-
demic argued that the government’s monopoly over currency issuance is linked to its
own position of profit from this circumstance and not from a benefit that citizens de-
rive from there being such a monopoly.22 From this standpoint, monopolistic gov-
ernmental control over the quantity of money which is enshrined in law leads to
mismanagement to the detriment of its citizens. This can be contrasted with Gre-
sham’s Law in which currencies compete and good money is driven out by bad, i.e.:
members of a monetary system in which there are several competing currencies will
hoard value (good, overvalued money) and will leave less valuable currencies (bad,
undervalued money) to circulate and eventually abandoned, as happened with gold
standard and silver standard forms of currency throughout the history of money.23 As
Hayek concludes, “the best the state can do with respect to money is to
provide a framework of legal rules within which the people can develop the
monetary institutions that best suit them. [I]f we could prevent governments from
meddling with money, we would do more good than any government has ever done in
this regard.”24

In a world where subjects have become accustomed to the idea of legal

tender, it would seem absurd not to exist within a society whereby the law designates
a single currency as legal money. This is true in that governments that issue currency
need to do so in order to determine how payments within non-contractual legal ar-

21 Hayek F., The Denationalization of Money // Institute of Economic Affairs, 3rd edition, 1990 [accessible: http://na-
kamotoinstitute.org/static/docs/denationalisation.pdf] (accessed: 12/11/2017)

22 Ibid.

23 Federal Reserve of Minneapolis, Gresham’s Law or Gresham's Fallacy? // Federal Reserve of Minneapolis Quarterly
Review, 1986 [accessible: https://www.minneapolisfed.org/research/qr/qr1012.pdf] (accessed: 10/03/2018)

24 Hayek F., Good Money, Part 2: The Standard // Routledge, London, 1999 pp. 125

 1% 1
rangements with government are settled (e.g. taxes). However, Hayek asserts that
there is no reason why private parties should not be free to conclude agreements
between themselves where payment is settled in the currency of their choosing. Al-
though, this would contravene legal tender laws in which bills issued can be used to
settle all debts, whether public or private. The great majority of jurisdictions have ap-
plicable legislation which enforces this rule, thereby rendering contractual statements
which obligate that payment must be in something other than the jurisdiction’s cur-
rency null and void. It must here be stated though that, although there shall be no ob-
ligation to settle debts in anything other than legal tender: within the realms of the
doctrine of freedom of contract, private contractual parties are able to agree between
themselves on any form of payment that is acceptable for all. Returning again to
Hayek, the sanctioning of the use of any currency agreed on by private parties leads
to a situation in which subjects can check whether money is being abused by gov-
ernment since they are able to refuse money in which they have little confidence,
thereby inducing government to ensure inflation stability of their currency.25 In this
case, Hayek argues, Gresham’s Law ceases to be relevant since Gresham’s Law only
operates when subjects are forced to transact within a system where currencies are
prescribed a set value of exchange; “[e]xactly the opposite will happen when people
are free to exchange the different kinds of money at whatever rate they can agree
upon.”26 Placed within this paradigm, legal tender legislation therefore brings about
Gresham’s Law.

Although Hayek asserts that the concept of legal tender does not make eco-
nomic sense, he affirms that society’s acceptance of currency as a medium of ex-
change come from the fact that it is generally acceptable.27 As such, money’s legitim-

25 Ibid. pp 18

26 Ibid.

27 Ibid. pp. 30

 1% 2
acy comes from its acceptance and thereby exemplifies the crux of the social con-
tract: “[a]n agent acts rationally when accepting money as a payment for his goods if
and only if he has reasons to expect that he could buy new goods with them, goods
which would give him at least as much satisfaction as those he sold.”28 Therefore, the
three roles that money takes on and those that concern law29 prove fundamental in the
development of society, with money serving as the “barometer of a society’s
virtue”,30 whilst currency manipulation leads to the decline of societies. Con-
sequently, we must question the role of the state in assigning the status of legal tender
as opposed to Hayek’s proposition of private currencies.

In considering US legislation, for example, it has been asserted that Congress

does not have the power to give government a monopoly over the creation of
money,3132 whereas the same cannot be said for other common law countries such as
the UK.33 This is due to the fact that before the US constitution was drafted and rati-

28 Lagerspetz E., 1984, pp. 7

29 1. Money as a medium of exchange. 2. Money as a measure of value or more accurately phrased perhaps, as a com-
mon denominator of value. 3. Money as a medium of discharge or satisfaction of obligations and specifically as a medi-
um of payment of debts (Eder P., Legal Theories of Money, Cornell Law Review, Volume 20 Issue 1 December, 1934
pp. 55 [accessible: https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=1360&context=clr] (accessed:
18/10/2018))

30 Rand A., The Meaning of Money // The Quantumlounge [accessible:http://www.quantumlounge.com/data/

money.htm] (accessed: 15/10/2017)

31 Leef G., After A Century Of The Fed, It's Time To Return To Protecting Us From A 'Terrorist' Who Made Pure Silver
Coins: The Bernard von NotHaus Case // Forbes, 2014 [accessible: https://www.forbes.com/sites/georgeleef/
2014/12/09/protecting-us-from-a-terrorist-who-made-pure-silver-coins-the-bernard-von-nothaus-case/] (accessed:
18/01/2018)

32 Although this is a question under debate still today. Article 1 Section 8 of the US Constitution states that Congress is
bestowed the power to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights
and Measures;” which the US Supreme Court has interpreted to mean that “every contract for the payment of money,
simply, is necessarily subject to the constitutional power of the government over the currency, whatever that power may
be, and the obligation of the parties is, therefore, assumed with reference to that power” Knox v. Lee. Parker v. Davis,
79 U.S. 457 (12 Wall. 457, 20 L.Ed. 287)

33 “No piece of gold, silver, copper, or bronze, or of any metal or mixed metal, of any value whatever, shall be made or
issued except with the authority of the Treasury, as a coin or a token for money, or as purporting that the holder thereof
is entitled to demand any value denoted thereon.” UK Coinage Act 1971, 9(1)

 1% 3
fied,34 private coinage and a system of private currencies existed mostly based on
gold which varied from state to state.35 However, when Bernard von NotHaus began
to mint his own silver and gold coins in 1998, later releasing an electronic version in
2003,36 on a doctrinal platform of taking back control of monetary value and offering
real competition to the Federal Reserve, law enforcement agencies eventually stepped
in and arrested von NotHaus for the violation of federal criminal law 18 U.S. Code
§486.37 The wording of this statute, leaves it open to interpretation, with the point of
focus in the von NotHaus case being that the prohibition of anything “intended for
use as current money”,38 which the prosecution argued, and subsequently judge an
jury agreed with, gives the federal government the exclusive right to mint currency.
This case bears obvious and significant relevance in light of the advent of cryptocur-
rency and gives an insight into why the creator of the first cryptocurrency would opt
to use a pseudonym.

The fact that governments assume a legal monopoly over the issuance of
money, thereby preventing subjects from exercising a free choice of a mutually ac-
ceptable medium of exchange, presents itself a problem when it comes to cryptocur-
rency. Where cryptocurrency is used as a method of payment to settle debts it would
fall under the aforementioned laws which grant sovereign monopoly over national
currency to states. However, whilst some countries are opting to introduce outright

34 Following ratification, states were no longer able to issue their own currency. Schweitzer M., State-Issued Currency
and the Ratification of the U.S. Constitution // The Journal of Economic History Vol. 49, No. 2, The Tasks of Economic
History (Jun., 1989), pp. 311-322, 1989 [accessible: https://www.jstor.org/stable/2124065] (accessed: 15/03/2018)

35 Leef G., 2014

36 Down K., New Private Monies A Bit-Part Player? // The Institute of Economic Affairs, 2014 [accessible: https://
iea.org.uk/wp-content/uploads/2016/07/New%20Private%20Monies%20-%20Kevin%20Dowd.pdf] (accessed:
16/03/2018) pp. 88

37 "Whoever, except as authorized [sic] by law, makes or utters or passes, or attempts to utter or pass, any coins of gold
or silver or other metal, or alloys of metals, intended for use as current money, whether in the resemblance of coins of
the United States or of foreign countries, or of original design, shall be fined under this title  or imprisoned not more
than five years, or both.” 8 U.S. Code Section 486

38 US. v. Von NotHaus, Case No. 5:09-CR-00027-RLV-DCK, April 17, 2017

 %14
bans for cryptocurrencies,39 several states have thus far been reluctant to do so, in-
cluding the UK and US who have taken a permissive stance towards its usage (whilst
calling for caution amongst the general population investing large sums).40 The de-
centralised aspect of cryptocurrency allows it to transcend jurisdictional restraints
across the globe, thereby complicating regulators’ efforts to enforce its prohibition.

Hayek’s advocation of denationalised currencies fits perfectly within the

scope of cryptocurrencies, which in turn adheres to the Menegerian doctrine of mon-
ey being a socio-economic construct in which cryptocurrencies compete to be used,
but where an eventual winner is at present yet to be determined. However, the current
market does not correlate with Meneger’s view of price stability defining the curren-
cy’s usage, in that the price of the most popular cryptocurrency has swung by 35%
since the beginning of 2018.41 On the other hand, one can assert that Bitcoin’s price
saw a sharp increase towards the end of 2017 is due to Gresham’s Law: it was seen as
an ideal store of value that was only appreciating and therefore capital flooded into
this cryptocurrency, thereby driving it out of circulation and reducing the supply. As
regards to Menger’s doctrine failing to completely correlate to reality, the author be-
lieves two factors are at play.

39 For example in Algeria where the 2018 Finance Bill from December 2017 puts forward Article 117 in which “The
purchase, sale, use or holding of so-called virtual currency is prohibited. Virtual currency is used online by internet
users. It is characterised by the absence of physical backing such as that of coins, bills, cheque or bank card payments.
Any violation of this provision is punishable in accordance with the law and regulations in effect." [Author translation
from the French: “L’achat, la vente, l’utilisation et la détention de la monnaie dite virtuelle est interdite. La monnaie
virtuelle est celle utilisée par les internautes à travers le web. Elle est caractérisée par l’absence de support physique
tels que les pièces, les billets, les paiements par chèque ou carte bancaire. Toute infraction à cette disposition, est punie
conformément aux lois et règlements en vigueur.”] Journal officiel de la République Algérienne // Journal officiel de la
République Algérienne N° 76, 2017 [accessible: https://www.joradp.dz/FTP/jo-francais/2017/F2017076.pdf] (accessed:
15/03/2018)

40 See Appendix 1

41 Since the beginning of 2018 the first cryptocurrency, Bitcoin, has undergone price swings that have seen its value
shift by up to 35% to date (17/04/2018): to a low of US$6000 on 16 February, 2018, from a high of US$17,290 on 6
January, 2018. See Appendix 2

 1% 5
Firstly, we are yet to witness the end of the competition that will bring a cer-
tain cryptocurrency to a stage where it is widely used. Secondly, and more important-
ly due to its influence on the first factor, user uncertainty due to lack of clear regula-
tion is hindering adoption, and this uncertainty lends itself to the massive price
swings that we have seen for several cryptocurrencies in recent times.42 Moreover,
since we are yet to have any regulation in place, it is difficult to say that any of the
theoretical doctrines mentioned will or will not hold true. Indeed, the theories men-
tioned above depend on the total absence of legal tender laws or regulation which al-
lows cryptocurrency to be used as legal tender. The growth in cryptocurrency accep-
tance as a method of payment shows that society is nearing a stage where it may one
day become part of the social contract: an accepted means of payment and store of
value that will further the development of society. For this, legislation needs to
recognise the existence of cryptocurrency.

In contradistinction to the US, the EU Commission not only provides a work-

ing definition of cryptocurrency,43 but also explicitly recognises contractual parties’
right to use it as a means of settling debts, thus paving the way for its acceptance as a
legally recognised medium of exchange. From an economic point of view, for crypto-
currency to fulfil the role of money it would have to adhere to four minimum re-
quirements: 1) a measure of value; 2) a medium of circulation; 3) a means of pay-
ment; and 4) a store of value.44 Since cryptocurrency fits within these preconditions,
it can be considered money from an economic perspective, independent of the legal
classification assigned to it. The author asserts that this is the logic by which the Eu-

42 Price relation of other cryptocurrencies such as ETH (Ethereum’s Ether) and BTH (Bitcoin Cash) in apparent price
relation to BTC has also seen similar price changes throughout 2018.

43 “[A] digital representation of value that is neither issued by a central bank or a public authority, nor necessarily at-
tached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred,
stored or traded electronically”. European Central Bank, Opinion of the European Central Bank, October 2016 on
amendments to Directive (EU) 2015/849 and Directive 2009/101/EC, (CON/2016/49) (2016/C 459/05) 1.1.3. // 2016
[accessible: https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A52016AB0049] (accessed: 30/03/2018)

44
Lastra R., International Financial and Monetary Law // Oxford, Second Edition 2015, pp. 12–13 [accessible: https://
www.gbv.de/dms/zbw/783225016.pdf] (accessed: 12/11/2017)

 1% 6
ropean Central Bank assigns cryptocurrency status as currency. However, since it has
yet to become commonly accepted throughout wider society as a whole, difficulties
are encountered when proclaiming cryptocurrency a currency. The social phenomen-
on which has led to the rise in awareness of cryptocurrency and its supporters may
yet have significant economic consequences, but the means by which it is created,
coupled with the concept that its circulation should remain outside of state control
will hinder mass adoption. Furthermore, returning to the Hayek’s proposition of
private monies, the author asserts that two separate systems for private money can be
discerned: those that by their very essence cannot become widespread as they are loc-
alised within a certain territory, and those which are restricted by law and by func-
tion, such as regulated electronic money.45

With regards to cryptocurrency, its protagonists aspire for it completely sub-

stitute fiat currency, eliminating the need for currency issued by central banks. Again,
due to its trans-territorial and global nature, any natural person or entity is able to ex-
change fiat holdings into cryptocurrency via an internet connection and an exchange
platform, whose legality also comes into question, but this point will be addressed at
a later stage in this section. Moreover, cryptocurrency as a whole has been maligned
by its use to purchase illegal goods and services, owing to its pseudonymous charac-
teristic.46 Similarly to other emerging technologies, newly formed issuers of cryp-
tocurrency are currently attempting to exploit the lack of regulation to establish a
market share early on, whilst incumbent technologies are constrained by liability that
may arise should the introduction of restrictive legislation regarding cryptocurrency
come into force. Furthermore, incumbent market players lobby for regulation to the

45 Electronic money differs from cryptocurrency in the legal status assigned to it and the regulation which exerts au-
thority over it. Issuers of electronic money, as are issuers of localised private money, are centralised institutions mean-
ing regulators are able to exert authority. Moreover, cryptocurrency’s value is determined by demand and supply eco-
nomics, whereas electronic money is linked to an exact amount of fiat money. CGAP, Infographic: Bitcoin vs Electronic
Money // 2014 [accessible: http://www.cgap.org/data/infographic-bitcoin-vs-electronic-money] (accessed: 22/03/2018)

46 Although cryptocurrency protects user privacy, the great majority allow for the ability to retrace transactions due to
the public nature of ledgers on which the transactions are recorded.

 1% 7
detriment of cryptocurrency issuers who subsequently are constrained from being
able to realistically compete with the incumbents.47 With the high risk posed by cryp-
tocurrency in relation to the general public, some legislators scrambled to impose
more rigorous obligations on cryptocurrency exchanges and this is demonstrated by
legislation introduced in New York.48 However, on the whole, and as is the case for
the majority of emerging technologies, regulators are playing a game of catch up.
This has led to a situation where legislative arms of governments are taking an ex
post, reactionary approach to developments, whereas there is a need for them to legis-
late ex ante in anticipation of further progress so that regulation may keep in step
with the ever-evolving challenges that it is presented with.

1.3 Problems in regulating cryptocurrency; existing laws

There are myriad hindrances when it comes to regulating cryptocurrencies.
Here the author would like to highlight the individual problems that the regulators
face when attempting to introduce legislation to cryptocurrencies:
1. Cryptocurrency has a global reach which transcends jurisdictional bound-
aries.
2. The underlying technology behind cryptocurrency, blockchain, enforces
transaction finality, meaning transactions are not reversible where errors
take place.
3. Lack of transparency on exchanges due to price formation not being subject
to standards, leading to price differences across exchange platforms and,
therefore, price manipulation and fraudulent behaviour.

47 Astore A.,Regulatory Issues and Challenges Presented by Virtual Currencies // Columbia Business Law Review,
2017 [accessible: https://cblr.columbia.edu/regulatory-issues-and-challenges-presented-by-virtual-currencies/] (ac-
cessed: 12/01/2018)

48 Known as the BitLicense Regulatory Framework, the Revised Virtual Currency Regulation obligates those engaging
in “virtual currency business activity” to obtain a license which has come to be called the “BitLicense.” New York State
Department of Financial Services, New York Codes Rules and Regulations, Title 23 // Department of Financial Ser-
vices, Regulations of the Superintendent of Financial Services, Part 200. Virtual Currencies [accessible: https://www.df-
s.ny.gov/legal/regulations/adoptions/dfsp200t.pdf] (accessed: 15/02/2018)

 1% 8
4. Information in the cryptocurrency sphere is limited and unequally dis-
tributed amongst market players, leading to illegal activity such as insider
trading.
5. Exchanges also do not have to uphold financial probity since they are not
audited or governed by regulatory bodies,49 meaning there is increased like -
lihood for misappropriation.
6. Cryptocurrencies do not have a set standard or definition, and so can be
easily misrepresented.
7. Actors dealing with cryptocurrency are not incorporated as entities which
are easier to regulate as legal persons. Any actors that decide to become le-
gal entities can incorporate in a jurisdiction more favourable to cryptocur-
rency issuers.
8. There is no way for users to make a complaint to be made against an issuer
in the event of loss or other and there is no judicial recourse or access to in-
surance schemes to compensate for any losses incurred.
9. IT security is often insecure, leading to funds being stolen or fraudulently
misappropriated.
10. Opaque system of protocol governance whereby only several individuals
have power over alterations to the code.
These ten factors demonstrate a need to formulate a standard across the cryptocurren-
cy sphere; without such a standard it will be near impossible to implement a working
set of regulatory requirements. This could well be done via the introduction of a self
imposed regulatory structure from the industry that could define its own standards
that could later be used to create legislative standards, which would bring certainty to
the market conjuncture. The results of such standards would minimise risks to con-
sumers and bring more culpability to issuers for their actions, meanwhile the market
would stabilise where subjects believe that parties will be held liable. Later in the

49 An exception to this being the NY BitLicense as mentioned above

 1% 9
work I will outline which legal tools could be implemented and how this could work,
but first of all the civil, public and private laws from around the world will be ex-
plored.

There has been some debate on whether to classify cryptocurrency as a secur-

ity and the implications that this would have on the taxes to be settled with the state.
Public law regarding taxation of cryptocurrency tends to lean towards literal inter-
pretation that aims to prohibit unfavourable interpretations in relation to taxpayers.
This de lege lata approach brings about significant challenges, specifically in applica-
tion of value added tax (VAT) and income tax law provisions.50 If we consider
cryptocurrency in terms of whether VAT should be paid on transfers to other parties
in terms of payment for services rendered, cryptocurrency falls under provisions that
regard payment in another means than that of legal tender and so is not subject to
VAT.

This is the current standpoint of the European Court of Justice which issued
an opinion in October of 2016, identifying that “Article 135(1)(e) of Directive
2006/112 must be interpreted as meaning that the supply of services such as those at
issue in the main proceedings, which consist of the exchange of traditional currencies
for units of the ‘bitcoin’ virtual currency and vice versa, performed in return for pay-
ment of a sum equal to the difference between, on the one hand, the price paid by the
operator to purchase the currency and, on the other hand, the price at which he sells
that currency to his clients, are transactions exempt from VAT, within the meaning of
that provision.”51 In doing so, the Court classified the particular cryptocurrency in

50 Kopyściański T., Srokosz W., Legal and economic analysis of the cryptocurrencies impact on the financial system
stability // University of Wroclaw School of Banking, 2015 [accessible: http://www.universitypublications.net/jte/0402/
pdf/F5N180.pdf] (accessed: 21/11/2017)

51 Official Journal of the European Union, Judgment of the Court (Fifth Chamber) of 22 October 2015 (request for a
preliminary ruling from the Högsta förvaltningsdomstolen — Sweden) — Skatteverket v David Hedqvist, Case
C-264/14 [accessed: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A62014CA0264] (accessible:
18/01/2018)

 2% 0
question as a means of payment which facilitates trade, which, although not yet regu-
lated in law, performs the same function as legal tender. The Court followed the logic
that foreign currencies are covered by Directive 2006/112 and are VAT exempt, al-
though they are not legal tender within the territory of the EU, furthering their argu-
ment with economic overtones in stating that “the objective of Article 135(1)(e) of
the VAT Directive is to ensure that, in the interests of the smooth flow of payments,
the conversion of currencies is as unencumbered as possible.”5253 As such, it was de-
termined that cryptocurrencies, by performing the same function as legal currencies,
should have the same legal status and be VAT exempt. This judgement has un-
doubtedly furthered the adoption of cryptocurrencies in both a legal and economic
sense, since: 1) VAT deductions are not applicable and therefore consumers do not
bear the cost of exchanging fiat for cryptocurrency; and 2) it provided regulatory as-
surance from one of the most influential courts in the world.

As for the US no VAT law exists at federal law since sales taxes are set at
state level, so instead a federal level arm of the administrative state - the US Securit-
ies and Exchange Commission (SEC) - shall be assessed in a different aspect of law:
financial law. As the largest securities’ market in the world,54 the US’ SEC has a
global reach. This is due to foreign entities being listed on stock exchanges in the US,
whilst US investors also hold assets abroad; the SEC assumes jurisdiction over both
intraterritorial and extraterritorial matters. In March of 2018 the SEC made a state-
ment raising concerns about exchange platforms in that they provide “a mechanism
for trading assets that meet the definition of a ‘security’ under the federal securities

52 Opinion of Advocate General Kokott, 2015, Case C‑264/14, Skatteverket v David Hedqvist [accessible: https://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A62014CC0264] (accessed: 03/11/2017)

53 Here it must be stressed that the ECJ opinion relates to the exchange of foreign currency and not to purchases of
goods/services using cryptocurrency for which VAT applies to the business transaction in question.

54 Wee R,, Biggest Stock Exchanges In The World // Worldatlas, 2017 [accessible: https://www.worldatlas.com/articles/
biggest-stock-exchanges-in-the-world.html] (accessed: 18/02/2018)

 2% 1
laws.”55 In determining whether a cryptocurrency meets the criteria of a security un-
der US law, the SEC employs the Howey Test, based on a Supreme Court case from
1946.56 To determine whether a transaction can be considered an investment contract
(and therefore a security) according to the Howey Test, the transaction should be 1)
an investment; 2) the purchaser should expect to receive a profit; 3) the money is in-
vested in a common enterprise; and 4) profits are expected from a third party or pro-
moter. Although many cryptocurrencies could fit within this test, it is suffice to say
that this work is not so extensive as to assess cryptocurrency as anything other than
medium of exchange. However, the SEC’s further actions may have ramifications for
the cryptocurrency sphere as a whole and therefore those looking to issue private
cryptocurrency will have to take SEC rulings into account. Another point of equally
worthy note that complicates the matter further is that, in the same month of 2018, a
US federal judge sided with the US Commodity Futures Trading Commission
(CFTC) in calling Bitcoin and other cryptocurrency a commodity.57 It is clear that the
confusion will continue until a single body for the regulation of cryptocurrencies is
established and a different legislative stance is taken from the present application of
de lege lata.

Earlier a point of discussion was the application of the US Code in regards to

the issuance of private moneys and, although it was adjudged in court for the afore-
mentioned Article gives the government a monopoly over the control of money, the

55 US Securities and Exchange Commission, Statement on Potentially Unlawful Online Platforms for Trading Digital
Assets Divisions of Enforcement and Trading and Markets // S Securities and Exchange Commission, 2018 [accessible:
https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading]
(accessed: 18/04/2018)

56 United States Supreme Court, Securities and Exchange Commission v. W. J. Howey Co. // No. 843 Argued: May 2,
1946 Decided: May 27, 1946, [accessible: https://caselaw.findlaw.com/us-supreme-court/328/293.html] (accessed:
13/03/2018)

57 US Commodity Futures Trading Commission, CFTC Charges Patrick K. McDonnell and His Company Cabbage-
Tech, Corp. d/b/a Coin Drop Markets with Engaging in Fraudulent Virtual Currency Scheme // US Commodity Futures
Trading Commission, 2018 [accessible: https://www.cftc.gov/PressRoom/PressReleases/pr7675-18] (accessed:
16/04/2018)

 2% 2
Article was questioned in that it was open to interpretation.58 In the view of the au-
thor, the intentions of those drafting Article 8, §486 of the US Code were to counter
counterfeiting of money, rather than to prescribe a prohibition of private money is-
suance, with the interest in creating obligations against counterfeiting to protect the
value of currency and the monetary system as a whole. Articles contained within the
US Code59 form part of criminal law, just as do further articles in the given code pro-
hibiting the counterfeiting of foreign currencies.60 However, these statutes do not ex-
plicitly apply to cryptocurrency, which exists solely in digital form online. The case
of von NotHaus was won by prosecutors since the currency, Liberty Dollars, was de-
signed to mimic and replace US legal tender alone. This leads one to ponder upon
whether the language of the aforementioned statues can be applied to cryptocurrency,
as a system which aims to create an alternative monetary system for the world.

Moreover, the applicability of tax laws also comes into question. Omri Mari-
an raises a pertinent issue in his essay on whether cryptocurrency is a “super tax
haven”.61 Cryptocurrency undoubtedly has similar traits to traditional jurisdictions
considered to be tax havens since earnings are not reported to traditional tax authori-
ties, whilst the subjects themselves enjoy a level of anonymity. However, traditional
tax havens provide regulated financial institutions similar to home jurisdictions with
a discounted tax rate; cryptocurrency, on the other hand is able to exists outside of
traditional financial institutions. Marian concludes by stating that legislators should
offer more attention to this phenomenon since, although cryptocurrencies exist within
a virtual arena, their effects are not virtual; with their operation happening “within

58 See footnote 37

59 Title 18 of the US Code, Sections 470-477 and 485-489: Murphy E., Murphy M., Seitzinger M., Bitcoin: Questions,
Answers, and Analysis of Legal Issues // Congressional Research Service, R43339, 2015 [accessible: https://fas.org/
sgp/crs/misc/R43339.pdf] (accessed: 13/01/2018)

60 18 US Code Sections 478-483, Ibid.

61 Marian O., Are Cryptocurrencies 'Super' Tax Havens? // 112 Mich. L. Rev. First Impressions 38, 2013 [accessible:
http://scholarship.law.ufl.edu/cgi/viewcontent.cgi?article=1365&context=facultypub] (accessed: 22/01/2018)

 %23
real economies and, as such, their growth potential is, at least theoretically infinite.”62
However, since Marian was writing back in 2013 it is possible to contrast his state-
ments with the current reality. Indeed, early investors in Bitcoin have seen the value
of their investments rise dramatically and these individuals may surely look to ob-
scure their gains. Addressed, however, in the paradigm of this work and current reali-
ty, the large price swings currently make cryptocurrency an unlikely choice in the ob-
fuscation of wealth. Although, should regulation be introduced and the value sta-
bilise, measures will have to be foreseen in order combat tax avoidance. Such mea-
sures could use methods of coercion which obligate holders of cryptocurrency into
declaring their holdings, whilst audits may well be carried out by specialist firms that
are able to follow transaction flows into particular accounts. As mentioned earlier,
cryptocurrency such as Bitcoin is pseudonymous due to transaction records being
stored within a public ledger. This means that it is possible to link IP addresses to
specific digital wallets and the transactions to them, thereby identifying the subject
who controls the wallet.63 Moreover, with transactions logged digitally and the data
stored in such a way so that it cannot be retrospectively altered, the raw data available
to the tax authorities will be more credible.

Since cryptocurrency exists outside of jurisdictional boundaries, it is likely

that it will require an international legislative solution and, due to this fact, it has be-
come an object of discussion for international regulators. As such, the World Bank
has held several conferences on the legal and regulatory policy implications of cryp-
tocurrencies,64 the European Banking Authority has issued several warnings to con-

62 Ibid. pp 47-48

63 A wallet is a piece of software which stores the private access keys to a particular cryptocurrency. Access to the wal-
let allows for transactions to take place using the private key. Again, there are methods of obscuring wallet ownership,
yet suspicions are surely to be raised with the conversion of cryptocurrency into large amounts of fiat. The author here
admits that it is unlikely cryptocurrency in its current form will replace fiat or fiat forms of cryptocurrency that may be
introduced by governments.

64 Notably two dedicated entirely to cryptocurrencies: Virtual currencies: the legal and regulatory challenges (June
2013); and Virtual currencies: legal, regulatory and policy implications (May 2014)

 2% 4
sumers about the risks involved with purchasing cryptocurrencies,65 as has the Finan-
cial Action Task Force, cited in this paper. However, sterner warnings from suprana-
tional organisations with regards to the implementation of legislation have thus far
not been followed.66 The majority of warnings from international regulators are cen-
tred around consumer protection and anti-money laundering (including terrorist fi-
nancing). Here again we encounter the question of whether existing regulations can
be extended to cryptocurrency transactions. With regards to anti-money laundering
legislation, the author believes that the inclusion of technologically neutral terms and
broad definitions such as those used in the the legislation of the Fourth EU Anti-
Money Laundering Directive indicate that anti-money laundering legislation is at
present suitable in regards to the regulation of cryptocurrency.67 Moreover, the intro-
duction of a licensing scheme such as that of New York’s 2015 “BitLicense”68 - a sui
generis approach - also raises questions of the regime to be put in place, which enti-
ties will be subsequently subject to the cryptocurrency transmission requirements and
be obligated to receive licensing, in addition to the rules that would in fact be applied
to licensed entities involved in the transmission of cryptocurrencies.

In another jurisdiction, Singapore, legislators took steps to potentially clarify

certain cryptocurrency businesses, such as exchanges, fall under legislative the defin-
ition of a remittance business69 and this is comparable to the stance of the US’ Finan-

65 European Banking Authority, ESAs warn consumers of risks in buying virtual currencies // 2018 [accessible: https://
www.eba.europa.eu/-/esas-warn-consumers-of-risks-in-buying-virtual-currencies] (accessed: 28/11/2017)

66 For example, the European Banking Authority recommended that EU legislators become “obliged entities” in the
Anti-Money Laundering Directive (AMLD4). ECB, European Central Bank, Virtual currency schemes - a further ana-
lysis // European Central Bank, 2015 [accessible: https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes-
en.pdf] (accessed: 14/01/2018), pp. 29

67 EU Anti-Money Laundering Directive Article 3 (3): “‘property’ means assets of any kind, whether corporeal or in-
corporeal, movable or immovable, tangible or intangible, and legal documents or instruments in any form including
electronic or digital, evidencing title to or an interest in such assets; ”

68 See footnote 48

69 Defined in Section 2(1), Money-Changing and Remittance Businesses Act (Cap. 187), as “the business of accepting
moneys for the purpose of transmitting them to persons resident in another country or a territory outside Singapore.”

 %25
cial Crimes Enforcement Network whose requirements for record keeping extend to
cryptocurrencies under the Bank Secrecy Act.70 However, with no further clarifica-
tion given, we are yet to witness whether a sui genesis approach will be taken across
the board, with one author stating that the choice between creating new legislation
and extending existing regulation could “ultimately be a matter of form rather than
substance”.71 Independent of the approach taken, in this instance it is necessary that
the regulators clarify their stance towards those entities operating with cryptocurren-
cy but not in the exchange, transmission or trading of them, whether for fiat or other
cryptocurrency. Here, legislation would have to be created regarding those who make
conclude purchase-sale agreements with a consideration that is cryptocurrency, but
should not be subject to the same stringent requirements. This is where the author ad-
vocates a sui generis approach since it offers flexibility in its customisation of rules
for the industry in question.

As regards to whether legislation should look to classify cryptocurrency ex-

change operations as remittance businesses or money changers, first attention should
be drawn to the three different types of payment arrangements that exist within cur-
rent legislation of value transfers: unidirectional flow arrangements; bidirectional
flow arrangements and closed arrangements. The distinction between defines whether
the crypto asset is a currency which interacts with the real world economy since fiat
currency allows for bidirectional flow arrangements. In terms of cryptocurrency and
its exchange, a unidirectional flow arrangement would allow for cryptocurrency to be
exchanged into fiat but not back to cryptocurrency, meanwhile bidirectional arrange-
ments allow for free conversion to and fro without hindrance, meaning they can be
used as a medium of exchange. With regards to a closed arrangement, cryptocurren-
cies may be exchanged within a market solely for cryptocurrency, but there is no in-

70 Lim J., A Facilitative Model For Crypto-Currency Regulation In Singapore // National University of Singapore, 2014
[accessible: https://law.nus.edu.sg/cbfl/pdfs/working_papers/CBFL-WP-JL01.pdf] (accessed: 16/03/2018), pp. 371

71 Ibid.

 2% 6
teraction with traditional fiat currency.72 This distinction becomes important when de-
fining whether a cryptocurrency can be classified as a currency and since bidirection-
al flow arrangements are possible, cryptocurrency is able to become an economic unit
of exchange and thus generates a need for legislation since it is able to have an im-
pact on the economy at large. It should be stressed that regulation brings confidence
to the market and capital inflow, whilst, at present, existing laws in some jurisdictions
offer no classification to cryptocurrencies that would remedy situations or enforce
criminal sanctions for their theft.73

With that said, arises the question of whether cryptocurrency, as an intangible

asset, can be considered property and therefore conversion remedies can be applied
when misappropriation or theft occurs. If it is not considered property then it cannot
be stolen, meaning that no proprietary remedy may be applied against third parties
that gain control over the intangible cryptocurrency, although personal remedies may
be enforced against contracted parties or under the premise of unjust enrichment or
tort.74 However, taking into account that there are many legal object in the modern
digital economy that exist in intangible form, the author asserts that the physical exis-
tence of an object as a criterion for conversion remedy would be improper and base-
less.75 Furthermore, legislation exists in jurisdictions such as that of the UK which
expressly provides protection for such property, including “things in action and other
intangible property.”76 In the digital era, this should be legal matter of fact, but, as
demonstrated, intangible property is not clearly defined as having legal protection.

72 Doles Silva L.G., Cryptocurrencies: international regulation and uniformization of practices // United Nations Com-
mission on International Trade Law, 2017 [accessible: https://www.uncitral.org/pdf/english/congress/Papers_for_Con-
gress/29-DOLES_SILVA-Cryptocurrencies_and_International_Regulation.pdf] (accessed: 23/10/2017)

73 Singapore case law, for example, has “left undetermined the question of whether conversion remedies are available
for intangible property – a category that includes crypto-currencies.” Lim J., 2014, pp.18

74 Ibid. pp. 19

75 Green S., To Have and To Hold? Conversion and Intangible Property // 71(1) M.L.R. 114, 2008, pp. 117

76 UK Theft Act 1968 c. 60 section 4 (1) Property

 2% 7
This has its own consequences for cryptocurrency since the lack of a clear definition
of property rights in regard to this object of perceived value will hinder the develop-
ment of a flourishing place in the global economy for cryptocurrencies.

This section has explored the application of law to the cryptocurrency sphere
from a theoretical, economic, case law doctrinal stance and in terms of existing
statutes from various jurisdictions in order to clarify and highlight the certain
positions that are being taken in regard to this monetary technology. One of the main
points of this section was cryptocurrency’s transjurisdictional nature, whilst
classifying it as currency can at present only be undertaken from purely economic
perspective, since it has yet to gain widespread acceptance as a medium of exchange
in society at large. In assessing the application of current legislation and its
applicability, the author has highlighted a need for an original approach with regards
to the regulation of cryptocurrency and asserts that this is likely to take place. In
discussion of VAT applicability to cryptocurrency, the author argues that such an
affirmation as that of the European Court of Justice paves the way for cryptocurrency
to become a more widely used medium of exchange, pending the implementation of
regulation which would bring assurance to market participants and, henceforth,
improve price stability. The work will no move on to an exploration of the reactive
measures that have been taken by the industry and legislators of different
jurisdictions, progressing onto a discussion of the the privacy issues that
cryptocurrency presents and subsequently offering a review of proposed legislature
from academics who studied the present subject.


 2% 8
2 Proposal of legal framework for cryptocurrency regulation
Having analysed stances that can be taken with regards to legislation regulat-
ing cryptocurrency, this second part will analyse will cover the different aspects of
bringing in regulation, in addition to conducting a complex analysis of the reac-
tionary position that legislators have taken. First and foremost, the author would like
to set forth why there is a need for regulation, progressing on to how self-regulatory
bodies could aid faith in cryptocurrency, and subsequently making a proposal for how
this could be done.

2.1 Self regulation as a model for cryptocurrency

Regulation begins with a definition of policy objectives to determine the
need to intervene in a certain market. Interventions, legal or self-regulatory, should be
justified with regards to consumer welfare to address:
1) inadequate competition, whereby market actors are engaging in fraudulent
deceptive activities that are illegal or dishonest;
2) imperfect information, which leads to a situation where consumers cannot
make an informed choice;
3) dispute resolution, so that there is a set procedure to remedy contract
breaches or contraventions of the law;
4) externalities - knock on effects that lack of regulation is having on other
aspects of society or other markets;
5) social objectives, so that public order may be preserved;
6) risk to vulnerable consumers, such as those that lack adequate bargaining
power;
7) standards for which would provide further market growth and protection.77 

Although fundamental concerns exist for market intervention, there is often much

77 UK National Consumer Council, Models of self-regulation: An overview of models in business and the professions //
National Consumer Council PD 20/P/00, 2000 [accessible: http://www.talkingcure.co.uk/articles/ncc_models_self_reg-
ulation.pdf] (accessed: 06/03/2018)

 2% 9
debate about the methods of intervention and how it will help achieve a certain
objective. The question arises as to the type of regulation needed for a particular
sector and one option is self regulation.

Although the impact of cryptocurrency requires legislative regulation from

the state, an effective self regulatory framework which involves dialogue between
regulators and the industry is a model that could provide optimal market conditions
for wider use of cryptocurrency. Such a framework would involve a governance
process that would start by deciding upon, and subsequently policing and enforcing
standards by private entities within the industry and the professionals within it, rather
than by public regulatory bodies. As such, this would involve the private sector being
proactive in the regulatory process, with the industry regulating itself. Moreover, self
regulation brings down the cost of monitoring the market and enforcing rules, whilst
private bodies tasked with regulating their own industry bring an element of technical
expertise of a level that the legislators are unlikely to have attained, with this having
especial relevance in nascent technological industries where the pace of innovation
moves too fast for public regulatory bodies to catch up. Additionally, incentives are
created for those willing to voluntarily comply, since it reduces industry costs in
amending and revising standards, meanwhile fostering collaborative conduct and
beneficial interaction between the industry and its public regulators. Furthermore, self
regulation is said to increase trust between all market actors (consumers, regulators
and industry), leading to further advances in innovation and a boost in investment.78
Internet-based industries, such as that of cryptocurrency, have a particularly pertinent
benefit from self regulation since this industry looks to mirror the long-established,
real-world activity of currency regulation.79 Since one can distinguish protocol and

78 Daniel Castro, Benefits and Limitations of Industry Self-Regulation for Online Behavioral Advertising // The In-
formation Technology & Innovation Foundation, 2011 [accessible: http://www.itif.org/files/2011-self-regulation-online-
behavioral-advertising.pdf] (accessed: 23/10/2017) pp. 3

79 Bertelsmann Foundation, Self-regulation of Internet Content // Bertelsmann Foundation, 1999 [accessible: https://
www.cdt.org/files/speech/BertelsmannProposal.pdf] (accessed: 31/01/2018), pp. 21.

 3% 0
back-end operations as traditionally regulated through industry self policing, it is pos-
sible to assert that this model bears fruit when it comes to global networks that tran-
scend jurisdictions.80

In sum, self regulatory bodies play the role of interpreting rules within a strict
legal framework set out by legislators, whilst they also create rules without formal
supervision; they may also take on regulatory functions usually left to public bodies
that encompass the creation of rules, through to enforcing compliance with such
rules. Conversely, it has been argued that “self regulation cannot function without the
support of the public authorities, be it that they simply do not interfere with the self-
regulatory process, be it that they endorse or ratify self-regulatory codes and give
support through enforcement.”81 As such, self regulation should take on the form of
“soft law” norms that are not legally obligatory and carry no legal sanctions, but car-
ry reputational harm when they are contravened and incentives when they are com-
plied with. Reputational risk in in itself is enough to bring actors within an industry
up to a certain standard and in certain situations can be even more effective in more
developed markets. Indeed, market actors exercise a precautionary approach where
there is regulatory uncertainty; in such a situation one can envisage standards being
higher than would there be a regulatory standard already in place since entities in a
publicly regulated industry often go to lengths to circumvent particular rules whilst
also complying with them. Meanwhile self regulation in the form of soft norms is
more flexible to changes that counter negative practices that could cause repetitional
harm to the industry. This means that the threat to reputation, perhaps coupled with
perceived impeding retroactive legislation, would incentivise compliance on a volun-
tary basis.

80 A prime example here would be ICANN (“Internet Corporation for Assigned Names and Numbers”) which assigns
and polices use of domain names to ensure the stable operation of the internet.

81 Bertelsmann Foundation, 1999, pp. 22

 3% 1
Since the internet and the cryptocurrency transactions completed within it are
borderless, a transnational regulatory body may be the first step in enforcing industry
standards across the globe. Due to the nature of this fact, regulatory boundaries that
represent sovereignty and jurisdiction are unable to fully enforce provisions to
counter cybercrime and other online contraventions of law.82 This is because crimes
can be committed in one jurisdiction which infringe legal provisions in another or
several other jurisdictions. Sufficient regulation for cryptocurrency will therefore re-
quire cooperation between foreign regulators for cybersecurity issues to be effect-
ively resolved. This will aid the creation of an effectual regulatory landscape that will
further consumer belief in the use of cryptocurrency. This is especially of relevance
taking the double deontology risk into account,83 since legislation in jurisdictions
such as the EU has extraterritorial effect,84 meaning the possibility of conflicting
rules for certain cases. Regulation that has been carefully thought through will clarify
the industry environment to increase consumer and investor confidence, and this
would require correctly identifying aspects whose lack of regulation would increase
the likelihood of money laundering and cybercrime, whilst there is also a need for an
approach that doesn’t restrict the industry via over-regulation, leading to a reduction
in innovation and an unproductive environment. In short, the aim is to strike a bal-
ance between fostering further innovation and preventing use which contravenes law;
this balance will push further adoption of cryptocurrencies.

According to the European Union Agency for Network and Information Secu-
rity (ENISA), the main drivers for cryptocurrency adoption will be “cost reductions,

82 For example, hate speech

83 Lim J., 2014, pp 26

84 For example, the recently in force EU General Data Protection Regulation (EU General Data Protection Regulation,
Regulation (EU) 2016/679, [accessible: https://eur-lex.europa.eu/legal-content/EN/AUTO/?uri=celex:32016R0679]
(accessed: 04/03/2018)) which extends applies to EU residents, in addition to data on non-EU residents held outside of
EU jurisdiction.

 3% 2
improved risk management, and automated regulatory compliance”,85 with the
agency asserting that increasing use of cryptocurrency may bring about a number of
benefits for not only the industry, but society at large.86 Furthermore, the European
Parliament in its resolution on cryptocurrency estimates that a reduction in the trans-
action and operational costs involved in transnational money for remittance costs
could stand at up to 20 billion euros.87 Such institutions are looking forward and be-
lieve in the creation of a regulatory landscape that offers cryptocurrency status as le-
gal tender, in addition to legislating for their conversion with fiat currency. Such leg-
islation will involve a need for the safeguarding of privacy and security, whilst the
approach should be proportional at EU level so that innovation should not be stifled
or costs increased to levels which would hinder cryptocurrency’s development and
the advantages that it offers at present.88 As such, European agencies are currently
considering supervision in the form of licensing of cryptocurrency exchanges in order
to protect consumers, following the example of Asia.89 Since the European is a single
economic market, such licensing rules should be introduced at a single point in time
for all and harmonised across all member states in order to avoid the creation of cryp-
tocurrency safe havens within the Union. However, clear licensing rules would need a
strict definition and classification of cryptocurrency and activities conducted with it,
so that market actors and regulators could have clarity about what needs to be li-
censed.

2.2 Cryptocurrency legal classification

85 ENISA, 2017, pp. 4

86 Ibid.

87 European Parliament, European Parliament resolution of 26 May 2016 on virtual currencies (2016/2007(INI)) [ac-
cessible: http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-
TA-2016-0228+0+DOC+XML+V0//EN] (accessed: 22/02/2018)

88 Ibid.

89 ENISA, 2017 pp. 11

 3% 3
When it comes to classifying cryptocurrency, the first thing to be addressed is
the question of the nature of cryptocurrencies and their legal status. This point con-
cerns the scope of any legal regime applied, in terms of to which entities it applies
and the period of time such a regime is in force. Secondly, the language and legal
terminology that is applied must be carefully considered to determine the meaning
assigned. Furthermore, parties involved must be clearly defined, in addition to the
public law regime assigned, whether in accordance with laws on taxation, currency
controls, money laundering, etc.90 In sum, there is a need to define cryptocurrency, to
examine applicable regulations and to consider issues regarding user protection.91
Since cryptocurrency is no longer a novelty, but an asset that is finding ever-more ac-
ceptance throughout the market commercially, it can no longer be ignored. In terms
of the public law regime to be assigned, regulation is necessary to provide consumers
with protection, hinder criminal transactions, simplify and clarify taxation issues, etc.
However, cryptocurrency has several features that make it difficult to classify and
categorise within existing asset classes.

As mentioned in the previous part of this work, a simple approach which

looks to find analogies to the features of cryptocurrencies with regards to existing as-
set classes means different regulatory organs come to different conclusions as to clas-
sifying cryptocurrency, whether as currency, property, or something else entirely.
Such an approach leads to inconsistencies as different regulatory bodies look to draw
comparisons within their specific area of law, notwithstanding the jurisdictional is-
sues that arise. Hewitt suggests that a framework for regulation can be derived from
commercial law in order to determine how to categorise cryptocurrency for regulato-

90 Saveliev A.I., Commentary on the terms of regulating cryptocurrency operations and other relations based on
“Blockchain” technology in the Decree from the President of the Republic of Belarus on the “Development of the digi-
tal economy” № 8, 21 December, 2017 // NRU HSE, 2017 [accessible: https://publications.hse.ru/mirror/pubs/share//
direct/213716008] (accessed: 22/02/2018), pp. 2

91 Ishikawa M., 2017

 3% 4
ry purposes and make it commercially viable.92 This is down to the fact that cryp-
tocurrency is becoming more accepted commercially and so it makes more sense to
characterise it in a way that fosters its viability as a means of payment, and not in
terms of its similarity towards existing asset classes that could subsequently threaten
its use as a currency. This is important since cryptocurrency can bring about further
economic growth. Therefore, commercial law can serve as a guide on how to reach a
legal consensus on the asset class which cryptocurrency can be assigned. Since cryp-
tocurrency is ultimately a medium of commercial exchange, a sensible approach
would be to identify the areas of law which cryptocurrency interacts with so that an
asset classification may be assigned.

For example, it has been proposed that cryptocurrency should be treated as

property but this would lead to issues arising in situations whereby a pledge is made
that cryptocurrency becomes a security interest.93 This bears relevance since a lender
bears security interest over assets until the debt is settled. As such, in a situation
where a lender lays claim over the security interest of a business and the property as-
sets of the business which were offered as collateral to secure a loan, cryptocurrency
when classified as property would form part of this security interest. Where a situa-
tion arises in which the lender requires the debt to be satisfied, the lender lays claim
over the property, regardless of whether this asset is within the debtors possession.
Where a debtor is unable to satisfy the debt, the lender lays claim of a blanket lien
over all of the debtors assets, which would include the cryptocurrency being used as a
medium of exchange, but de jure being a security interest. On this basis, the lender’s
interest subsequently encumbers the cryptocurrency, meaning that, should the debtor
use it to purchase further goods, they should provide a guarantee that they are free

92 Hewitt E., Bringing Continuity to Cryptocurrency: Commercial Law as a Guide to the Asset Categorization of Bit-
coin // Seattle University Law Review, Vol. 39:311, 2016 [accessible: http://digitalcommons.law.seattleu.edu/cgi/view-
content.cgi?article=2319&context=sulr] (accessed: 01/04/2018)

93 A security interest is a legal claim on collateral pledged to obtain a loan.

 3% 5
from lien. In case of a blanket lien, they will not be free from such security interest
and “the security interest will remain with the bitcoins through subsequent
transfers”94 due to priority of security interests in transferred collateral.95 This superi-
ority of interest means that the lender retains a lien over the cryptocurrency unless
otherwise authorised, meaning security interest in the asset is retained throughout
subsequent transfers. Conversely, “[t]ransferees of money take free of a preexisting
security interest”.96 The result of this would be a reluctance to accept cryptocurrency
as payment, since the primacy of security interest may lie with another party, thus
greatly hindering the feasibility of cryptocurrency as a commercial asset since it
could be taken as repayment on part of the default of an unrelated debtor. As such,
classifying cryptocurrency as property brings with it problems that do not exist were
it to be prescribed legal tender as currency.

Although cryptocurrency has properties which make is similar to precious

metal or commodity,97 classifying it as property brings about legal issues. Therefore,
it is possible to state that cryptocurrency is difficult to classify and this has led to reg-
ulatory divergence, with different regulatory bodies stating their claim over its regula-
tion in light of its different aspects. If one is to state that cryptocurrency is a commer-
cial asset, it should be therefore used in commercial contracts as an item of barter.98
However, such contracts often do not stipulate exact price terms; instead determining
the price in accordance with the judgement of the seller. In the case of cryptocurren-
cy, price swings make it difficult to place a particular valuation, thereby hindering its

94 Lawless B., Is UCC Article 9 the Achilles Heel of Bitcoin? // CREDIT SLIPS, 2014, [accessible: http://www.cred-
itslips.org/creditslips/2014/03/is-ucc-article-9-the-achilles-heel-of-bitcoin.html] (accessed: 16/03/2018)

95 For example, as per the US Uniform Commercial Code, § 9-325. Priority of Security Interests in Transferred Collat-
eral, 2010, whilst the same can also be said within the EU as per the Capital Requirements Regulation Article 209(2)(b)

96 Lawless B., 2014

97 Such as scarcity.

98 See Barter, Black’s Law Dictionary, defining barter as “[t]he exchange of one commodity for another without the use
of money”.

 3% 6
use as a commercial asset. With regards to taxation laws, cryptocurrency exhibits a
problematic nature when it comes to the need to calculate gains and losses. If we con-
sider the asset as property in terms of tax, then it is necessary to calculate the differ-
ence between the basis value when the consumer received the cryptocurrency against
the realisation value which is exhibited when it is sent. It can be stated that the EU
decided against classifying cryptocurrency as a property in light of this fact, since it
causes untold problems of accountancy with constant computations with regards to
value taking place whenever a transaction takes place. Conversely, classifying cryp-
tocurrency eliminates the aforementioned issues since no such capital gains transac-
tions arise from spending the asset.

Whenever a new object of law appears and there is a need to legitimise its use
within transactions, there are two methods which can be applied in its classification:
1) applying existing legislation to it by finding analogues and regulating it within cur-
rent legal regimes; or 2) classifying it as an object which cannot be regulated within
the scope of existing regimes and thereby adopting a sui generis regime - creating a
new object of law within legislation. When applying cryptocurrency to the legislation
which regulates currency, one can certainly assert that cryptocurrency satisfies the
criteria of being a medium of exchange. However, since definitions99 rely on the
medium of exchange to be legally recognised by legislators, cryptocurrency cannot
yet be classified as legal tender. As such, the biggest hindrance cryptocurrency faces
in being accepted as legal by a nation’s legislators; acceptance which would legit-
imise cryptocurrency the world throughout as a form of foreign currency and thereby
offer grounds for it to be used as legal tender elsewhere. Although it has been high-
lighted that classifying cryptocurrency as a currency seems the most appropriate
stance, regulators are hesitant to do such a thing, meaning a sui generis approach is
likely to be taken. Hewitt asserts that this could be accomplished by creating a com-

99 “Coined money and such bank-notes or other paper money as are authorized [sic] by law and do in fact circulate
from hand to hand as the medium of exchange.” The Law Dictionary, What is Currency [https://thelawdictionary.org/
currency/] (accessed 06/04/2018))

 3% 7
pletely new asset class: one which function as currencies, but lack governmental
backing - “electronic pseudo-currencies”.100 An asset classification such as this could
make it possible to distinguish cryptocurrencies from foreign currencies, meaning
that other jurisdictions that adopt prohibitive legislation in relation to cryptocurren-
cies would not have to alter existing laws which include currencies recognised as le-
gal tender in other countries as currency. Moreover, such an approach could well re-
strict or prohibit debt settlement with state apparatus in cryptocurrency, whilst other
requirements could be added in order to distinguish it from legal tender.

Whether cryptocurrency achieves wider acceptance is a question that remains

open, but it is irrefutable that it is establishing its place within commerce and is no
longer a novelty to be ignored. Its commercial viability is entrenched in its property
as currency and thus the author asserts it should be treated as such. Classification
should take place via a consensus of various state organs to eradicate the current reg-
ulatory divergence. Since this work aims to provide a rough framework for the regu-
lation of cryptocurrency, taking into account its transjurisdictional properties, differ-
ent reactions will now be considered and assessed in order to uncover an ideal ap-
proach to legislation.

2.3 Legislator reaction to cryptocurrency

This section will now evaluate various public authorities’ methods of address-
ing cryptocurrency. Whilst there are some countries that even to this point in time
have thus far neglected to take note of cryptocurrency, there are still others that have
began monitoring, making recommendations, giving guidance, regulating or intro-
ducing outright prohibition of the technology. Those states that have yet to issue offi-
cial positions on cryptocurrency will henceforth be excluded since they offer no con-
tribution to the debate. It should be noted that those countries monitoring cryptocur-
rencies are yet to make official statements on their position and therefore also offer

100 Hewitt E., 2016

 3% 8
little to the debate. Conversely, those state authorities that have recognised cryptocur-
rency as a phenomenon that is having an impact on the society contained within their
jurisdiction have issued recommendations, which tend take a negative view towards
the technology,101 excluding the aforementioned report from the European Union
Agency for Network and Information Security, which warns consumers to act with
caution but sees promise in the technology for improving financial transactions, espe-
cially in countries with unstable currencies.102 Since greater risk is being attributed to
cryptocurrency transactions with regards to money laundering,103 several countries
have issued binding guidance which aims to combat this illegal activity.104 However,
given cryptocurrency’s pseudonymous nature, application of anti-money laundering
(AML) legislation is an uphill struggle.105

Authors note106 that some of the most comprehensive legislation is the New
York BitLicense which was explored above. However, it is worth mentioning that
there are also forward-thinking jurisdictions such as the Isle of Man that have brought
in regulation in order to foster economic development using cryptocurrency,107 whilst
also working on the integration of cryptocurrency into state administration

101 Lansky J., Possible State Approaches to Cryptocurrencies // Journal of Systems Integration, 2018 [accessible: http://
www.si-journal.org/index.php/JSI/article/viewFile/335/325] (accessed: 13/03/2018), pp. 23

102 ENISA, 2017

103 FATF, Virtual Currencies Key Definitions and Potential AML/CFT Risks // 2014 [accessible: http://www.fatf-
gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf] (accessed:
11/11/2017)

104 Including the EU, the US, Canada, Singapore, amongst others. Hansen J., Digital Currencies: International Actions
and Regulations // Perkins Coie LLP, 2018 [accessible: https://www.perkinscoie.com/en/news-insights/digital-curren-
cies-international-actions-and-regulations.html] accessed: 30/04/2018)

105 Dostov V., Shust, P., Cryptocurrencies: an unconventional challenge to the AML/CFT regulators? // Journal of Fin-
ancial Crime, Vol. 21 Issue: 3, 2014, pp. 249-263

106 Lansky, 2018, pp. 21

107 Sayer, L. Goodbye ICOs, hello ILPs? // Carey Olsen, 2018 [https://www.careyolsen.com/briefings/goodbye-icos-
hello-ilps] (accessed: 26/04/2017)

 3% 9
services.108 On the other hand, many legislators are on standby, unsure of the stance
to take, yet sure that the technology shows promise. As such this work will now ex-
amine some of the regulatory stances that countries have adopted towards cryptocur-
rency.

European Union legislators and their sovereign members have yet to qualify
cryptocurrency as official money, since it has not been established as such by an act
of another sovereign power, nor has it been declared as legal tender. Furthermore,
cryptocurrency is not classified as electronic money under the EU E-money Directive
2009/110/EC since it does not represent “stored monetary value as represented by a
claim on the issuer which is issued on receipt of funds for the purpose of making
payment transactions as defined in point 5 of Article 4 of Directive 2007/64/EC, and
which is accepted by a natural or legal person other than the electronic money
issuer”.109 This is due to the fact that, on the premise of the EU Banking Directives,
no such issuer exists.110 Moreover, no intrinsic value is stored on the blockchain;
cryptocurrency is instead transferred from one party to another, with the sole value
attributed derived from the perception of users when they exchange them. In addition,
cryptocurrency is not classified as a financial instrument within the Directive
2014/65/EU on markets in financial instruments,111 nor the Directive 2002/92/EC and
Directive 2011/61/EU on markets in financial instruments.112 Nor is cryptocurrency

108 Lansky J., 2018, pp. 24

109 Directive 2009/110/EC of the European Parliament (16 September 2009) on the taking up, pursuit and prudential
supervision of the business of electronic money institutions, 2009

110 “[I]ssuers must be regarded as financial bodies and as such subject to the first and second Banking Directives”
Opinion of the Economic and Social Committee on: - the 'Proposal for a European Parliament and Council Directive on
the taking up, the pursuit and the prudential supervision of the business of electronic money institutions', and - the 'Pro-
posal for a European Parliament and Council Directive amending Directive 77/780/EEC on the coordination of laws,
regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions' //
[accessible: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A51999AC0069] (accessed: 10/10/2017)

111 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial in-
struments and amending Directive 2002/92/EC and Directive 2011/61/EU

112 EU Directive 2002/92/EC and Directive 2011/61/EU on markets in financial instruments, 2014

 4% 0
qualified as a payment instrument within the definition stipulated within the Directive
on payment services in the internal market.113 However, as noted in Part I of this
work, the European Court of Justice ruled in 2015 that cryptocurrency should be
treated as a currency for tax purposes.114 As such, when cryptocurrency is purchased
with fiat currency via an exchange, no VAT is due. Although, since cryptocurrency
does not fit within any standard definition offered by EU legislators, the European
Banking Authority notes that cryptocurrency can be considered as “private money or
a commodity.”115 A point of note here that applies to all jurisdictions and may account
for their hesitancy to enforce strict or implement any legislation whatsoever is the
fact that any regulations introduced may introduce forum shopping, with cryptocur-
rency issuers and exchanges moving to jurisdictions that offer no, little, or regulation
that is favourable to the operators (issuers and exchanges), and not to the end user.


Whilst countries are adopting different approaches to the regulation and taxa-
tion of cryptocurrencies, the US is seeing division on the way cryptocurrency should
be classified from state to state. As mentioned above, whilst the country’s Inland
Revenue Service (hereinafter, IRS) would like to classify cryptocurrency as property
for taxation reasons, values paid as wages and capital gains from speculation are also
taxable.116 This means that consumers conducting transactions using cryptocurrency
would incur more tax liabilities than using standard currency and they will have to
calculate the difference between the value of the cryptocurrency when it first came
into their possession, and the value of it when exchanged for a good or service.

113 EU Directive (EU) 2015/2366 on payment services in the internal market, 2015

114 See footnote 52

115 European Banking Authority , EBA Opinion on ‘virtual currencies’ // European Banking Authority, EBA/Op/
2014/08, 2014 [accessible: https://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Vir-
tual+Currencies.pdf] (accessed: 20/10/2017), pp. 11

116 IRS, Virtual Currency Guidance : Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General
Rules for Property Transactions Apply // 2014 [https://www.irs.gov/newsroom/irs-virtual-currency-guidance] (accessed:
20/01/2018)

 4% 1
Should the cryptocurrency have appreciated in value, the consumer would be liable to
pay a capital gains tax on the value by which it had appreciated. It would seem that
this would not have been the intention of the tax authority when coming to the con-
clusion that cryptocurrency should be classified as property. In this case, it appears
that by considering cryptocurrency as currency, we eliminate the complication of
having to calculate gains and losses when making purchases (a realisation event),
significantly simplifying the situation. What is peculiar in the IRS’ conclusion in its
classification is the fact that the Notice refers to cryptocurrency as currency, ac-
knowledging that it functions much like currency, yet the Service determined that
cryptocurrency is property and should be treated as such.117 Furthermore, the US SEC
has issues its guidelines on how the financial regulatory organ classifies cryptocur-
rencies. Its guidance classifies cryptocurrencies as financial securities and therefore
requires that issuers register with the Commission as offering “securities under the
Securities Act of 1933 (‘Securities Act’) and the Securities Exchange Act of 1934
(‘Exchange Act’).”118 However, the Commission stated that not all cryptocurrencies
fall under its auspices and require evaluation using traditional securities law criteria.
This criteria relates to the aforementioned Howey test, which stipulates that securities
are an investment contract, which constitutes “an investment of money in a common
enterprise with a reasonable expectation of profits to be derived from the en-
trepreneurial or managerial efforts of others.”119 This led the financial organ to sug-
gest that cryptocurrency issuers should seek legal guidance as to whether their is-
suance would constitute that of a security, whilst it also put forward that some ex-
changes may have to register as “broker-dealers”, “securities exchanges” or “alterna-

117 IRS, Notice 2014-21 // 2014 [accessible: https://www.irs.gov/pub/irs-drop/n-14-21.pdf] (accessed: 20/01/2018)

118 Securities and Exchange Commission, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange
Act of 1934: The DAO // 2017, pp. 1 [accessible: https://www.sec.gov/litigation/investreport/34-81207.pdf] (accessed:
13/04/2018)

119 United States Supreme Court, Securities and Exchange Commission v. W. J. Howey Co., // No. 843 Argued: May 2,
1946 Decided: May 27, 1946, [accessible: https://caselaw.findlaw.com/us-supreme-court/328/293.html] (accessed:
13/03/2018)

 4% 2
tive trading systems” in order to operate within the law.120 Moreover, the Commission
stated that the automation of issuance via smart contracts121 does not make cryptocur-
rency exempt from the application of US securities laws.122 In sum, the Commis-
sion’s report highlights the difficulty in classifying cryptocurrency.

Another of the US’ financial regulatory bodies, the Financial Crimes En-
forcement Network (hereinafter, FinCEN) takes a different view to the IRS, in stating
that cryptocurrency is not a currency, since it does not have a central regulatory au-
thority.123 The FinCEN is also of the opinion that exchanges and other cryptocurrency
service providers should comply with existing regulations regarding broker-
dealers,124 although, unlike the IRS, it takes more of a view that cryptocurrency
should be regarded as a currency since it acts as a “substitute for real currency.”125
Meanwhile, the BitLicense regulations in New York have been formulated in such a
way that brings the understanding of cryptocurrency to that of stock ownership and
therefore governable within the regulations set out by the SEC.126 As such, the BitLi-
cense outlines specific rules as to who is permitted to buy, sell and own cryptocurren-
cy and the steps entities are required to take in order to be compliant with the rules.127

120 Securities and Exchange Commission, 2017, pp. 1

121 A form of computer code with a set algorithm that automates the execution of a certain agreement when pre-agreed
inputs are satisfied.

122 Securities and Exchange Commission, 2017, pp. 2

123 Department of the Treasury Financial Crimes Enforcement Network, Application of FinCEN’s Regulations to Per-
sons Administering, Exchanging, or Using Virtual Currencies // FIN-2013-G001, 2013 [accessible: https://www.fin-
cen.gov/sites/default/files/shared/FIN-2013-G001.pdf] (accessed: 31/01/2018). Cryptocurrency in the report is classi-
fied as “de-centralized virtual currency” pp. 5

124 Hewitt, 2016, pp. 626

125 Department of the Treasury Financial Crimes Enforcement Network, 2013, pp. 1

126 New York State Department of Financial Services, In the Matter of Virtual Currency Exchanges, 2013 [accessible:
https://www.dfs.ny.gov/about/ea/ea140311.pdf] (accessed:19/01/2018)

127 Ibid.

 4% 3
Once again, this highlights the current regulatory divergence that is not just world-
wide, but even on a national scale.

Returning again to the SEC’s statement on cryptocurrency it can be noted that

issuers are able to find a way to circumvent the classification of a security. One point
of note for the industry was that cryptocurrency issued cannot be regulated as a secu-
rity if it has a utility function, although “[m]erely calling a token a ‘utility’ token128 or
structuring it to provide some utility does not prevent the token from being a
security.”129 This led to many issuers stating in their terms that their token has a utili-
ty, carefully crafting the clauses of their terms to state counter aspects of the Howey
Test to avoid their offering being classified as an investment contract. As such, not
only have issuers resorted to complex legal disclaimers where a utility is found for
the cryptocurrency issued,130 and the terms of the offering clearly state that the offer-
ing is does not “constitute an offer of securities or a solicitation for investment, does
not pertain in any way to an initial public offering or a share/ equity offering, and
does not pertain in any way to an offering of securities in any jurisdiction… [nor] in-
tended to be marketed, offered for sale, purchased, sold, or traded in any jurisdiction
where they are prohibited by applicable laws or require further registration with any
applicable governmental authorities.”131 However, in an administrative proceeding,
the SEC launched an order of cease and desist against one issuer that stated that even
if the issuers cryptocurrency “had a practical use at the time of the offering, it would

128 Here, cryptocurrency

129 Clayton J., Statement on Cryptocurrencies and Initial Coin Offerings // US Securities and Exchange Commission, //
US Securities and Exchange Commission, 2017 [accessible:https://www.sec.gov/news/public-statement/statement-
clayton-2017-12-11] (accessed: 23/02/2018)

130 i.e. statements which classify cryptocurrency as “software with cryptographic elements that are a utility appliance
for the Platform.” CyberTrust, White Paper // 2017 [accessible: https://icobazaar.com/static/f81eed2e8028c82cabd-
f160309989eb0/CyberTrust-WhitePaper.pdf] (accessed: 09/04/2018)

131 CyberTrust, 2017

 4% 4
not preclude the token from being a security,”132 thereby complicating the legal land-
scape further. The organ stipulated that assessments as to whether issuance constitute
a investment contract require an emphasis on “economic realities underlying a trans-
action, and not on the name appended thereto,”133 with assessments focussing on sub-
stance rather than form.134 As such, by definition of the SEC, mere functionality does
not preclude the fact that issuance of cryptocurrency does not constitute an offering
of a security. In this, the SEC found that the cryptocurrency being issued involved the
transaction of a security since the consumers had a reasonable expectation of profit
based on the fact that the platform to be created from the funds raised from the is-
suance would be used to create a profitable business and holders of the cryptocurren-
cy expected to see a rise in value of the currency on part of this profitable business
growth.135 However, one must state here that software developers have long been us-
ing profits from the purchases of software to develop their platforms, so this state-
ment raises the question of whether such software distribution also constitutes the
sale of a security.136 Fortunately, the SEC provided several answers for this. Amongst
other reasons, since those purchasing the cryptocurrency offered those willing to pur-
chase at an earlier stage a discount of up to 15%, it furthered the expectation of profit
from investment, with the company’s terms of sale stipulating that there was an ex-
pectation of a rise in value, whilst the cryptocurrency would be traded on secondary
markets.137 Here the crux of the matter centres around the reasonable expectation of
the cryptocurrency rising in value, thereby constituting an offering of a security.

132 US Securities and Exchange Commission, Release No. 10445 // Administrative Proceeding File No. 3-18304, In the
Matter of MUNCHEE INC., 2017 pp. 9 [https://www.sec.gov/litigation/admin/2017/33-10445.pdf] (accessed:
06/01/2018)

133 Ibid. pp. 8, relying on Forman, 421 U.S. at 849.

134 Ibid. relying on Tcherepnin v. Knight, 389 U.S. 332, 336 (1967)

135 Ibid. pp. 5

136 Mullin S. When Does Software Become Securities? // Venture Law Blog, 2017 [accessible: https://www.venture-
lawblog.com/securities-law/when-does-software-become-securities/] (accessed: 22/02/2018)

137 Ibid.

 4% 5
There are, however, some authors that cite the Howey Test in arguing that cryptocur-
rency Bitcoin is a security under US law.138 The author of this work disagrees with
this stance since, as an autonomous and decentralised method of value exchange, Bit-
coin: does not have a central authority that promises increases in value; nor is it a
common enterprise; or does it offer an expectation of profits to derive from the efforts
of others. In regards to the aforementioned Test, the properties of Bitcoin could only
only be considered as a security on the grounds that acquiring the cryptocurrency in-
volves an investment of money. Moreover, even this point can be called into question,
since, when considered solely as a medium of exchange, Bitcoin does not constitute
an investment as such if its immediate purpose is to be subsequently used as a means
to purchase goods or services. Moreover, on the subject of the cryptocurrency Bit-
coin, further credence is being given to the fact that it may one day become legal ten-
der on part of US states drafting bills for its adoption as a means of settling debts
with state organs.139

On the subject of US legislation, again the author of this work would like to
draw attention to the New York regulations to license activities which involve cryp-
tocurrencies. Following public hearings on the possible regulation of cryptocurren-
cies at the beginning of 2014,140 the New York Department of Financial Services
(hereinafter, NYSDFS) proposed a revised regulatory framework a year later that in-
volved the mandatory issuance of licenses to businesses engaged in “transmitting,
storing, buying, selling, exchanging, issuing or administering”141 of cryptocurrencies,

138 Yang R., When is Bitcoin a security under US securities law? // Journal of Technology Law & Policy, Vol. 18, No.
2, 2013, p. 99

139 Arizona is one of several US states which have drafted a bill which allow Bitcoin to be accepted as a means of
payment to settle taxation debts before the state. Arizona Senate Bill 1091 // 2018 [accessible: https://legiscan.com/AZ/
bill/SB1091/2018] (accessed: 26/04/2018)

140 New York State Department of Financial Services, 2013

141 He D., et al, Virtual Currencies and Beyond: Initial Considerations // IMF Staff Discussion Note, 2016, pp 33. [ac-
cessible: https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf] (accessed: 05/03/2018)

 4% 6
with licenses not required for currencies: used exclusively within a gaming environ-
ment; and that can be exchanged for goods and services so long as they cannot be ex-
changed bidirectionally for fiat currency.142 Moreover, the regulation exempts state-
chartered banks from requiring the license to operate with cryptocurrency where they
are approved to do so by the superintendent.143 However, the legislative efforts of
New York state have come under fire for not being permissive enough to foster tech-
nological development, whilst also placing barriers to market entry before startup
companies due to rigorous requirements.144 The author views such regulation as a
negative step, which, if implemented on a wider scale would hinder the utility of
cryptocurrencies.


A country which is much over looked in its policy towards cryptocurrency is

Belarus. The country’s legislators enacted the technologically permissive and pro-
gressive Presidential Decree No. 8 “For the development of a digital economy” at the
end of 2017145 to foster the development of technologies, including that of cryptocur-
rency, and attempting to position itself as crypto-currency-friendly state. As part of
the Decree, provisions clarify public law norms for operations involving cryptocur-
rencies, classifying them as assets that can held by any physical person or legal entity,
whilst companies are permitted to freely issue and operate with cryptocurrencies via
qualified residents of the country’s “High Technology Park”,146 thereby creating

142 New York State Department of Financial Services, New York Codes Rules and Regulations, Title 23 // Department
of Financial Services, Regulations of the Superintendent of Financial Services, Part 200. Virtual Currencies pp. 7 [ac-
cessible: https://www.dfs.ny.gov/legal/regulations/adoptions/dfsp200t.pdf] (accessed: 15/02/2018)

143 Ibid.

144 Adler D., The BitLicense: Regulatory Overreach or Prudent Response? // Fordham Journal of Corporate and Finan-
cial Law, 2018 [accessible: https://news.law.fordham.edu/jcfl/2018/03/26/the-bitlicense-regulatory-overreach-or-
prudent-response/#_ednref9] (accessed: 14/04/2018)

145 Decree of the President of the Republic of Belarus, On the development of the digital economy // No.8, Minsk,
2017 [accessible: http://president.gov.by/ru/official_documents_ru/view/dekret-8-ot-21-dekabrja-2017-g-17716/] (ac-
cessed: 26/03/2018)

146 Ibid.

 4% 7
somewhat a regulatory sandbox.147 Although the Decree stops short of assigning
cryptocurrency the status of legal tender, it follows the European Union in exempting
transactions with it from VAT.148 The Decree also implements a favourable regime for
cryptocurrency startup companies that exempt them from tax payments for profits for
5 years (until 2023), in an attempt to bring high-tech companies to Belarus. It has
been noted that this is a practical step, considering the difficulties that arise in enfor-
cing tax regulations on cryptocurrency transactions.149


Conversely, Belarus’ eastern neighbour, Russia, has witnessed its regulators

announce that operations involving cryptocurrencies should be taxed in accordance
with the country’s tax code.150 However, there is some doubt as to whether holders of
cryptocurrency have began paying taxes in accordance with this letter. Moreover, the
country has altered its previous stance,151 comprehending the benefits that the under-
lying distributed ledger technology can bring. As such, a bill on Digital Financial As-
sets152 has been proposed and is currently awaiting a second parliamentary reading.153
The bill proposed to permit bi-directional transactional flows, whilst operators (ex-

147 "A regulatory sandbox is a framework set up by a financial sector regulator to allow small scale, live testing of in-
novations by private firms in a controlled environment (operating under a special exemption, allowance, or other lim-
ited, time-bound exception) under the regulator’s supervision.” Jenik I., Lauer K., Regulatory Sandboxes and Financial
Inclusion // CGAP, 2017 pp. 1 [accessible: http://www.cgap.org/sites/default/files/Working-Paper-Regulatory-Sand-
boxes-Oct-2017.pdf] (accessed: 14/02/2018)

148 Decree of the President of Belarus, 2017, pp.3

149 Saveliev A, 2018

150 Ministry of Finance of the Russian Federation Letter from 13/10/2017 // № 03-04-05/66994, 2017 [accessible: ht-
tps://www.glavbukh.ru/npd/edoc/99_555930143] (accessed: 28/01/2018)

151 Key figures in government, such as the Head of the Central Bank of the Russian Federation, had suggested that
cryptocurrency should not be regulated as currency, whilst still other parliamentarians called for it to be banned.

152 Federal Bill of the Russian Federation On digital financial assets 25/01/2018 // Ministry of Finance of the Russian
Federation, 2018 [accessible: https://www.minfin.ru/ru/document/?id_4=121810] (accessed: 13/03/2018)

153 AK&M Online News, Russian parliament supports bill on digital financial assets // 2018 [accessible: http://
www.akm.ru/rus/news/2018/april/23/ns_6010031.htm] (accessed: 03/04/2018)

 4% 8
changes) should be registered with the corresponding state organ,154 but the bill also
declines to declare cryptocurrency legal tender.155


Further east, in Japan, the country amended its financial legislation to include
cryptocurrencies,156 legitimising them as a form of online payment, whilst also creat-
ing a regulatory framework for cryptocurrency businesses that makes cryptocurrency
exempt from Consumption Tax (VAT).157 The amendment assigns cryptocurrency a
formal definition as a “prepaid payment instrument”, but does not equate cryptocur-
rency to the country’s legal tender.158 This classification means that capital and opera-
tional requirements are placed on cryptocurrency, whilst also meaning they can be
legally accepted as a means of payment commercially.159 Similarly to the New York
BitLicense, the Act introduced a system of registration for cryptocurrency exchange
services, however the systems differ in that “[o]nly approved virtual currencies by the
authority are considered legitimate and can be traded, sold or promoted to public …
[and r]egulation applies to non-custodial businesses too.”160 Prohibitively high entry
requirements, just as with the NY BitLicense, will go some way to protecting con-
sumers, but this is sure to stifle innovation within the sector.

154 Federal Bill of the Russian Federation On digital financial assets, 2018, Article 4.1.

155 Ibid.

156 Ariyoshi N., Tanizawa S., Katagiri H., The Essential Points of the Amendments to the Regulation on Virtual Cur-
rency Exchange Services // Nishimura and Asahi, 2016 [accessible: https://www.jurists.co.jp/sites/default/files/newslet-
ter_pdf/en/newsletter_201611_finance.pdf] (accessed: 15/03/2018)

157 Miller G., The Law and the Future of Cryptocurrency // Al Bawardi Critchlow, 2017 [accessible: http://ab-
critchlow.com/the-law-and-the-future-of-cryptocurrency/ (accessed: 27/03/2018) [accessible: http://www.common-
lii.org/int/cases/EngR/1825/166.pdf] (accessed: 17/03/2018)

158 Bulling G., Chasser M., Cryptocurrencies Becoming More Mainstream? // National Law Review, 2017 [accessible:
https://www.natlawreview.com/article/cryptocurrencies-becoming-more-mainstream] (accessed: 16/11/2018)

159 Ibid.

160 Higashi K., The new bitcoin regulation in Japan… worse than the “Bitlicense”? // Medium, 2017 [accessible:
https://blog.indiesquare.me/the-new-bitcoin-regulation-in-japan-worse-than-the-bitlicense-e669618d69e0] (accessed:
23/04/2018)

 4% 9
Throughout the world different jurisdictions have taken various regulatory
stances so far. In the common law jurisdiction of Australia and similarly to the USA,
the Tax Office has stated that cryptocurrency is property subject to capital gains
tax,161 whilst here regulatory diversion also exists, with the official state budget doc-
ument stating that it would like to see cryptocurrency treated “just like money for
GST162 purposes”.163 Meanwhile, Taiwan has banned cryptocurrency ATMs, whilst
cryptocurrency can be purchased at convenience kiosks.164 In the non-EU European
state of Switzerland, the country’s officials are taking a more progressive stance, with
the state owned Federal Railways accepting cryptocurrency as a means of payment
for its services.165 Conversely, in Bangladesh, Bangladesh Bank Officials stated that
anyone handling operations in cryptocurrency could be jailed for a maximum of 12
years in line with existing anti-money laundering legislation.166

This section has noted that there are several methods that legislators in differ-
ent jurisdictions have adopted in respect to cryptocurrency. They can be summed up
as follows:
1) Imposing restrictions and on already regulated entities that interact
with cryptocurrency;

161 Australian Taxation Office, Tax treatment of cryptocurrencies // Australian Taxation Office, 2018 [accessible:
https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia---specifically-bitcoin/] (accessed:
03/04/2018)

162 Goods and services tax

163 Australian Government, Australia as the innovation and FinTech nation // 2017 pp. 2 [accessible: https://
www.budget.gov.au/2017-18/content/glossies/factsheets/download/FS_Innovation.pdf] (accessed: 31/01/2018)

164 Robertson K., Bitcoin Regulation Around the World // Wallet Weekly, 2017 [accessible: https://www.walletweekly.-
com/bitcoin-regulation-around-world/] (accessed: 23/09/2017)

165 SBB, Mit Bitcoin bequem und einfach einkaufen. // 2016 [accessible: https://www.sbb.ch/de/bahnhof-services/di-
enstleistungen/weitere-dienstleistungen/bitcoin.html] (accessed: 13/02/2018)

166 Mowla G., Central bank issues notice banning Bitcoin in Bangladesh // Dhaka Tribune, 2017 [accessible: https://
www.dhakatribune.com/business/banks/2017/12/27/bangladesh-bank-ban-bitcoin/] (accessed: 26/02/2018)

 5% 0
2) Adopting legislative and regulatory measures, subjecting entities that
operate with cryptocurrency to regulation, such as for money remitter or for
anti-money laundering or counter terrorist financing purposes;
3) Publishing official statements that caution the public about the risks
associated with cryptocurrency, and statements clarifying the authorities’ posi-
tion in regard to cryptocurrency;
4) Monitoring and studying developments.

Although any legislative approach with oversight from a central bank or gov-
ernment would at first glance seem at odds with the decentralised and distributed na-
ture of cryptocurrency, the creation of such does not mean that units of cryptocurren-
cy should be issued from such a centralised entity, with protocol and transaction
ledgers able to remain decentralised. Legislation is necessary to protect legal persons
from abuse and therefore a regulator is needed to ensure market compliance. More-
over, there is the issue of privacy to address.

Since cryptocurrencies work on a principle of a distributed ledger, which is

publicly available for inspection and can be downloaded from the internet, the issue
of privacy becomes a concern. This has become of pertinent concern with new legal
concepts regarding data lifetime, such as that stipulated in the European Union Gen-
eral Data Protection Act, which requires that personal data is deleted when it becomes
no longer necessary.167 However, the chronological nature of blockchain-based tech-
nology which serves as the basis for cryptocurrency could not operate where previous
data can be deleted. Although the EBA168 stated that the ledger does not contain per-

167 EU General Data Protection Regulation, Regulation (EU) 2016/679, [accessible: https://eur-lex.europa.eu/legal-
content/EN/AUTO/?uri=celex:32016R0679] (accessed: 04/03/2018)

168 EBA, 2014

 5% 1
sonal data that currently pertains to the definition of the GDPR,169 this is debatable
since cryptocurrency is pseudonymous, meaning it is possible to identify end users. If
the identity of a certain set of address holders is known, it is theoretically possible to
exploit this knowledge to create a graph of incoming and outgoing transactions for a
specified cryptocurrency.170 This graph could then be carefully analysed to expose the
identities of the holders of the cryptocurrency. Although, it must be stated that this is
a a costly task that would take up a great mount of time. Furthermore, cryptocurrency
ledgers demonstrate open and public values for connected addresses, and by using a
block explorer, any member of the public can see how the values of an account by
possessing the public key of such account. This raises the question of how to strike
the right balance between the information publicly recorded in the network and avail-
able to all, with the need for privacy that users desire when conducting financial
transactions and conducting account operations. In addition, distributed ledgers not
only increase security throughout the network via their decentralised nature, but if ne-
farious individuals were to hack the network, it is possible that all information could
be obtained, not only the data located at the focal point of the attack. Moreover, pro-
tocols for different networks are generally quite similar meaning that one hack of a
certain network could put others at risk.

Illegitimate activities taking place with cryptocurrency are possible due to the
lack of intermediaries that regulate transactions and are well positioned to monitor
and report misconduct. A perfect example of such are KYC (know your customer)
rules that financial institutions are subject to in order to prevent tax evasion and
money laundering. If the distributed ledgers behind cryptocurrency offer privacy in a

169 Article 4.1 GDPR: “‘personal data’ means any information relating to an identified or identifiable natural person
(‘data subject’); an identifiable natural person is one who can be identified, directly or indirectly, in particular by refer-
ence to an identifier such as a name, an identification number, location data, an online identifier or to one or more
factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that natural per-
son;”

170 Moser M., Anonymity of Bitcoin Transactions: An Analysis of Mixing Services // University of Munster, 2013 [ht-
tps://pdfs.semanticscholar.org/e1ae/d9296c3af9139f48d15e043e2e8beab55409.pdf] (accessed: 03/04/2018)

 5% 2
way that eliminated such intermediaries then regulators will be unable to take advant-
age of such intermediaries as informational agents. Marian notes that the situation as
described “in theory, would necessitate the regulation of dispersed crowds meaning
direct regulation of individuals who participate in financial markets. Such regulation
is immensely costly - a problem exacerbated by the fact that the users, as explained
above, are relatively anonymous.”171 As such, the decentralised and anonymous as-
pects of cryptocurrency present significant problems for legislators.

2.4 Literature analysis and legal framework proposal

Authors argue that it is precisely the anonymous aspect of cryptocurrency that
makes it difficult to regulate. However, Marian suggests a framework that “takes ad-
vantage of the unique structure of cryptocurrencies’ protocols by making legitimate
users passive agents of regulatory efforts.”172 Marian argues this is possible due to the
very nature of the distributed ledger upon which cryptocurrency relies, making it pos-
sible to analyse and monitor transactions. Along with Ruppert,173 this author states
that regulators can map transactions across the network in order to trace transactions,
with this aspect allowing regulators to identify holders of public keys. This is made
possible by analysing the internet protocol TCP/IP, which, once a public key has been
identified as being held by a specific user, it can be linked to a specific IP address and
therefore the location of a user. Analysing transactions in such a way means that reg-
ulators could track illicit payments and punish criminal activity that utilises cryp-
tocurrency. This would make the use of cryptocurrency less suitable for illicit usage,
and open up the possibility of regulation. Ruppert goes on to argue that such a system
could be implemented in such a way that transactions using cryptocurrency would

171 Marian O., A Conceptual Framework for the Regulation of Cryptocurrencies // University of Chicago Law Review
Online, Vol. 82, Iss. 1, Art. 4, 2017 [accessible: http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?
article=1035&context=uclrev_online] (accessed: 28/01/2018)

172 Ibid. pp. 54

173 Ruppert, 2017

 5% 3
necessitate the consumer having to disclose their identity to retailers, yet the retailers
would only be obliged to disclose the identity of public key holders based on the de-
cision of a court of law.174 As such, although law enforcement agencies would have to
use a different agent (i.e. no longer via the banks, but via retailers) to obtain financial
information regarding accounts, balances and checks could be implemented to avoid
overreach on part of the state. Such a system would adequately address privacy con-
cerns before the state: a system of privacy without anonymity. Moreover, Marian ar-
gues that for cryptocurrency to be accepted and widely used, the system requires a
way to identify users due to the fact that financial systems are based on trust within
the market; whilst there is anonymity, we cannot secure trust in financial markets.175
However, the author of this work asserts that, not only is it possible for anonymous
financial systems to exist, they are already proliferating using complex cryptographic
protocols that mask the source of the cryptocurrency.176 Such cryptocurrency presents
a challenge to legislators who hope to identify users completing transactions of illicit
nature, since it will be harder to bring such users to justice. Ruppert also proposes
another system in which amounts spent and received by a particular individual could
be calculated, yet the provenance and destination of the transactions is not
disclosed.177 The author of this work believes this model, whilst satisfying privacy
issues, would not be suitable since knowing total transaction values would not aid
law enforcement agencies in their struggle against illicit activities as it would not be
clear where the payments have been sent or received.

Marian’s framework makes the assumption that cryptocurrencies should not

be considered as a homogenous instrument and should be instead deconstructed ac-

174 Ibid.

175 Marian, 2015

176 For example, cryptocurrency ZCash implements zero-knowledge cryptographic protocols that are able to transfer
value and verify transactions without revealing the value transferred or the sender/recipient to the network at large.

177 Ruppert, 2017

 5% 4
cording to their unique traits.178 Marian believes that positive traits of cryptocurrency
should be separated from elements that should be the focal point of regulators, and,
for Marian, the target of their efforts should be the anonymous nature of cryptocur-
rency.179 Moreover, “[a]nonymity should be targeted only to the extent that it increas-
es the likelihood that individuals use cryptocurrencies to engage in criminal be-
haviour.”180 Regulation of cryptocurrency, as such, should not aim to decrease the
level of criminal activity taking place, but should aim to hinder any increases in such
illicit activities. Cryptocurrency is able to bring about increased anonymity, which in
turn is assumed to increase illicit use, one can state that such anonymity is a norma-
tively desirable goal. Marian asserts that the current level of anonymity for financial
transactions should be set as a benchmark for regulators and regulation should not
aim to increase nor decrease this level.181 Furthermore, he asserts that legislators
should adopt a stance that does not place regulatory costs on the legitimate use of
cryptocurrency and such an environment will lead to the further development of the
technology.

As such, Marian proposes that legislators could impose costs on those inter-
acting with cryptocurrencies in the form of a sales tax, whereby at least one of the
transacting parties is known, with the author arguing that this would “force criminals
to internalize excess costs when disposing of their illicit gains in the open
economy.”182 Such a framework would only allow merchants to accept payment in
cryptocurrency, so long as the other party identifies themselves. Moreover, regulators
could incentivise transactions in which the user discloses their identity; this in turn

178 Marian, 2015, pp. 59

179 Ibid.

180 Ibid.

181 Ibid.

182 Ibid. pp. 61-62

 5% 5
would make it more simple to identify other actors since more users identifying
themselves diminishes anonymity throughout the network. Marian asserts that users
could identify themselves similar to when signing transactions using a PIN code for
bank cards,183 either, as Abramowicz suggests, regulators could take a more stringent
stance and prohibit the use of cryptocurrency that has at any point been transferred
without adequate disclosure of the user.184 The author of this work believes that the
latter approach would be difficult to enforce unless a completely new cryptocurrency
came about and from its very beginnings is regulated in such a way. For such restric-
tions to be imposed on existing cryptocurrencies would be such a severe restriction
that their use and usefulness would diminish significantly.

Another point raised throughout this work is that, for cryptocurrency to be-
come a widely-accepted means of payment, it requires recognition as a currency.
Since no jurisdiction has adopted the stance of classifying cryptocurrency as legal
tender, its viability as a means of value transfer within commerce is questionable.
This position is supported by most authors, but the author this work agrees with sui
generis propositions such as that of Hewitt who advocates that cryptocurrency should
be treated as an entirely new asset type that bears the hallmarks of traditional, fiat
currency: “electronic pseudo-currency”.185 This new asset class would for legal pur-
poses function as currency, but, in its lack of state backing, would be distinguished
from other legal tender such as the national of a jurisdiction and other recognised for-
eign currencies. Governments could adopt a stance which restricts the payment of
taxes or for state services in cryptocurrency. Hewitt goes on to propose a regulatory
mechanism in which purchase-sale agreements are structured with provisions that re-
quire “the buyer to confirm the seller’s willingness to accept pseudo-currency in lieu

183 Ibid. pp. 62

184 Abramowicz, 2015

185 Hewitt, 2016, pp. 639

 5% 6
of legal tender or property.”186 Such a proposition would distinguish cryptocurrency
from state-backed currency, whilst also providing a mechanism for those that do not
wish to accept cryptocurrency.

It is clear from the arguments presented above that, as a transjurisdictional,

internet-based technology, difficulties arise where there will not be internationally
harmonised legislation. As such, the author of this work believes that an international
solution is required: one that seeks to coordinate regulators worldwide. The author
believes this could be done by setting international standards on a self-regulatory ba-
sis, with oversight from a supranational organisations comparable to the IMF, World
Bank or the European Banking Authority. The standards would require four key cor-
nerstone elements to facilitate wider use of cryptocurrency. 1) Cryptocurrency ex-
changes and operators should segregate accounts of clients similarly to traditional
banking systems. 2) Merchants should not be forced to accept cryptocurrency, with
cryptocurrency not being assigned legal tender status, yet having a place in law, simi-
larly to the pseudo-currency proposition put forward by Hewitt. 3) A stabilising au-
thority should be created to oversee cryptocurrency operator activity. This operator
would provide for exchange rate stability. 4) Regulatory stances should be clarified
and unified so that there is no divergence. This would require a standard definition of
cryptocurrency.

This requires clear and targeted legislation that tackles the concerns (e.g.
money laundering and fraud) that technological innovation brings about. Moreover, a
self-regulatory framework should involve an effective partnership between the regu-
lators and the industry for the creation of clear and coherent standards. Lastly, in view
of the author: effective regulation can only be brought about by taking an in-
ternational approach which involves the input of regulators from other jurisdictions,

186 Ibid.

 5% 7
taking into account the decentralised and transjurisdictional essence of cryptocurren-
cy. Self regulation would involve the setting of a governance code which enforces
standards and gives accreditation to operators that adhere to such standards. These
standards would revolve around: transparency; developers’ fiduciary duties; respon-
sible computing power usage from miners; etc. An industry-wide consensus about the
standards to be set, in conjunction with permissive governmental regulation which
serves privacy within society and deters illicit activity will form the basis of the fu-
ture development of cryptocurrency.

The main issue at present is regulatory diversion; should this issue remain
unresolved, cryptocurrency will exist in a state of regulatory limbo, with consumers
and legal entities alike continuing with scepticism and a lack of confidence in using it
as a medium of exchange. This diversion could be eliminated by changes to
commercial law to classify cryptocurrency as a pseudo currency within its own
separate legislation. As such, classification of cryptocurrency needs to be carefully
considered so that it fits evenly across all paradigms of civil, administrative and
criminal law. Such a fit should aim to place the technology uniformly across each
aspect of legal regulation. However, difficulties will arise with the divergence in how
certain provisions are interpreted, such as how linguistic interpretation is preferred
for tax law.


 %58
Conclusion
This work has aimed to highlight the issues that the current legislative and
regulatory landscape face in the creation of a regulatory framework for cryptocurren-
cy. Having assessed the topic at hand from socio-legal, historical, theoretical and fun-
damental perspectives, the author has noted that a uniform approach both across as-
pects of law and worldwide are needed in order to foster confidence in cryptocurren-
cy as a means of payment. Since cryptocurrency can be considered a currency in an
economic sense, a legal classification should be well thought through in order to fa-
cilitate its use throughout the global market. Self regulation is a model that should be
implemented, with legislative oversight, leading to coordination and harmonisation of
legislation worldwide. The author also asserts that jurisdictional silos in which cryp-
tocurrency is treated differently depending on the legislation in specific jurisdictions
is not a viable option, just as such an approach with regards to the internet is difficult
to implement. Since this work advocates a positive and permissive stance with re-
gards to legislation on cryptocurrency, any regulation which hinders cryptocurrency’s
use as a commercial asset would not be the correct legal stance to take. As such, a
new asset type with sui generis legislation that offers provisions to classify cryptocur-
rency as currency is the best approach.

In order to address the issues at hand, a three-step process should be under-

taken. The nature of cryptocurrency and there legal status should firstly be estab-
lished. Subsequently, the regulations applicable to cryptocurrency operators and fi-
nancial actors interacting with cryptocurrency should then be examined. Lastly, is-
sues concerning user protection should be assessed. The completion of the above
steps will foster the further development of the technology, striking a balance be-
tween the promotion of innovation and curbing illicit use. The facilitative model out-
lined has demonstrated how the use of soft norms in conjunction with black letter law
on an international scale will help bring about such a balance. This work has ad-
dressed the legal uncertainty that currently surrounds cryptocurrency, defining and

 5% 9
proposing a cross-jurisdictional framework that will encourage capital inflow and in-
creased usage of the technology as a means of payment.

Moreover, such a stance, which offers vendors the right to accept cryptocur-
rency as a means of payment may well lead to the darwinistic circulation of private
monies within the scope put forward by Hayek. As such, legislators should aim to put
forward a framework of legal rules in which people are able to develop monetary sit-
uations that suit them. Nevertheless, as a nascent industry, it is too early today to tell
whether cryptocurrency will form part of the social contract, such as traditional cur-
rency, yet when quantified in terms of Hayek, the neoliberal concept of belief in a
system will lead to such a trust-based value assessment as outlined in the first part of
this work.

As outlined in this work, the author believes a sui generis approach such as
that proposed by Hewitt is the most viable option. The creation of a separate asset
class such as a pseudo-currency that would offer citizens the choice of whether to ac-
cept it as payment. Moreover, by introducing industry participation via self regulating
organisations, further transparency can be brought to the cryptocurrency industry,
raising standards throughout. Such a mechanism, supplemented with soft law over-
sight is likely to bring about price stability via consumer confidence. Additionally,
this work has highlighted the need for the harmonisation of cryptocurrency classifica-
tion across civil, administrative and criminal law so as to eradicate the current regula-
tory divergence within single jurisdictions.

Whilst cryptocurrency challenges the doctrine of government monopoly over

the control of money, the value prescribed to it has been called into question by many,
stating that there is no intrinsic value. However, value is extremely subjective, by
encouraging a system of cryptocurrencies, the world can profit from a transparent
monetary system in which value cannot be confiscated, and is instead subject to free

 6% 0
market ideology and consumer choice. Cryptocurrency may well fit within
definitions of currency in an economic sense, it is now up to the legislators to create
clear regulations in line with an ample legal definition to bring an element of state
control that will further adoption.


 %61
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Appendices
Appendix 1
Map highlighting the stance of nation states towards cryptocurrency, Thomson
Reuters, available: https://blogs.thomsonreuters.com/answerson/wp-content/uploads/
sites/3/2017/10/World-of-Cryptocurrencies-graphic.pdf



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Appendix 2
BTCUSD price throughout 2018, Bitfinex, available: https://www.tradingview.com/
chart/?symbol=BITFINEX:BTCUSD