Adam Keane 17427714 Banking Law

CRYPTOCURRENCY:
THE ISSUES FOR
REGULATORS
Adam Keane
17427714
BANKING LAW
Financial technologies are a major problem for
financial regulators.” Critically discuss, focusing
on one financial technology, either: automated
trading or cryptocurrencies

I have chosen cryptocurrencies to focus on with

a particular emphasis on bitcoin.
INTRODUCTION

Cryptocurrency is an internet-based medium of exchange which

uses cryptography to conduct financial transactions1. These
currencies aren’t issued by a central bank, but are accepted by
natural or legal persons as a means of payment2.
They leverage a technology called blockchain to achieve
transparency and immutability3. The most important feature of a
cryptocurrency is that it is not controlled by any central authority:
the decentralized nature of the blockchain makes cryptocurrencies
free from government oversight and interference4.
This technology brings with it its own kind of problems. The same
immutability that cryptocurrencies provide has been used
extensively for criminal enterprise. The volatility of the currency
has some critics believing there is a crypto sized bubble5.

At the beginning, cryptocurrencies were considered little more than

a curiosity. Today however they have a market cap of over $200
billion 6and regulators must catch up and address these issues.

1 Ulas Akkucuk, Handbook of Research on Creating Sustainable Value in the Global Economy (2019) 90

2 https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CeleX%3a52016PC0450.

3 Nathan Rief, Blockchain Explained https://www.investopedia.com/terms/b/blockchain.asp

4 Anthony Heston, Cryptocurrency: How to Safely Create Stable and Longterm Passive Income (2018)

5 Kevin Roose, Cryptocurrencies: Bitcoin, Blockchain and Beyond (2018) 87

6 https://coingape.com/altcoins-cryptocurrency-market-cap/
It is argued that traditional financial regulation is antithetical to
the autonomy and self governance that cryptocurrencies facilitate7.
Lawmakers must therefore come up with a new type of regulation
that caters for this unfolding technology. The first part of this essay
will look at how cryptocurrencies are currently regulated
throughout the world. The second part will assess the risks they
pose and look at possible solutions in the form of regulation.

THE LEGAL STATUS OF

CRYPTOCURRENCIES

(a) United States

It is difficult to find a consistent legal position on cryptocurrencies

in the United States. This is unsurprising given its highly fragmented
legal system and the countless laws which vary from state to state.
The SEC has stated that bitcoin is not a commodity or a security8.
Meanwhile the CTFC (Commodities Trading Commission) has
designated bitcoin as a commodity in the US. The Internal Revenue
Service and the United States Treasury confirmed that crypto-

7 Nabilou, Hossein, How to Regulate Bitcoin? Decentralized Regulation for a Decentralized Cryptocurrency
(2019) International Journal of Law and Information Technology.

8 Eric Engle, Bitcoin: Digital Financial Law (2019) 79-80

currency does not have the status of 'legal tender' in any state.
Rather, crypto-currency is treated as property9.
The Legal status of cryptocurrencies also vary from state to state.
In August of 2013, a Texas US District magistrate judge referred to
bitcoin as currency10.
The two recent cases of Espinoza and Murgio offer more conflicting
views and confuse the matter further. In US v Murgio, the federal
magistrate ruled that bitcoins are “funds within the plain meaning
of the term”11. Controversially in Espinoza a Florida court stated
that “bitcoin is not legal tender for its inability to act as a store of
value12”.
It is hoped that the proposed ‘Cryptocurrency Act of 2020’ would
provide more legal clarity. This Act should it be passed would
outline the roles each government institution (CFTC, FinCen, SEC)
has in regulating cryptocurrencies13.

9Keith A Aqui of the Office of Associate Chief Counsel (Income Tax Accounting), IRS Virtual Currency
Guidance (14 April 2014) Internal Revenue Service Notice 2014-21 <https://www.irs.gov/pub/irs-drop/
n-14-21.pdf

10 Arvind Narayanan, Bitcoin and Cryptocurrency Technology: An Introduction (2016) 90

11 United States v. Murgio, 209 F. Supp. 3d 698, 707 (S.D.N.Y. 2016).

12 Florida v Espinoza F14-2923 (11th Cir, 2016)

13Jason Brett, U.S. Blockchain Entrepreneurs Support Crypto-Currency Act of 2020 Despite Pressure from
D.C Lobbyists (2020) Forbes. https://www.forbes.com/sites/jasonbrett/2020/03/14/us-blockchain-
entrepreneurs-support-crypto-currency-act-of-2020-despite-pressure-from-dc-lobbyists/#5cc63f5b5945
(b) European Union

Within the Eurozone, only the Euro has the status of legal tender14.
None the less, contracting parties in the EU are free to use other
currencies such as the US dollar as well as other types of privately
issued money such as cryptocurrencies15. Therefore EU citizens may
use cryptocurrency as a kind of private money. The European
Banking Authority on its website defines cryptocurrencies as
unregulated digital money that is not guaranteed by the Central
Bank but which can be used as a method of payment16. In 2015,
regarding the proceedings between Mr. Hedqvist and the Swedish
Tax authorities, the ECJ made the judgement that for tax purposes,
cryptos should be treated as currency and exchanges should be
exempt from VAT17.

This would appear to affirm its legal status as currency if not legal
tender in the EU.

The Central Bank of Ireland stated in Dail Eireann that it does not
regulate cryptocurrencies18. The Department of Finance recently
proposed the creation of a new blockchain working group to help
create cohesive regulation across government agencies. The

14“Article 128(1) TFEU lays down the legal tender status of Euro banknotes while Article 11 of Council
Regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro does the same in relation to Euro
coins” https://ec.europa.eu/info/business-economy-euro/euro-area/euro/use-euro/euro-legal-tender_en.

15 Tessa Schembri, The Legal Status of Cryptocurrencies In the European Union (2018) 25

16 https://eba.europa.eu/eba-warns-consumers-on-virtual-currencies

17 Skatteverket v Hedqvist ( Case C– 264/14) (2015) BVC 34

18 J. Anthony Malone, Bitcoin and Other Virtual Currencies for the 21st Century (2014) 68
working group would aim to help bring a coordinated approach to
rules around cryptocurrencies and monitor developments in
technology around the world19.

(c) The United Kingdom

The UK government has stated that it does not regulate bitcoin and
that it is treated as a foreign currency for tax purposes20. HM
Revenue & Customs originally treated bitcoin as a voucher and
charged 20% VAT at the point of purchase. It has since reversed its
position and now views bitcoin as an asset or private money21.
The Financial Conduct Authority have promised developments in
cryptocurrency regulation. They have stated that their focus is on
regulating exchanges, rather than wallets. While this satisfies the
desire for anonymity and enables free flowing crypto commerce, it
remains to be seen whether this approach would do much to
combat money laundering and cross-border terrorism. There is a
risk that innovation will be put before crime prevention. Recent
FCA guidelines categorized cryptocurrencies as ‘exchange tokens’
which were outside the perimeters of regulation22.

19 Department of Finance, Discussion Paper: virtual Currencies and Blockchain Technology (march 2018)
(Jun. 18, 2018), available at http://www.finance.gov.ie/wp-content/uploads/2018/03/virtual- Currencies-
and-Blockchain-Technology-march-2018.pdf.

20 UK Parliament, ‘Banking: Bitcoins’ (Parliamentary Debate, House of Lords, 18 December 2013)

21 Jean – Marc Moulin, Droit de la finance alternative (2017) 74

Financial Conduct Authority – Guidance on Cryptoassets: Policy Statement 19/22. https://

22

www.fca.org.uk/publication/policy/ps19-22.pdf
We have seen in the section above that cryptocurrencies enjoy
different legal status throughout the world. Perhaps a more
pertinent question then would be…

Are Cryptocurrencies Money?

Cryptocurrencies have a number of similar functions as
conventional money23. Cryptocurrency can be a means of payment
for goods and services, and, for example, U.S law specifically
stipulates that it can be a payment unit in which wages are paid24.

Japan has recognized cryptocurrency Bitcoin fiat money as having

the same function as money25. Accordingly, the government decided
to develop a regulatory framework for the full integration of the
cryptocurrency into the banking system of Japan26.

I am not convinced that cryptocurrency is money. To quote SEC

Commissioner Hester Peirce, “money is a way of storing and
redeeming value”27. It’s money not because of its form, but
because of its function. I would argue that cryptocurrency is not a
valid medium of storing value. The value of cryptocurrency is so
volatile and inconsistent that it does not serve the same function as

23 Niaz Chowdhury, Inside Blockchain, Bitcoin and Cryptocurrencies (2019) Chapter 17

24 Umit Hacioglu, Blockchain Economics and Financial Market Innovation (2019) 416

25 https://www.cnbc.com/2017/09/29/bitcoin-exchanges-officially-recognized-by-japan.html

26 Werner Haslehner, Tax and the Digital Economy: Challenges and Proposals for Reform (2019)

27Beaches and Bitcoin: Remarks before the Medici Conference. https://www.sec.gov/news/speech/

speech-peirce-050218
more traditional FIAT currencies. The only rationale for classifying
cryptocurrencies as money would be to avail of regulatory
protections such as anti-money laundering legislation.

ASSESSING THE RISKS: MONEY

LAUNDERING, TERRORISM AND
THE NEXT BIG BUBBLE

A common criticism aimed at cryptocurrencies is that they aid

global money laundering. In July 2017 The US Justice Department
charged Alexander Vinnik and BTC-e in a 21-count indictment for
operating an international money laundering scheme and laundering
funds from illegal hacking28.

Bitcoins seem to be a perfect tool for laundering criminal proceeds

as all transactions bypass the regulated banking system, making the
tracking of money movement difficult for public authorities29. The
bitcoin system provides a high level of anonymity. Unlike with bank
accounts, bitcoin addresses are not registered to individuals. The
bitcoin address itself is a unique identifier and the account is only

28"Russian National And Bitcoin Exchange Charged In 21-Count Indictment For Operating Alleged
International Money Laundering Scheme And Allegedly Laundering Funds From Hack Of Mt. Gox". United
States Department of Justice. 26 Jul 2017. Retrieved 22 Oct 2018.

29Rolf Van Wegberg, Bitcoin Money Laundering: Mixed Results?: An Exploratative Study on Moneylaundering
of Cybercrime Proceeds Using Bitcoin. (2018) 6. https://doi.org/10.1108/JFC-11-2016-0067
accessible by someone who has the login details to the virtual
wallet.

Users do not need to be verified before they purchase bitcoin and

there is no requirement to record users and transactions. Bitcoin
transactions take place across many different jurisdictions. Law
enforcement are tasked not only with monitoring fast and
voluminous transactions, they must decide which country has the
power to launch the criminal investigation30. This leads to the
questions over which country's anti-money laundering regulations
should be applied. The system as a whole has only one downside for
criminals. Owing to the blockchain concept, all historic information
on any bitcoin address and transactional information is stored in
the bitcoin31. If law enforcement are able to acquire the users login
details they would have a full history available to them.

Is existing legislation adequate in dealing with money laundering?

The lack of clarity around the legal status of cryptocurrency is a big

hurdle for regulators in the US. The Bank Secrecy and Patriot Acts
are termed with stopping the money laundering using real
currency32. Bitcoin is not considered legal tender in the US33 and
does not fall under the strict definition of currency – that is to say
it is not the “coin and paper money of the United States or any

30 Nathalie Rebe, Counter-Terrorism Financing: International Best Practices (2019) 83

31United Nations Office on Drugs and Crime, Basic Manual on the Detection and Investigation of the
Laundering of Crime Proceeds Using Virtual Currencies (2014)

32 The Bank Secrecy Act (BSA), 31 USC 5311

33 William H. Byrnes, Asset Forfeiture and Recovery and Compliance (2020)

other country”. The Financial Crimes Enforcement Network has
stated that bitcoins and other cryptocurrencies are subject to the
jurisdictions anti money laundering laws but it has neglected to rule
on whether they are currency34.
A far clearer position is taken in Europe courtesy of the fifth anti-
money laundering directive. While much of the directives contents
is a simple update on the 4th anti-money laundering directive, it
takes significant new legislative steps in the treatment of
cryptocurrency35. The directive provides a legal definition of
cryptocurrency, which may broadly be regarded as “a digital
representation of value that can be digitally transferred, stored or
traded and is accepted… as a medium of exchange”36. Users of
cryptocurrency have the same obligations as financial institutions in
that they must report any suspicious activity they find37.
The directive goes further again by giving financial intelligence
units a mandate to obtain the identities of crypto users and
including an obligation that providers of cryptocurrency register
with the relevant authorities in their jurisdiction38. On the whole I
think that this is a significant push against the anonymity associated
with cryptocurrency. The powers granted by this directive give law

34Karen Yeung, Regulation by Blockchain: the Emerging Battle for Supremacy between the Code of Law
and Code as Law (2019)

35Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending
Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money
laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU

36 Ibid.

37Yury Myshinskiy, The Fifth Money Laundering Directive Explained (Jan 23rd 2020) https://medium.com/
@y.myshinskiy/the-fifth-money-laundering-directive-5amld-explained-in-detail-9709e2678744

38Simon Braun, AMLD5 and Cryptocurrencies (2018), https://www.lexology.com/library/detail.aspx?

g=35d0bed0-2fb0-41a0-9f07-31ebcf6a95e0
enforcement the much needed tools in combatting money
laundering but the lack of an adequate global framework means
that cybercrime is still possible between the US, Europe and Asia.
Comprehensive developments are needed to stop cross border
money laundering.

I am very sceptical over how well the UK approach of regulating

exchanges and not wallets would work to tackle this issue. With the
volume of transactions and the difficulty in establishing
jurisdiction, I believe countries need to collaborate on anti-money
laundering legislation that would give direct access to crypto
wallets and not leave law enforcement chasing transactions across
borders.

The Terrorist Threat

There has been widespread concern that cryptocurrency is being

used to fund global terrorism but it remains to be seen how
prevalent its use is. While there is no doubt the anonymous nature
of cryptos make it an ideal tool for funding terrorist activity, there
is no evidence to suggest it is being used more than other legal or
illegal funding sources39. Examples of legal sources include stock
market investments while illegal funding is often sourced through
robbery, kidnappings and drug trafficking40.

39Fabian Maximilian, Financing terrorism through cryptocurrencies – a danger for Europe? – (2018) JMLC
21(4), 513–519

40 Ibid.
Are we headed towards a Crypto bubble?
Another primary concern for financial regulators is the volatility of
cryptocurrencies and whether this threatens financial stability. The
market is to a large extent driven by speculation and the valuation
has little to do with the fundamentals of cryptocurrencies. In fact,
several prominent economists have identified bitcoin and other
cryptocurrencies as a speculative bubble. The measured view is
that a global collapse in the valuation of cryptocurrency would do
little damage to the economy. Economist Robert Kollman argues
that “Despite recent growth, the market cap of
cryptocurrency remains modest, compared to the size of
‘conventional’ financial markets”41. While it is true that the $200
billion cryptocurrency market account for a very small piece of the
entire financial industry42, I would argue that its rapid growth over
the last decade shows its importance and the need for regulation
and protection for its adopters. In 2018, cryptocurrencies lost 80 %
of their value between the months of January and September43. The
plummets have been so severe and sudden that bitcoin lost almost
a third of its value in a week44. The decentralised nature of
cryptocurrencies is again at issue here. Unlike other bubbles such as

41Preeti Varathan, Most Economists Think Bitcoin Won’t Bring Down the Economy – Yet (2017) https://
qz.com/1165698/most-economists-think-bitcoin-and-other-cryptocurrencies-arent-dangerous-survey-says/

42 Lerong Lu, Bitcoin: speculative bubble, financial risk and regulatory response – (2018) 3 JIBFL 178

Steven Russolillo, Bitcoin Continues Steep Fall as Cryptocurrency Collapse Worsens (2018) https://
43

www.wsj.com/articles/bitcoin-falls-below-4-000-as-cryptocurrency-collapse-worsens-1543241154

Tom Wilson, Bitcoin Plummets as Cryptocurrencies Suffer in Market Turmoil (2020) https://
44

www.reuters.com/article/us-health-coronavirus-bitcoin/bitcoin-plummets-as-cryptocurrencies-suffer-in-
market-turmoil-idUSKBN20Z1GA
the housing bubble ten years earlier, investors are not covered by
official financial protection schemes45. This means that should
another bubble burst, investors will have to bear all the financial
losses themselves. While a cryptocurrency crisis is highly unlikely to
cause the same kind of economic recession created by the subprime
mortgage bubble, the lack of regulations and safeguards in place is
worrying. The cryptocurrency market is small now but should a
global economic shock such as the Covid-19 pandemic trigger a lack
of confidence in traditional currency and more widespread adoption
of cryptocurrency, the regulatory framework is not in place. The
financial risk here is too great to remain unchecked.

The Future for Regulation:

Lifting the Veil
While the past decade has been very profitable for early adopters
of cryptocurrency, the rapid growth has left regulators with a lot of
work to do. The latest European legislature identifies
cryptocurrency as a key platform for facilitating the flow of ‘dirty
money’46. The Fifth Anti-Money Laundering Directive represents the

45 Lerong Lu, Bitcoin: speculative bubble, financial risk and regulatory response – (2018) 3 JIBFL 178

46Michael Harris, All You Need to Know About the 5th Money Laundering Directive, and Beyond (2020) – CRJ
9 1, 6
European position that full and wide reaching regulation is the way
for the future47. Organisations dealing in cryptocurrency will have
the same obligations and have to comply with the same rules as
other financial institutions. This new regulation comes at the
expense of the users anonymity, and would seem to be antithetical
to the central principles of bitcoin, namely that it is pseudonymous.
This may be the price to pay for widespread adoption of
cryptocurrency and to legitimize the cryptocurrency market.

47H.S, AMLD5 & The Recession of Crypto Freedom: Regulations are Here and They Keep Getting Stricter
(2019) https://medium.com/daomaker/amld5-kyc-the-recession-of-crypto-freedom-regulations-are-here-
and-they-keep-getting-c1b8b0b549c4