"Mann and Proctor on the Law of Money", ottava edizione - 2022 - OXFORD UNIVERSITY PRESS
O. Virtual Currencies
1.109
The growth of virtual currencies (or cryptocurrencies) in the period since 2009 has stimulated a wealth of publications and debate on technological, legal, regulatory, and other aspects of this development. [318] It should be emphasized that, at the time of writing, only
318 See, for example, the materials discussed in Goode, Payment Obligations, paras 1.13-1.17. For a discussion of the status of virtual currencies in a variety of jurisdictions see Hoegner (ed), The Law of Bitcoin (iUniverse, 2015). For a recent examination of virtual currencies in both private law and in a public and international law context, see Fox & Green (eds), Cryptocurrencies in Public and Private Law (Oxford University Press, 2019). For a further collection of papers on this subject, see Brummer (ed) Cryptoassets—Legal, Regulatory and Monetary Perspectives (Oxford University Press, 2019).
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a tiny fraction of transactions are settled through the use of Bitcoin or other media of the same genre. [319] The publicity surrounding virtual currencies has thus so far been disproportionate to their actual use and market success as a means of exchange. Nevertheless, that position could change, especially if consumers begin to lose faith in national currency units.
Furthermore, there is no doubt that Bitcoin is being used as a means of payment or settlement in substitution for ordinary currencies in some transactions (although there is equally much speculative activity based on its volatility). As a result, the legal nature of virtual currencies plainly requires consideration in a work of this kind. In particular, it is necessary to consider whether (i) virtual currencies fall within the definition of ‘money as currently formulated [320] and (ii) if they fall outside the definition of ‘money’ then should that definition be expanded to incorporate virtual currencies? It may be that the answers to these questions will evolve over time, but the below commentary is based on the current state of affairs (or, perhaps more accurately, on the writer’s perception).[321]
When, in the Sixth Edition of this work, the present writer extended the definition ‘money to 1.110 include’ bank deposits repayable on demand, he offered the justification that such deposits could be used as an immediately available form of payment, and that the legal features of such a deposit were thus essentially similar to physical cash.[322]
As a result of these considerations it is necessary to seek to establish a definition of a ‘virtual 1.111
currency’ and a satisfactory description of its functions. It is proposed to commence this search by reference to a report published by the Financial Action Task Force (FATF).[323] The FATF Report notes [324] that, in the context of virtual currencies ‘two popular narratives have emerged: (1) virtual currencies are the wave of the future for payment systems and (2) virtual currencies provide a powerful new tool for criminals, terrorist financiers and other sanctions evaders to move and store illicit funds, out of the reach of law enforcement and other authorities. The first category is no doubt directed towards technophiles and those who may seek to profit legitimately from the growth of virtual currencies. The latter category comprises those of a less optimistic outlook and—given its role—this no doubt includes FATF itself. That, however, does not detract from the value of its efforts to provide a framework of definitions.
The FATF Report [325] defines ‘virtual currency’ as ‘a digital representation of value that can be 1.112
digitally traded and functions as (1) a medium of exchange and/or (2) a unit of account and/or (3) a store of value, but does not have legal tender status (ie, when tendered to a creditor, is a valid and legal offer of payment) in any jurisdiction. It is not issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the virtual currency...’ Virtual currencies must therefore be distinguished from both national currencies and from e-money.[326] The FATF Report also notes a distinction
319 Bitcoin is at present the most prominent of the virtual currencies, and reference will therefore be made to Bitcoin for convenience.
320 On that definition, see para 1.71 above.
321 For clarity, it should be explained that Bitcoin is a self-standing unit or measure. Cryptocurrencies therefore differ from e-money, because the latter is an electronic representation of a national unit of account. On e-money, see para 1.87 above. For a very useful and multi-jurisdictional discussion of the present subject matter, see Zilioli, ‘Crypto-assets: Legal Characterisation and Challenges under Private Law’ (2020) 45 European Law Review 251.
322 See the discussion at para 1.73 above.
323 FATF is an inter-governmental body that seeks to develop policies to protect the international financial system against money laundering, terrorist financing and the financing of weapons of mass destruction. The FATF Report noted in the text is titled ‘Virtual Currencies: Key Definitions and Potential AML/CFT Risks’ (June 2014).
324 See p 3.
325 p 4.
326 See para 1.87 above.
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between (i) convertible virtual currencies, where there is in practice a market for exchange into national currencies and (ii) non-convertible or closed virtual currencies which are limited in use to a closed domain whose rules prohibit transfer or exchange.[327] Since the latter form of virtual currency can only be used as a means of exchange within a limited environment for very narrow purposes, it is proposed to leave that category aside for the purposes of the present work.
1.113
As a further refinement, the FATF Report distinguishes between centralized and decentralized virtual currencies. Centralized virtual currencies are controlled by a single, third party administrator who issues the currency, maintains a payment ledger and has the right to redeem/withdraw the currency. Centralized currencies at present account for the majority of transactions where the virtual currency is used as a medium of payment.[328] Decentralized virtual currencies are distributed, open source, peer-to-peer units that have no central administrative or monitoring authority.[329]
1.114 The |ECB has also examined the position of virtual currencies and has defined them as ‘a digital representation of value, not issued by a central bank, a credit institution or e-money institution, which in some circumstances can be used as an alternative to money. As a consequence of their scope and limited functions, ‘the ECB does not regard virtual currencies, such as Bitcoin, as full forms of money as defined in economic literature. Virtual currency is also not money or currency from a legal perspective. [330]
1.115 National authorities have also issued cautionary announcements about virtual currencies. For example, the Banque de France has also affirmed that cryptoassets are not currencies and has warned against their speculative character. [331] Whilst no formal legislation has been forthcoming in that country, there has been a significant volume of material that discusses the nature of these assets. [332] However, French case law treats the sale and purchase of Bitcoin as a form of payment service, and participants in that market therefore require authorization pursuant to the Payment Service Directive.[333]
1.116
The present writer would agree that virtual currencies do not fall to be defined as ‘money’ In terms of the State Theory of money, this necessarily follows from the fact that such currencies
327 See p 4 of the FATF Report.
328 Examples include Liberty Reserve dollars and Linden dollars.
329 Examples include Bitcoin and Litecoin.
330 On the points just noted, see European Central Bank, ‘Virtual Currency Schemes—A Further Analysis’ (February 2015) 4. It may be noted that the ECB had earlier defined virtual currencies as ‘a type of unregulated, digital money which is issued and usually controlled by its developers and used and accepted among the members of a specific virtual community’; see European Central Bank, ‘Virtual Currency Schemes’ (October 2012) 13.
331 ‘Lemergence du bitcoin et autres crypto-actifs: enjeux, risques et perspectives', Bulletin de la Banque de France, March 2018, Focus No 16.
332 See, for example, all the contributions in the Journal Banque et droit (n°159, Jan-Feb 2015) on ‘Bitcoin’: Bonneau, ‘Le Bitcoin une monnaie?’ (p 8); Mignot, ‘Le Bitcoin: nature et fonctionnement’ (p 10); Ouakrat, ‘Une analyse sociotechnique d'un type d'usage du bitcoin: le crypto-marché Silkroad’ (p 14); Demarquette, ‘Le prix du bitcoin: bulle ou réaction rationnelle du marche?’ (p 18); Bourgeois-Gironde, ‘Le bitcoin, entre représentation naive et innovation théorique’ (p 23); Roussille, ‘Le bitcoin: objet juridique non identifié (p 27); Goffinet, ‘La régulation du bitcoin’ (p 32); Vigna, ‘Les monnaies virtuelles: des risques pour la protection des investisseurs et le bon fonctionnement des marchés’ (p 33); and also: CorbionCondé, ‘De la défiance A légard des monnaies nationales au miroir du bitcoin: RD bancaire et fin’ (2014), dossier 13; Drummond, ‘Bitcoin: du service de paiement au service d'investissement?’ Bull. Joly Bourse (2014) 249; Bali, ‘Les crypto-monnaies, une application des blockchain technologies a la monnaie’,, RD bancaire et fin’ (2016), étude 8; Mathey, ‘La nature juridique des monnaies alternatives à l'épreuve du paiement, RD bancaire et fin (2016), étude 41; Kleiner, ‘Bitcoin, monnaie étrangére et indexation: quelle équation?’ in Mélanges en I'honneur du professeur Joél Monéeéger (LexisNexis 2017) 239.
333 This is the effect of a 2013 decision of the Court of Appeal in Paris: Paris, 26 September 2013, no 12/00161; Juris Data No 2013-024887.
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are not issued under the authority of the State and thus have no legislative backing. In terms of the Societary Theory, virtual currencies have not achieved a level of general acceptance that is a necessary part of that theory.334
However, notwithstanding that conclusion, it must be observed that virtual currencies have 1.117
occasionally become entangled with legislation that is intended to regulate money. This in some respects joins to the concern that virtual currencies can be used as a medium for money laundering or tax evasion—crimes that are generally associated with money in its narrow meaning. It is appropriate for completeness to examine some of the cases that have arisen in this context, which serve to highlight the ambiguous position of virtual currencies within the monetary law framework. As will be seen, the issues have arisen in various jurisdictions and different opinions have been expressed as to the monetary status of virtual currencies.
1.118 It should be noted at the outset that the status of virtual currencies as money does not appear to have been judicially considered in England.[335] In its report on this subject, the Financial Markets Law Committee notes ‘strong support for the view that virtual currencies which have become a medium of exchange and which are capable of passing in currency should, in their legal aspect, be viewed as money.[336] It must perhaps be assumed that this view rests on the Societary Theory (rather than the State Theory). Other commentators have expressed the firm view that virtual currencies cannot be regarded as ‘money in any real sense.[337] This view has been reiterated at various official levels in the United Kingdom.[338]
The European Court of Justice in Skatteverket v Hedqvist [339] has had to consider whether the 1.119
business of exchanging Bitcoin for national currency units involves ‘transactions concerning currency, bank notes and coins used as legal tender’. If the business met that test then it would qualify for an exemption from value added tax for the purposes of the EU’s VAT Directive.
The Court observed that Bitcoin ‘is neither a security conferring a property right not a security of a comparable nature’ To the contrary. ‘[T]he Bitcoin virtual currency has no other purpose than to be a means of payment and... it is accepted for that purpose by certain operators. On that basis, the Court held that the business of exchanging Bitcoin for national currencies fell within the scope of the VAT exemption noted above. Given the terms of the terms of the VAT exemption, it seems fairly clear that the Court regarded Bitcoin as ‘money'. [340] Whilst this approach may well be valid in the specific context of the VAT Directive, this aspect of the judgment cannot be accepted in the wider context of monetary law. Bitcoin
334 Although it should be said that this view does not necessarily represent the end of the matter—see the cases discussed at para 1.128 below.
335. There are various decisions that consider the status of virtual currencies as property (rather than as money). These cases are noted at para 1.128 below.
336 Financial Markets Law Committee, ‘Issues of Legal Uncertainty arising in the context of Virtual Currencies (July 2016) 16. The report is discussed by Perkins and Enwezor, “The Legal Aspect of Virtual Currencies’ (2016) 10 JIBFL 569. For a follow-up report by the same Committee, see ‘Exchange Tokens: Issues of Legal Uncertainty’ (October 2019, available at <http://www.fmlc.org>).
337 See the ECB materials noted at n 330, above and see also Persaud ‘Explaining Why Bitcoin is Fake Reveals Which Regulatory Policy is Monetary Policy’(2018) 4 JIBFL 207.
338 See, for example, ‘Cryptoassets Taskforce: Final Report’ October 2018, published jointly by HM Treasury, the FCA, and the Bank of England), at para 2.13. The same view is adopted, in a taxation context, by Her Majesty's Revenue and Customs: ‘Cryptoassets for Individuals’ (HMRC Policy paper, 19 December 2018).
339 Case C-264/14, ECLI:EU:C 2015, 71.
340 For a similar view, see Athanassiou, ‘Impact ofdigital innovation on the processing of electronic payments and contracting: an overview of the legal risks, European Central Bank Working Paper Services (no 16, October 2017) p19.
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clearly cannot be ‘money’ for the purposes of the State Theory, since it lacks the necessary ingredient of a legislative framework. Nor can Bitcoin qualify as money under the Societary Theory. Whilst Bitcoin may be ‘accepted ... by certain operators, this does not reach the level of general acceptance that would be required for the purposes of the Societary Theory.
1.120 As far as the UCC of the US is concerned, virtual currencies should not be treated as ‘money. That expression ‘means a medium of exchange authorised or adopted by a domestic or foreign government as part of its currency.[341] The Code therefore clearly adheres to the State Theory of money as explained earlier in this text. However, it should be emphasized that the UCC applies only to commercial matters. Consequently—and as will be seen below—a more open-textured approach can be adopted in areas dealing with anti-money laundering legislation and similar regulatory contexts.
1.121 It is fair to say that experience in this area in the United States has been varied. In some of the earlier cases, the courts clearly tended to the view that virtual currencies were to be regarded as ‘money’ for various statutory purposes because they could be used for the purchase of goods and could also be exchanged for other currencies [342] and for the execution of transactions of a finance nature.[343] However, the Florida Court in State of Florida v Espinoza [344] was confronted with a prosecution for the sale of payment instruments without a licence. The relevant legislation defined ‘payment instrument’ as ‘a check, draft, warrant, money order, travellers check, electronic instrument or other instrument of money or monetary value, whether or not negotiable’ An additional charge of money laundering related to transactions involving ‘coin or currency of the United States or any other currency, travellers checks, personal checks, money orders, investment securities in bearer form or otherwise in such form that the title thereto passes upon delivery. The court relied upon a release by the Internal Revenue Service (IRS) to the effect that Bitcoin was to be regarded as property (rather than money). As a result, the defendant was acquitted because Bitcoin was not money or a monetary instrument for the purposes of the respective statutory definitions reproduced above. This was a doubtful approach to the matter because the IRS release related to taxation rather than money laundering or associated offences, and was thus being taken out of context. It is therefore perhaps unsurprising that the US District Court of the Southern District of New York declined to follow Espinoza in US v Murgio.[345] In that case, the court held that Bitcoin could be used as a medium for the purchase of goods and services and thus constituted ‘funds’ or ‘monetary value’ within the scope of the applicable legislation. Expressing its strong disapproval of Espinoza the court observed that ‘there is no plausible interpretation of monetary value or payment instruments ... that would place Bitcoin outside the statute's ambit. This, in turn, relied on an earlier judicial statement that ‘... money is an object used to buy things ... ' [346] The defendant was therefore convicted in this case.
1.122 The Florida and New York decisions just noted are perhaps an illustration of a point made earlier in this chapter, namely that ‘money’ can have different meanings in different contexts, and that any relevant statutory framework must be construed as a whole. [347] They do
341 §201(24), UCC.
342 SEC v Shavers and Bitcoin Savings and Trust, Case No 4:13-CV-416, US District Court, Eastern District of Texas, 18 September 2014.
343 US v Robert M Faiella (US District Court, SDNY, 18 August 2014).
344 Case WD FL4-2923, Florida Circuit Court, 22 July 2016.
345 15-cr-0069 (AJN) (SDNY 12 January 2017).
346 US v Ulbricht 31 F Supp 3d, 540, 570 (SDNY 2014).
347 See the discussion at para 1.02 above.
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not justify the conclusion that virtual currencies are ‘money’ for the purposes of the more general definitions given in this chapter, because they do not meet the criteria of either of the main theories.
From a US perspective, matters might have rested there but for the efforts of the Commodity 1.123
Futures Trading Commission (CFTC) to regulate activities in the virtual currency sphere. In CFTC v McDonnell, a federal court confirmed that the CFTC enjoyed enforcement jurisdiction in relation to frauds involving virtual currencies sold in interstate commerce. This necessarily involved the conclusion that virtual currencies were ‘commodities’ as defined in the Commodities Exchange Act. The definition of that expression in section 1a(9) of that Act includes a defined list of specified commodities ‘and all other goods and articles ... and all services, rights and investments ... in which contracts for future delivery are presently or in the future dealt in: The inclusion of virtual currencies within this definition seems to overlook the requirement that relevant contracts must involve future delivery. However that may be, the status of virtual currencies as commodities was upheld by the US District Court for the District of Massachusetts, thus confirming the powers of the CFTC to prosecute crimes involving such currencies.[349]
The result is that US case law treats virtual currencies as both ‘money’ and ‘commodity’ ac- 1.124
cording to the context. No doubt this can in part be attributed to the fact that all of the relevant cases have arisen in the context of fraud, and the courts have been reluctant to come to a decision that would deprive the relevant authority of prosecutorial power. In contrast, courts in the Netherlands have concluded that Bitcoin is a form of transferable 1.125
proprietary asset, but is not money.[350] But these cases involved contractual claims for non-delivery and damages, and thus lacked the public interest considerations that must have motivated the US decisions.
Perhaps the most interesting continental decision emanates from Berlin’s Superior Court 1.126
of Justice in a recent criminal appeal.[351] In that case, the defendant was charged with providing banking and financial services without authorization, in contravention of section 54 of the German Banking Law. In order to constitute an offence, the relevant business activities must involve ‘units of account’ or ‘financial instruments. In 2011, the German Financial Supervisory Authority (BaFin) published a guidance note that indicated virtual currencies fell within the scope of its regulatory ambit because they were ‘units of account’ Rechnungseinheiten and were thus ‘financial instruments’ for the purposes of the German Banking Law.[352] The Superior Court firmly disagreed with this view, noting that Bitcoin was not a unit of account because it does not provide a meaningful reference point for the value of goods or services.[353] It also noted that Bitcoin is not issued by a central bank and lacks both common recognition and general acceptance as a currency. For these reasons, which may be said to combine both the State Theory and the Societary Theory, Bitcoin was not a
348 2018 WL 3435047 (EDNY, 16 July 2018) affirming an earlier decision in the same case at 287 F Supp 3d 213 (EDNY 2018). See also the earlier decision in Re Coinflip Inc, CFTC Docket No 15-29 (17 September 2015).
349 CFTC v My Big Coin Pay, Inc., Case 1:18-cv-10077.
350 Case No c/08/140456/HAZA/13-255, Rechtbank Overijssel (14 May 2014) and Case No c/13/642655/PTRK 18.196, Rechtbank Amsterdam (20 March 2018).
351 Kammergericht Berlin, Urteil v.25.09.2018—Az:(4)161 Ss 28/18 (35/18).
352 For discussion of the subject see BaFin Annual Report 2013, p 58 and Jens Miinzer ‘Bitcoins: Supervisory Assessment and Risks to Users’ (BaFin, 17 February 2014).
353 ie it does not provide a measure of value or similar standard—see the discussion at paragraph 1.07 above.
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‘unit of account’ and, hence, was nota financial instrument. This may perhaps be regarded as the clearest decision to date to the effect that virtual currencies are not ‘money.
1.127
In similar vein, the Criminal Chamber of the Spanish Supreme Court had occasion to consider the legal status of Bitcoin in a case where a high frequency trader had failed to invest Bitcoin received by him from his clients, but rather had appropriated them to his own use. [354] Leaving aside questions of sentencing for the crime, the question arose whether the defendant should be ordered:
(a) to transfer the relevant number of Bitcoin back to the defrauded investors; or
(b) to pay to the investors the cash value of the Bitcoin.
The point was highly significant because the value of the Bitcoin at the time of the fraud (in 2014) was approximately EUR12,000 but, by the time the issue of restitution arose, their value had multiplied to approximately EUR354 million. The Supreme Court adopted the latter route, holding that Bitcoin was a ‘patrimonial asset’—it could form the subject matter of a commercial transaction but it could not be treated as a monetary consideration, or as money. Consequently, the court ordered the payment of the prevailing monetary value of the Bitcoin by way of compensation. The decision of the Spanish Supreme Court on the monetary status of Bitcoin is thus consistent with the earlier case law and materials referred to above.
1.128
The fact that a virtual currency has no monetary status does not mean that it has no legal status at all—the status of Bitcoin as a form of property in the eyes of English law has provisionally been confirmed by the High Court in Liam Robertson v Persons Unknown,[355] where the claimant succeeded in obtaining an asset preservation order in respect of a number of Bitcoin, which had allegedly been the subject of a ‘phishing’ or hacking attack. The order depended upon the claimant having title to property; it was determined that Bitcoins were property and were capable of being subjected to a trust or tracing action.[356]
1.129
This position has been reinforced in various respects. First of all, in Elena Vorotyntseva v Money 4 Limited (ta Nebeus.com), [357] the court granted a freezing injunction to prevent the dissipation of cryptocurrency assets held by Nebeus on behalf of the claimants. The court determined that cryptocurrencies amounted to a form of property that could be made the subject matter of a freezing order (although it should be noted that neither party attempted to dispute that issue). Secondly, the status of cryptoassets as property has been recognised in other jurisdictions.[358] On the other hand, the English courts have declined to recognise Bitcoin as an adequate alternative to cash in the context of an application for security for
334 Case STS/326/2019, 20 June 2019. The case related to the administrator of Cloud Trading & Devs. 335 August 2019, Moulder J.
336 The court relied upon a decision of the Singapore International Commercial Court to similar effect in B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(1) 03. That case in turn relied on the comments of the House of Lords in National Provisional Bank v Ainsworth [1965] 1 AC 1175 (at p 1248) to the effect that an item could only qualify as a ‘property right if it is ‘definable, identifiable by third parties, capable in its nature of assumptions by third parties, and have some degree of permanence or stability'. The Singapore court held that cryptocurrencies met these criteria.
337 [2018] EWHC 2596 (Ch). See also Jon Science Ltd v Persons Unknown, 21 December 2020 (Commercial Court).
358 See Ruscoe v Cryptopia Ltd (in liquidation) [2020] NZHC 782. In this case, a crypto exchange had gone into insolvent liquidation. The New Zealand High Court held that (i) cryptocurrencies were a form of ‘property’, (ii) those assets were therefore capable of being held on trust for a third party, and (iii) the cryptocurrencies under the control of the exchange were held on trust for its customers, and were thus not available to meet the claims of the general body of unsecured creditors.
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costs, on the basis that its volatility makes it unsuitable as a substitute for money for these purposes.[359]
On 18 November 2019, the UK Jurisdiction Taskforce published its Legal Statement on 1.130
cryptoassets and smart contracts. [360] The Legal Statement refers to the House of Lords decision in Ainsworth [361] and concluded that cryptocurrencies amounted to ‘property’ because they were definable, capable of ownership, control, and transfer and enjoyed a degree of permanence. This statement influenced a further decision to the effect that misappropriated Bitcoins were a form of property and could thus be made the subject matter of a proprietary injunction issued by an English court.[362]
Virtual currencies may thus be a form of ‘property. However, as noted above,[363] virtual currencies 1.131
do not fall within any of the legal definitions of ‘money’ used in this text because they lack both a legal framework and a general acceptance in society as a whole. It therefore remains to await further developments in this sphere that might prompt a reconsideration of those conclusions. In the meantime, virtual currencies continue to attract regulatory scrutiny. The European Banking Authority has noted the lack of adequate governance requirements for virtual currency schemes, and the need to bring such schemes into the framework of anti-money laundering legislation.[364] The same authority has also published a report to the effect that activities involving virtual currencies will generally fall outside the scope of EU legislation on electronic money and payment services.[365] Separately, the European Securities Market Authority has noted that virtual currencies frequently fall outside the scope of legislation covering the securities markets.
Leaving aside the specific issue of the monetary status of virtual currencies, it is necessary 1.132
briefly to outline some of the wider implications that might ensue if such currencies did indeed become a more widely used means of exchange, and thus began to challenge national currencies for that role.
The prevailing official view appears to be that virtual currencies have not gained sufficient 1.133
market share so as to pose a threat to traditional currencies or to financial stability in the United Kingdom.[366] There are thus insufficient linkages between virtual currencies and mainstream financial markets. As a result, virtual currencies do not at present form a threat to the stability of the financial system, and a significant growth in the use of such currencies would be necessary in order for the position to change. That said, in a report issued in February 2022 [367] the Financial Stability Board clearly demonstrated an enhanced level of concern in relation to these developments. In particular, the report notes the increasing interdependence between credit institutions and cryptocurrencies, the increasing use of leveraged trading strategies and a market opacity that is a barrier to understanding by
359 Tulip Associates v Bitcoin Association (February 2022).
360 The Legal Statement represented the outcome of a consultation process on the subject launched on 9 May 2019.
361 See n 356 above.
362 Ion Science Ltd v Persons unknown and others (unreported, April 2021).
563 See para 1.109 above.
364 See ‘EBA Opinion on Virtual Currencies’ (European Banking Authority, 4 July 2014).
365 See ‘Report with Advice for the European Commission on Crypto-assets’ (European Banking Authority, 9 January 2019).
366 See, for example, Ali and others, ‘The Economics of Digital Currencies, Q3 Bank of England Quarterly Bulletin (2014) 276.
367 Financial Stability Board, “Assessment of Risks to Financial Stability from Crypto-assets” 16 February 2022,
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consumers and investors. Money laundering and cyber crime are also highlighted risk factors. The development of this market will therefore remain under regulatory scrutiny and a tightened supervisory framework may be expected in due course.
1.134 A significant growth in the use of virtual currencies could also have implications for monetary policy. The conduct of monetary policy by a central bank involves the setting of interest rates and control over the money supply in a national economy. Changes in monetary policy thus derive their effect by feeding into the cost of credit and the wider economy as a whole. A substantial increase in the use of virtual currencies could therefore blunt the use and effectiveness of monetary policy, as such currencies operate outside the sphere of official influence.
1.135 In the sphere of artificial or ‘non-State’ currencies, it is necessary to discuss a development that was announced shortly before the completion of the present work, and the implications of which remain to be fully assessed.
1.136 As noted above, the official approach to cryptocurrencies has tended to be relatively dismissive, largely because the volume of use was limited and they accordingly posed no threat to the stability of the financial system. However, this attitude began to change on 18 June 2019, when the social media site, Facebook, along with various partners, published a white paper setting out its plans for a global currency to be known as Libra.[368] The aims and objectives described in the White Paper include the following:
(a) the establishment of a ‘simple global currency and financial infrastructure that will allow access to the financial system for 2 billion people worldwide who are unable to access the mainstream financial system, even though they may have mobile phones and access to the internet;
(b) the promotion of access to financial services;
(c) the creation of a global, instant, and low-cost payment system that will enhance commerce and economic opportunities;
(d) the establishment of a reliable digital currency to be built on a secure and reliable blockchain and backed by a reserve of assets designed to support the intrinsic value of the currency; and
(e) the establishment of the Libra Association, which will be responsible for the coordination and governance of the currency network. Members of the Libra Association include subscribers from the payments industry, technology and communications sectors, and various other areas.
1.137
The White Paper contemplates a global currency to be established during the course of 2020 that can replicate the best features of strong national currencies, including stability, low inflation, wide global acceptance, and fungibility. To that end, the Association will establish a ‘Libra Reserve, consisting of bank deposits and short-term government securities in recognized currencies. The content of the reserve means that the Libra would not be similar to a currency peg,[369] but there would be a range of high-quality assets that would be intended to provide backing to the currency and hence reinforce confidence in it. Whilst Libra will thus be a cryptocurrency of the type that has been described above, the proposed Libra Reserve will be something of a distinguishing feature.[370] It may be noted that Bitcoin and similar
368 See the Libra White Paper published by the Libra Association and available at <https:/libra.org/en-us/white-paper/>. The unit has subsequently been rebranded as ‘Diem.
369 On currency pegging arrangements, see para 33.16 below.
370 A digital currency backed by cash or similar assets is generally referred to as a ‘stablecoin.
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cryptocurrencies have no backing of this kind and their value is self-standing. Asa result, the cash value of such items has tended to fluctuate and be highly speculative. The existence of a reserve as backing should lead to a much more stable cryptocurrency. The reserves will be created through investor subscriptions for Libra tokens, and through purchases by users of the system.
The prospect of the use of a digital currency widely available to consumers and businesses 1.138
alike under these circumstances has provoked serious concern in official quarters, not least because Facebook boasts over 2 billion users. The scope for rapid growth in the use of Libra is therefore very significant and is on a different scale to existing cryptocurrencies. Numerous central banks and financial regulators have expressed the view that a regulatory framework for Libra must be agreed prior to its launch. [371]
As noted above, the proposed creation of Libra coin has prompted some concern in regula- 1.139
tory circles. However, it seems inevitable that the service will need to be licensed or authorized in the jurisdictions in which it will be available to users, with the result that there may be ample opportunity to ensure the application of satisfactory regulatory oversight. However, there may be reservations to this position. For example, in the EU context:
(a) the Payment Services Directive [372] applies to ‘payment services provided within the Union, to ‘payment transactions in the currency of a Member State’, and to certain ‘payment transactions in a currency that is not a currency of a Member State.[373] As noted earlier, it may be argued that the status of Libra coin as a cryptocurrency may mean that it is not a ‘currency’ for these purposes and thus falls outside the scope of the Directive.[374] The fact that Libra coin will be backed by fiat currency would not necessarily affect this view. It is, however, necessary to exercise caution in this area as the Financial Conduct Authority (FCA) has stated that cryptocurrency assets may in some cases be used as a method of facilitating payments and transfers, and would thus fall within the scope of this legislation;[375] and
(b) the E-money Directive[376] requires that an electronic money institution must be authorized and regulated in its home State. For these purposes ‘electronic money’ means ‘electronically ... 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 ... and which is accepted by a natural or legal person other than the electronic money issuer.[377] Whilst the ‘backing’ of Libra coin by the Libra reserve of fiat currencies suggest that Libra coin may constitute ‘monetary value, it seems that Libra coin will not constitute e-money because there will be no ‘claim against the issuer’ for the purposes of this definition. It appears that the Libra reserve will be held by an international group of custodians but there will be no redemption rights, exercisable against the Libra Association itself (and, hence, no claim against
371 The development is noted by the Financial Policy Committee of the Bank of England in its Financial Stability Report, July 2019, at p 45.
372 Directive (EU) 2015/2366 of the European Parliament and ofthe Council dated 25 November 2015 on payment services in the internal market, OJ L 337, 23.12.15, p 35.
373. See Art 2 of the Directive explaining its intended scope.
374 See the discussion at para 1.87 above.
375. See ‘Guidance on Cryptoassets—Feedback and Final Guidance to CP 19/3’ (Financial Conduct Authority, January 2019).
376 Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions, OJ L 267, 10.10.2009, p 7.
377 See Art 2(2) of the Directive.
64 THE CONCEPT OF MONEY AND MONETARY SYSTEMS
it). Rather, the reserve will reinforce confidence in the value of Libra coin for the purposes of transactions that are contracted in it.[378] Nevertheless, a note of caution must again be sounded in this respect. The FCA has expressed the view that ‘pegged’ cryptocurrencies may fall to be treated as e-money if the other elements of the definition are met.[379]
1.140
The fact that Libra coin may not necessarily slot neatly within existing regulatory frameworks is, however, more likely to be of theoretical interest only. The widespread use of a medium of exchange outside the system of fiat currencies may have a number of consequences. For example, the effectiveness of monetary policy is diluted if the means of exchange is not controlled by a central bank or monetary institution. Similarly, the widespread use of Libra coin may have consequences for the stability of the financial system since, again, significant activity would be taking place outside the boundaries of that system.[380]
1.141
A further twist to the status of virtual currencies as ‘money is offered by the recent decision of El Salvador to adopt Bitcoin for use within its borders. This was achieved through the Bitcoin Law (Ley Bitcoin) adopted by the Legislative Assembly on 8 June 2021. The following points may be noted in relation to this measure:
(a) as noted in the introduction to the law, El Salvador adopted the US dollar as legal tender in 2021. However, approximately 70 per cent of the population does not have access to traditional financial services;
(b) Bitcoin therefore offered a means through which financial inclusion could be promoted;
(c) the law confers the status of legal tender on Bitcoin and (i) allows that it may be used in payment of taxes[381] and (ii) requires that economic agents must accept Bitcoin in payment for goods and services; [382]
(d) whilst the US dollar remains the reference currency for accounting purposes,[383] Bitcoin must be accepted in place of US dollars at the prevailing market rate.[384] Since Bitcoin is not displacing the US dollar as the national currency, there was no obligation on El Salvador to prescribe a substitution rate or recurrent link for these purposes,[385] and the rate at which creditors must accept Bitcoin for US dollar obligations may therefore fluctuate on a daily basis. However, the State is required to guarantee instant convertibility of Bitcoin into US dollars;[386]
(e) all pre-existing US dollar obligations may be discharged in Bitcoin;[387]
378 See generally the Libra Reserve, annexed to the Libra White Paper itself.
379 See ‘Guidance on Cryptoassets—Feedback and Final Guidance to CP 19/3’ (Financial Conduct Authority, January 2019).
380 For a very useful and early paper examining this subject, see Zetzsche, Buckley, and Arner ‘Regulatory Libra; The Transformative Potential of Facebooks Cryptocurrency and Possible Regulatory Responses, UNSWLRSF § (2014) 47. For further consideration of other aspects, see the discussion of Digital Currency Areas at para 24.39 below.
381 Art 4 of the Law.
382 Art 7 of the Law.
383 w Art 6 of the Law.
384 Art 2 of the Law.
385 On the theory of the recurrent link, see para 3.05 below.
386 Arts 8 and 14 of the Law.
387 Art 13 of the Law.
THE CONCEPT OF MONEY 65
(f) the Bitcoin Law thus contains many of the characteristics of a law that is designed to create a new national currency. In particular, it confers upon Bitcoin the status of legal tender even though the unit does not exist in a physical form. The law also deals with a number of consequential matters, such as the use of Bitcoin in payment of taxes;
(g) however, in the context of the status of Bitcoin as ‘money it should be noted that the law does not create Bitcoin as a unit of account, nor can it in any sense be said that Bitcoin is issued by or under the authority of the State. For these reasons—and notwithstanding the enhanced status conferred upon it by the Bitcoin Law—the unit cannot qualify as ‘money’ for the purposes of the definition adopted by this work.[388]
1.142
The challenges posed by Bitcoin and other virtual currencies to the role of central banks has been the subject of much discussion.[389]
Whilst the use of cryptocurrencies generally has prompted a range of concerns, it must be said 1.143
that recent official activity has been heavily directed towards stablecoins (eg such as Libra). At the October 2019 meeting of the IMF, the G7 released its report titled ‘Investigating the Impact of Global Stablecoins: This was published alongside the publication by the Financial Stability Board of its “Regulatory Issues of Stablecoins.[390] The G7 Report highlights various difficulties to which reference has already been made, including:
(a) possible market-concentration/competition risks of a stablecoin are controlled by a dominant proprietary platform;
(b) financial stability risk due to possible contagion into the real economy from the inadequate handling of credit or other risks;
(c) monetary policy risk where the ability of the central bank to influence the economy is diminished through the growing use of non-fiat currencies; and
(d) the implications of stablecoin substitution for national currencies and national monetary sovereignty.
The report continues to note numerous requirements that must support a stablecoin, including (i) legal certainty, (ii) sound governance, (iii) financial, systems and market integrity, (iv) consumer protection, and (v) tax compliance.
The G7 Report does acknowledge potential benefits of stablecoin systems available on 1.144
large platforms. These include the provision of banking facilities to millions of people who cannot access traditional bank accounts. They may also enhance cross-border payments, where the report acknowledges that current systems are ‘slow, expensive, and opaque. Nevertheless, it is clear that, on the whole, the G7 Report is negative on the future of stablecoins. In particular, it would prefer that issues in the cross-border payment market are addressed through the current market structures, rather than through a stablecoin innovation.
388 See the definition at para 1.71 above.
389 See, for example, Agustin Carstens, ‘Money in the Digital Age: What Role for Central Banks’ (Lecture to the House of Finance, Goethe University, 6 February 2018. Some lawyers are unconvinced about the status of virtual currencies. See, for example, Persaud ‘Explaining why Bitcoin is Fake Reveals Why Regulatory Policy is Monetary Policy, Butterworths Journal of International Banking and Financial Law (April 2018) 207, who observes that ‘standing behind Bitcoin is nothing:
390 For these reports, see the publication by the Committe on Payments and Market Infrastructures (Bank for International Settlements), October 2019.
66 THE CONCEPT OF MONEY AND MONETARY SYSTEMS
P. Central Bank Digital Currencies
1.145 It is now appropriate to mention various points about digital currencies issued by central banks. Digital currencies of this kind would, of course, differ significantly from virtual currency in that the digital variety would enjoy officially approved status.
1.146 Various central banks have considered the issue of digital currencies. It could be necessary for any central bank contemplating such matters to ensure that the issue of a digital currency fell within the scope of its legal mandate, or to secure appropriate amendments for that purpose. The status of digital currency issued by a central bank and denominated in the national currency as ‘money’ may be a difficult question, and is considered at paragraph 1.152ff]
However, special legislation would no doubt be required to confer upon it the status of legal tender, since existing legislation relates to money in its physical form. Primary motivations for considering a digital currency include the enhancement of payment security and further reductions in the inefficient use of cash. However, that may be, it appears that central banks are proceeding with caution and are not yet clear that the benefits of a digital currency will outweigh its costs. As a result, none of the exploratory projects have yet finally come to fruition. At the time of writing, the People’s Bank of China has indicated that it will issue a digital currency with a view to replacing physical cash in circulation. However, this will not employ decentralized blockchain technology. Rather, consumers and others would download a mobile wallet and exchange yuan for the digital equivalent, and the use of digital currency could thus be monitored by the central bank. The introduction of this particular digital currency would thus not involve the creation of credit or have any impact on monetary policy.[391]
Projects of this kind are in their infancy and further consideration may therefore be needed at a later date. [392] It has been observed that central banks have done a considerable amount of research on the subject of digital currencies but there is as yet no general consensus on the overall merits and benefits of such a project.[393] However, current interest and research on the subject do allow scope for some further commentary at this juncture.
1.147 The whole subject of central bank digital currencies was considered by the Markets Committee of the Committee on Payments and Market Infrastructures (Bank for International Settlements) in 2018.[394] The Committee's report notes that there are various design options for a central bank digital currency. Variations include (i) would such currencies only be available to a restricted circle of financial institutions, or would they be available to the public, (ii) would the currency be usable on an anonymous basis, and (iii) would the currency have interest-bearing characteristics? In the sphere of payments, the use of a central bank currency could enhance the efficiency of payment systems. On the other hand, central banks may be drawn into requirements for anti-money laundering compliance, and may be called upon to provide information for tax authorities or information involving private disputes.[395] In addition, the transmission of monetary policy may be enhanced through the issue of a central bank digital currency.[396]
391 See ‘China’s PBOC Says its own cryptocurrency is “close” to release, Bloomberg News, 12 August 2019.
392 On these points, see Barontini and Holden, ‘Proceeding with caution—a survey on central bank digital currency BIS papers No 101, January 2019 (Bank for International Settlements). The same point is repeated in the BIS Annual Report for 2019 (at p 57).
393 See ‘Digital Money Across Borders; Macro-Financial Implications’ (IMF Staff Paper, 2020).
394 See ‘Central Bank Digital Currencies, Bank for International Settlements (March 2018).
395 ‘See pages 10-12 of the Report mentioned in the preceding footnote.
396 See page 10 of the Report.
THE CONCEPT OF MONEY 67
In addition, the Legal Department of the IMF has published a very illuminating Working 1.148
Paper on the whole subject.[397] The paper distinguishes between token-based and account-based digital currencies. It notes that token-based digital currencies would only equate to the monetary status of bank notes if that position were achieved through significant revisions to national monetary law. In particular, currency laws currently confer legal tender status on bank notes and coins in physical form. The extension of legal tender status would therefore have to be achieved through legislation to that effect. On the other hand, account-based digital currencies would simply represent a form of central bank money, and no special legislation would be required in that context.[398] In each case, it should be appreciated that the central bank digital currency is not a new monetary unit—rather, it would simply represent another permissible form of payment in the existing national currency.
Significantly, in view of the size and reach of the single currency, the ECB has published a re- 1.149
port on the possible introduction of a central bank digital currency for the euro.[399]Chapter 4 of the report sets out the legal implications of the issue of such a currency for the euro, and suggests a fairly expansive approach to the ECB’s mandate for these purposes. For example, in the event that the digital currency was intended for general circulation and use, then the Report contemplates that this could be achieved on the basis of Article 128, TFEU. That article allows the ECB the exclusive right to issue or to authorize the issue of ‘euro banknotes.
The report argues that this includes a right for the ECB to determine the form and mode of issue of such banknotes, and accordingly may also allow for the issue of the currency through a digital medium. On the other hand, if the digital currency were to be restricted to financial institutions, then this could be sanctioned on the basis of Article 127(2), TFEU, which defines the basic tasks of the ESCB (including monetary policy, the holding of official reserves and the promotion of the smooth operation of payment systems).[400]
The Bank of England and HM Treasury have created a Taskforce to examine the possibilities 1.150
of a central bank digital currency in the United Kingdom.[401] The taskforce is to provide an assessment of the case for a central bank digital currency in this country, to coordinate the required objectives, and to provide guidance on design features and other matters. The establishment of the Taskforce follows on from an earlier consultation process conducted by the Bank.[402]
The potential use of central bank digital currencies has most recently been explored in a fur- 1.151
ther report primarily prepared by the Bank for International Settlements.[403] As the report notes, no major central bank has yet issued a digital currency, although certain projects are
397 See Bossu and others, ‘Legal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law Considerations’ (IMF Working Paper, November 2020). It may be appropriate to note that the Working Paper does not necessarily reflect the views of the IMF itself.
398 See p 41 of the Working Paper mentioned in the preceding footnote.
399 See ‘Report on a Digital Euro (ECB, October 2020).
400 It may be added for completeness that the Bank of England also published a discussion paper titled ‘Central Bank Digital Currency: Opportunities, challenges and design’ (Bank of England, March 2020). The paper includes extensive discussion of objectives, technological issues, monetary and financial stability, and other matters. However, there is no discussion of the legal nature of a digital currency or the legality of issuing such a currency within the scope of the Bank’s current mandate.
401 ‘Bank of England Statement on Central Bank Digital Currency’ (Bank of England Press Release, 19 April 2021).
402 ‘Central Bank Digital Currencies: Opportunities, Challenges and Design (Bank of England Discussion Paper, 12 March 2020).
403 ‘Central Bank Digital Currencies for Cross-Border Payments—Report to the G20’ (Bank for International Settlements, July 2021).
68 THE CONCEPT OF MONEY AND MONETARY SYSTEMS
operating in a pilot phase.[404] Whilst the initial project work has tended to focus on the domestic merits of such a currency, the BIS report notes that digital currencies could be used to enhance the process of cross-border payments, both in terms of time and cost.[405] This would in turn stimulate international trade through lower transaction costs. The achievement of these benefits would depend on a high degree of interoperability between different digital currency systems and may require amendments to national legislation to achieve smooth settlement outcomes.[406] The whole subject therefore remains something of a work in progress.
Q. Local Currencies
1.152
It may finally be appropriate to note the development of local or area currencies in the United Kingdom. These innovations have involved the introduction of physical notes which are intended to promote the spending of money within a local community of shops and outlets that agree to accept it as a means of payment. The objective is therefore to stimulate the local economy and, perhaps in a more abstract way, to promote a sense of community. It must be said that projects of this kind have had, at best, mixed success. A prominent example is offered by the ‘Bristol pound. Participation in this type of community currency scheme is obviously on a voluntary basis, and achievement of the objectives will thus depend on persuasion of local businesses to accept the unit.[407]
1.153 The Bristol pound scheme is operated by a community interest company. The local unit is acquired through a credit union in exchange for sterling on a one-for-one basis. Both the electronic and paper versions of the Bristol pound may be credited to an account with the credit union and exchanged for sterling accordingly. The local unit is therefore effectively backed by a sterling obligation of the credit union.
1.154 The Bristol pound and similar community innovations require limited commentary in the present context. From a monetary law perspective, local units cannot be ‘money’ in the formal sense, since they are not issued by or under the authority of the State. They are specifically designed for use within a local community and participation in such schemes is entirely voluntary. The design of such units means that they cannot achieve general acceptance within the United Kingdom and they lack any form of legal tender status. Without in any way detracting from their wider objectives or aspirations, such units thus cannot account to ‘money in a legal sense.
1.155 It should however be observed that the concept of local currencies has not been limited to the United Kingdom. Local currency projects have also taken root in France, where the Code Monetaire et Financier was amended to accommodate this development. In particular, the Code now provides for the issue of local currencies by foundations, unions, cooperatives and
404 The BIS Report refers to pilot projects in China (e-CNY), the Bahamas (Sand Dollar), and the Eastern Caribbean Monetary Union (DCash).
405 See page 4 of the BIS Report. As the Report points out, the whole system of international payments is cumbersome and expensive, because individual transactions may involve both the paying and the receiving bank, and various correspondent banks as intermediaries between the two ends of the transaction.
406 See page 19 of the Report.
407 Information on this subject is available at <https://bristolpound.org>. For a similar model in south London, see <https://brixtonpound.org>.
THE CONCEPT OF MONEY 69
other entities.[408] Such local currencies are issued under the authority of the State, and there may therefore be some discussion about their status as ‘money’. However, at least insofar as physical notes are concerned, France no longer has the power to issue legal tender banknotes on its own initiative, since the power to authorize such issues is reserved to the European Central Bank.[409] It may therefore remain difficult to categorize such instruments as ‘money’ in the true sense.
408 See Arts L311-5 and 3-116 of the Code. On the whole subject, see Pillard, ‘Monnaies locales complementaires et droit bancaire, Revue de Droit Bancaire et Financier, May/June 2015, p 21.
409 See the discussion at para 31.03, below.
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