Lawyers explain the EU's important definition of virtual currency

Author Jacek Czarnecki is an attorney at Wardynski & Partners, specializing in FinTech, digital currency, and blockchain.

Recently, the European Commission adopted a new legislative proposal to combat terrorist financing and tax evasion, which means that virtual currency exchanges and custodial wallet providers are included in the EU's Anti-Money Laundering Directive. In addition, the EU also defined virtual currencies in law for the first time. In this article, Czarnecki analyzes the impact of this new definition on the blockchain industry.

The European Commission this week adopted a legislative proposal that means virtual currency exchanges and custodial wallet providers are included in the EU’s Anti-Money Laundering Directive.

This move was expected, and it is clear that the European Commission wants to expand the anti-money laundering regulatory framework. However, the importance of this legal proposal may still exceed the anti-money laundering regulations.

The most noteworthy of these is that the EU defined "virtual currency" in law for the first time.

According to the proposal, “virtual currency” means: “… a digital representation of value that is not issued by a central bank or government agency and does not necessarily have to be tied to legal tender, but it must be accepted by natural or legal persons and used as a means of payment and can be used for transmission, storage or electronic transactions.”

This definition is broad, but technologically neutral (and theoretically not limited to cryptocurrencies like Bitcoin).

It also has two main parts: first, the broad concept of a “digital representation of value” that is not issued by a government agency, and second, someone needs to accept it as a means of payment (on an unspecified scale) and have it in electronic form.

It appears that while this definition is broad, it remains unclear how virtual currencies such as Ether (the native token of the Ethereum blockchain) will be treated. This is because, while Ether is traded on exchanges, it is rarely used as a means of payment.

Starting January 1, 2017, all EU member states’ anti-money laundering laws will include this definition. In many countries, this will be the first time that cryptocurrencies have been included in the law.

While this definition will have direct application in anti-money laundering regulation, it is likely to impact other laws as well.

This means that the introduction of a definition of “virtual currency” has the potential to become an anchor point in the legal systems of EU countries. Courts and government agencies will no longer have to interpret their own definitions (sometimes for specific purposes), but will have to take into account the current anti-money laundering legal definition.

Still, it could be a useful tool for national financial regulators or tax authorities, which until now have not had an anchor point in law to work with, and will now be able to use an established definition.

Whether this definition will stand the test of time or allow virtual currency technology to develop and compete in the EU remains to be seen.