Virtual Currencies in the European Single Market

Published 07 June 2016

What are virtual currencies?

European Banking Authority (EBA) regards virtual currencies as being a digital representation of value that is neither issued by a central bank or a public authority nor necessarily attached to a regular currency, but is accepted by natural or legal persons as a means of payment, and can be transferred, stored or traded electronically.

The leading technology which forms the basis for more than 600 virtual currency schemes is known as distributed ledger technology (or DLT), which facilitates 'peer-to-peer' exchanges. The most prominent of the virtual currencies using DLT to date is Bitcoin; while it was launched in 2009 and currently holds a market share among DLT-based VCs of almost 90 %, with a market value of the outstanding Bitcoins of around EUR 5 billion.

European Parliament: Change in the Dialogue Around Virtual Currencies

We have been following with interest the discussions at the European Parliament on the issues surrounding how to treat virtual currencies such as Bitcoin in the “real” economy, and in particular how the discussions have started to shift away from just denouncing virtual currencies as the tools of terrorists and criminals and towards seeing them as a “potential tool for good”.  To see the full text of the recent European Parliamentary Report, go to”

Problems Associated with Virtual Currencies

There is still a recognition that virtual currencies can be used to hide criminal conduct such as money laundering, terrorist financing and tax fraud.

There have been substantial fluctuations in the exchange rates of some virtual currencies, and if they become more widely used, it is likely that the potential for speculative bubbles in relation to instruments not directly connected to the real economy, would increase the risk to consumers, including through losses arising from financial losses where a platform that exchanges or holds virtual currencies fails or goes out of business.

Increased use of virtual currencies takes us further down a road where the exchange rates between national currencies and virtual currencies are determined by mathematical algorithms, which are not clearly understood and which could be used to destroy value in particular virtual currencies or even in national currencies. It is not clear who would control the generation of the appropriate mathematical algorithms and how resilient and reliable, governance structures could be introduced to kerb those with malicious motivations.

Potentially Positive Outcomes with Virtual Currencies

Notwithstanding the risks, there is an increasing recognition that virtual currency technologies could have positive implications.

Privacy Rather than Anonymity

Block chain technology used by virtual currencies facilitates privacy, but since transactions are also associated with a unique user ID, there is the possibility (with appropriate regulation) of using virtual currency technology to make payments more rather than less transparent. The very technologies which have been used to facilitate criminal enterprise might then be used to combine ease of use, low transaction and operational costs with a high degree of privacy, short of full anonymity so that transactions would be traceable to a certain extent in case of malfeasance and so that transparency for market participants in general could be increased, thereby decreasing rather than increasing tax evasion and money laundering.

Decreases in Cross Border Transaction Costs

More widespread use of virtual currencies also brings with it the potential to reduce costs in making payments and transfers, lowering transaction and operational costs for payments and especially cross-border transfer of funds, potentially to below 1 %, compared to the traditional 2 % – 4 % for online payment systems –, and to more than 7 % on average for the cross-border transfer of remittances. This could have downstream positive implications for secure online micro payment solutions for smaller businesses on a worldwide basis.

Benefits of Decentralised Architecture

The inherently decentralised architecture of DLT, means that it might continue to operate reliably even if parts of its network were to malfunction or to be hacked, and this could actually promote greater trust in international financial systems.

Next Steps for Europe?

The Report stresses the importance of consumer awareness, transparency and trust when using virtual currencies; calls on the European Commission to develop, in cooperation with the Member States and the virtual currencies industry, guidelines with the aim of guaranteeing that correct, clear and complete information is provided for existing and future virtual users, in terms of how virtual currency schemes are organised and operated and how they distinguish themselves from regulated and supervised payment systems in terms of consumer protection.

As part of an initial package of measures to start regulating virtual currencies, there is a  call in the Report to consider extending the scope of the Anti-Money Laundering Directive to include virtual currency exchange platforms, in particular where convertible virtual currency activities intersect with the regulated financial system.


One key problem of regulating in the area of new technology, is that it is often difficult to define appropriate safeguards in a timely manner before something bad happens. Also , the very act of appearing to regulate virtual currencies may itself convey an incorrectly reassuring message to the public about the advantages or security of virtual currencies.

If virtual currencies are an issue for your business, and in particular if you are considering raising crowdfunding finance for your business using Bitcoin, contact Katherine Evans of our Technology Law team at