Bitcoin In The News: International Reports, California Makes It Legal

by Manatt, Phelps & Phillips, LLP

Virtual and digital currencies continue to be the focus of policy makers around the globe.

In addition to new reports from international bodies addressing both the benefits and risks of the currencies, California enacted a new law removing barriers to recognizing Bitcoin and other digital currency as “lawful money” in the state.

Three international reports recently addressed Bitcoin. First up: The Organisation for Economic Cooperation and Development (OECD) published “The Bitcoin Question: Currency Versus Trust-less Transfer Technology.”

The working paper acknowledged that cryptocurrencies present “genuine policy issues” including consumer protection and money laundering, but focused on the underlying technology, which the OECD believes could ultimately shift the basis of trust in financial transactions and eliminate the need for trusted third parties.

“The general aim of policy should be to encourage technologies that improve competition in the payments system, and to ensure that the use of crypto-currencies remove anonymity where money transmission is concerned (to avoid the darker aspects of Bitcoin use) and to meet minimum requirements for consumer protection,” the OECD concluded.

Just a few days later, the Financial Action Task Force (FATF) published a report suggesting a conceptual framework for understanding and addressing the anti-money laundering and combatting the financing of terrorism (AML/CFT) risks associated with virtual currencies.

The FATF report, “Virtual Currencies – Key Definitions and Potential AML/CFT Risks,” agreed with the OECD that digital currency “has the potential to improve payment efficiency and reduce transaction costs for payments and fund transfers,” as well as improve access to financial inclusion for the underbanked and unbanked.

But the report also outlined a number of potential risks based on the various features of the virtual currency from greater anonymity to a global reach heightening AML/CFT risks. Decentralized systems are “particularly vulnerable,” the FATF noted, lacking a central oversight body or AML software to monitor and identify suspicious transaction patterns, and thwarting law enforcement without a central location or entity for investigative or asset seizure purposes.

The third body weighing in on virtual currency: the European Banking Authority (EBA), which published an opinion advocating for “a substantial body of regulation.”

After identifying more than 70 risks across several categories, the EBA said a regulatory regime was required, including the segregation of client accounts, the establishment of capital requirements, and the creation of “scheme governing authorities” accountable for the integrity of a particular virtual currency scheme.

As no regulation currently exists, the EBA advised as an “immediate response” that EU authorities discourage regulated financial services entities from buying, holding, or selling Bitcoin or other virtual currency until regulation is in place. Importantly, the opinion encouraged the continued innovation and development of virtual currency outside of the financial sector, which could still allow financial institutions to maintain relationships with businesses engaged in the field of virtual currency.

In the United States, digital and virtual currencies (as well as coupons and reward points) became legal money in California with the repeal of Section 107 of the Corporations Code, which previously characterized alternative forms of value as not having the status of lawful money. In recognition of changing times and changing payment systems, state legislators passed AB 129 and Governor Jerry Brown signed the updated law.

Although regulators have not taken action against the use of digital currencies in the state, the bill’s sponsor, Rep. Roger Dickinson, was concerned the old law could inhibit the growth of virtual currency in California. “In an era of evolving payment methods, from Amazon Coins to Starbucks Stars, it is impractical to ignore the growing use of cash alternatives,” Rep. Dickinson said in a statement about the bill’s passage.

To read the OECD paper, click here.

To read the FATF paper, click here.

To read the EBA’s opinion piece, click here.

To read AB 129, click here.

Why it matters: Virtual currencies are increasingly being taken seriously by regulators around the globe, who are recognizing the benefits offered by the technology despite the risks. While the OECD took a bullish stance on the disruptive benefits of the technology, the FATF fleshed out terms and concepts related to virtual currency and focused on AML/CFT issues. The EBA opinion followed a much more cautious approach, recommending that financial institutions take a hands-off approach until regulation is in place – yet leaving the door open for some interaction between financial institutions and businesses associated with virtual currency. In the meantime, California has removed a potential barrier to use of virtual currencies in that state.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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