1. 1 Expert Mission on Electronic Payments Bitcoin as virtual currency – analysis Adam Janiszewski TAIEX mission in Baku 5-7 May 2015

2. 2 Virtual currencies – definition (1)  “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” (2012, European Central Bank)  “a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically” (2014, EBA Opinion on ‘Virtual Currencies’).

3. 3 Virtual currencies – definition (2) Description of virtual currency:  lack of legal definition in EU law,  virtual (non-material) state of currency,  control by issuer/lack of control of the issuer,  lack of value basis in economic indicators,  as principle – used outside the banking clearing system,  used on closed virtual society (principle) or in real life,  speculative or trade purpose of possession of virtual currency.

4. 4 The most popular virtual currencies  More than 500 virtual currencies - Total Market Cap: $ 3,791,769,066 (on 23/04/2015),  VC – traded on more than 1700 markets,  Actual list of virtual Currencies on: www.coinmarketcap.com,www.coinmarketcap.com  Bitcoin – the most popular ($ 3,318,619,078) (on 23/04/2015),  Remaining top 10 (Total Market Cap) : Ripple ($ 253,513,761), Litecoin ($ 54,783,608), Dash ($ 18,106,371), Stellar ($ 12,985,828), BitShares ($ 11,533,256), MaidSafeCoin ($ 10,572,122), Dogecoin ($ 10,567,975), Nxt ($ 9,581,862), BanxShares ($ 7,096,779), Peercoin ($ 5,342,045).

5. 5 Basic information about Bitcoin (1) Bitcoin (BTC) - invented by Satoshi Nakamoto in (2009) First decentralized digital currency (the system works without a central repository or single administrator) – open source code. The system is peer-to-peer based model. Transactions are verified by network nodes and recorded in a public distributed ledger called the ”block chain”. Small multiples of bitcoin used as alternative units are millibitcoin (mBTC), microbitcoin (µBTC), and satoshi (the smallest multiple of bitcoin representing 0.00000001 bitcoin, which is one hundred millionth of a bitcoin).

6. 6 Basic information about Bitcoin (2) Limit of bitcoins (21 million). Supply growth - 25 bitcoins per block (approximately every ten minutes) until mid 2016, and then afterwards 12.5 bitcoins per block for 4 years until next halving. This halving continues until 2110-2140 when 21 million bitcoins have been issued. Mining bitcoins – mining pools (special IT device). Mining – “proof of work” – new block in block chain.

7. 7 Basic information about Bitcoin (3) Transaction – Public key, private key – bitcoin digital wallet. Criminal activity: black market, money laundering, financial pyramid? Security – attacks on the electronic platforms trading Bitcoin. Legal status in the UE Member States and in the third countries.

8. 8 Is Bitcoin the electronic money? (1)  EMD – definition – ‘electronic money’ means electronically, including magnetically, 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 as defined in point 5 of Article 4 of Directive 2007/64/EC, and which is accepted by a natural or legal person other than the electronic money issuer;  Art. 11(2) of the EMD - Member States shall ensure that, upon request by the electronic money holder, electronic money issuers redeem, at any moment and at par value, the monetary value of the electronic money held.  Art. 11(3) of the EMD - the contract between the electronic money issuer and the electronic money holder shall clearly and prominently state the conditions of redemption, including any fees relating thereto, and the electronic money holder shall be informed of those conditions before being bound by any contract or offer.

9. 9 Is Bitcoin the electronic money? (2)  Bitcoin is not issued by a single entity (issuer) – it is created by the system diffused over the word,  Bitcoin is not issued on receipt of funds – it is “excavated”,  There is no requirement to redeem the bitcoin.  In line with Polish legislation (Foreign Exchange law) bitcoin and other virtual currencies is not a legal tender in Poland.

10. 10 Is trading the bitcoin a payment service under the PSD? (1)  PSD - ‘payment account’ means an account held in the name of one or more payment service users which is used for the execution of payment transactions;  PSD - ‘payment transaction’ means an act, initiated by the payer or by the payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and the payee;  PSD - ‘payment order’ means any instruction by a payer or payee to his payment service provider requesting the execution of a payment transaction;  PSD - ‘payment instrument’ means any personalized device(s) and/ or set of procedures agreed between the payment service user and the payment service provider and used by the payment service user in order to initiate a payment order.  PSD - ‘funds’ means banknotes and coins, scriptural money and electronic money as defined in EMD.

11. 11 Is trading the bitcoin a payment service under the PSD? (2)  Bitcoin Wallet is not payment account – there is no service provider who runs the account and accepts payment orders (no contractual relation between provider and user) – trade of Bitcoins is based on rule P2P.  Transfer of Bitcoin is not a payment transaction within the meaning of the PSD – there is no provider who places Bitcoin on the account, transfer it or withdraw it from the Bitcoin Wallet.  Public key of Bitcoin is not payment instrument within the PSD – no provider to authorize transaction and to accept an order to initiate transaction.  Bitcoin is not covered by definition of “funds” under PSD.

12. 12 European Banking Authority on virtual currencies EBA/WRG/2013/01 (12 December 2013) “Warning to consumers on virtual currencies” The EBA has identified several characteristics and risks that you should be aware of when buying, holding, or trading virtual currencies:  possibility to lose your money on the exchange platform,  possibility that virtual money may be stolen from digital wallet,  user is not protected when using virtual currencies as a means of payment,  the value of virtual currency can change quickly, and could even drop to zero,  transactions in virtual currency may be misused for criminal activities, including money laundering.  Trade of virtual currencies may be subject to tax liabilities.

13. 13 Conclusions  Virtual Currencies create their own settlement units (own name of currency).  Virtual currencies are usually accepted in virtual societies (games) but may be also accepted and subject to speculative trade in real life.  Virtual currencies are not legally regulated on EU level (nor national).  As a principle - the issuer of the Virtual Currency (if there is one) is not financial institution regulated by EU legislation and subject to financial supervision.  There is not state guarantee for lost of virtual currency.  Increase of volume of turnover of Virtual Currency and increase of its presence in real life will enhance the EU or national Regulator to establish the legal frames for Virtual Currencies.

14. 14 Expert Mission on Electronic Payments Thank you for your attantion