Legal Risks and Challenges Related to Virtual Currencies

Introduction

Since the appearance of Bitcoin, the first and currently most popular virtual currency, no single day has passed away without market news, references and commentaries on the developments of the virtual currency operations, markets and technology. In 2019, key players of the financial markets and social networks also launched a project, which aimed to establish a virtual currency to be used by billions around the globe (Libra-project – White Paper). Even if the implementation of this projects is delayed or even derailed, it seems there are significant public and market interests towards the virtual currencies, which could challenge the dominance of the traditional or fiat currencies and may raise serious questions related to the monetary sovereignty of the states.

Besides the remarkable enthusiasm, there are several essential questions not yet answered on nature and operation of the virtual currencies. Some examples of these questions:

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  Can virtual currencies be regarded as money or what are the intrinsic features and preconditions to be met for the recognition of any of them as money?

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  Can they be credible alternatives to traditional currencies?

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  What would be the consequences of legal recognition as money of any of them?

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  Do they need to be regulated and what aspects of them can be regulated?

Besides these fundamental issues, one can endeavour specific related legal topics like the usage of virtual currencies in taxation, lending and borrowing, savings, payment of salaries, law enforcement, etc.

• Both lists can be further extended.

According to the Coinmarketcap database, in January 2020, there were more than 5000 existing virtual currencies; however, this number can change at any time, due to the unregulated and uncontrolled creation and issuance of them. Practically, anyone can create their own one. At the same time, the market capitalisation of the virtual currencies was around USD 238 bn. Bitcoin’s share of the whole market is around 65%. The number and market of the virtual currencies are constantly growing. Since the beginning of 2018, their number has grown by 3500!

I predicted that there was a significant number of legal risks and uncertainties around these new assets. The purpose of this chapter to provide an insight primarily into these legal issues and – where it was possible – to give also answers and/or formulate possible solutions either. Due to the close relevance, in certain cases, I also refer to economic aspects of the topic, however, my primary intention was to give a legal assessment.

Background

Currently, virtual currencies are legally not regulated in general, neither by domestic nor by international laws. They are designed to be digital forms of money based on the internet, mainly but not exclusively on the blockchain and the distributed ledger technology (DLT). Issuers or creators are not central banks entitled to issue banknotes and coins on behalf of the state. Creators are developer groups without any central authority. In many cases (e.g. in the case of Bitcoin) the developers’ or creators’ identity is unknown. Users of the virtual currencies are members of the internet’s virtual community.

To understand better their economic and legal background, it is necessary to find proper definitions and to examine their functions and forms. Monetary sovereignty is a substantial part of the concept of state sovereignty. Since the emergence of virtual currencies as privately created money raises several questions in this relation, this heading also analyses the scope of the monetary sovereignty and the impacts of virtual currencies on it. For a more precise understanding, it is also necessary to gain a brief insight into the technology either.