Presented in Berlin, June 2017

1. B L O C K C H A I N A N D
C RY P T O C U R R E N C Y R E G U L AT I O N
D R A N D R E S G U A D A M U Z , U N I V E R S I T Y O F S U S S E X

2. A P O L O G I E S …

3. … A N D A S T O RY

4. L E G A L I S S U E S
• Legal status of
cryptocurrencies
• Contract formation
• Criminal and fraud issues
• Regulation strategies

5. L E G A L S TAT U S O F
C RY P T O C U R R E N C I E S

6. C RY P T O -
C U R R E N C I E S ( C C S )
• A cryptocurrency is a digital
or virtual currency that uses
cryptography for security.
• Impossible* to counterfeit.
• It’s not issued by any
central authority, rendering
it theoretically immune to
government interference or
manipulation.

7. I S I T A PAY M E N T
S Y S T E M ?
• CCs don’t fit well with
existing payment systems:
• Two party systems: cash,
barter
• Three party systems:
Paypal, escrow
• Multi-party system:
credit cards, debit cards,
cheques,

8. I S I T A
C U R R E N C Y ?
• Depends on how national law
defines currency, and whether it
allows only one legal tender.
• Some countries allow
circulation of foreign currencies,
or even alternative currencies.
• Some countries allow one legal
tender, and several legal
currencies.
• Question is who can create new
value.

9. U S L A W
• In the United States, only the US Dollar is legal tender (31 U.S.C. §
5103).
• Similarly, only the Mint and the Federal Reserve can produce coins
and currency, which are the only means of legal tender.
• “Whoever, except as authorized by law, makes or utters or passes,
or attempts to utter or pass, any coins of gold or silver or other
metal, or alloys of metals, intended for use as current money,
whether in the resemblance of coins of the United States or of
foreign countries, or of original design, shall be fined under this title
or imprisoned not more than five years, or both.” 18 U.S.C. § 486

10. L I B E R T Y
D O L L A R
• Currency issued by
company in Idaho
supported by gold and
silver certificates.
• Libertarians flocked to use
it.
• Creator got charged and
convicted of issuing his
own currency.

11. I S I T E L E C T R O N I C
M O N E Y ?
D I R E C T I V E ( 2 0 0 9 / 1 1 0 / E C )
• 1. electronically, including magnetically,
stored monetary value;
• 2. as represented by a claim on the issuer
which is issued on receipt of funds for
the purpose of making payment
transactions;
• 3. the transaction is 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;
• 4. which is accepted by a natural or legal
person other than the electronic money
issuer.

12. I S I T A C O M M O D I T Y ?
“The term “commodity” means wheat, cotton, rice, corn, oats, barley,
rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum
tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard,
tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils),
cottonseed meal, cottonseed, peanuts, soybeans, soybean meal,
livestock, livestock products, and frozen concentrated orange juice, and
all other goods and articles, except onions (as provided by section 13–1
of this title) and motion picture box office receipts (or any index,
measure, value, or data related to such receipts), and all services, rights,
and interests (except motion picture box office receipts, or any index,
measure, value or data related to such receipts) in which contracts
for future delivery are presently or in the future dealt in.” 7 U.S. Code
§ 1a

13. I S I T A
S E C U R I T Y ?
• Any tradable financial instrument of
any kind.
• "Any note, stock, treasury stock,
bond, debenture, certificate of
interestor participation in any profit-
sharing agreement or in any oil,
gas, or other mineral royalty or
lease […]
• debt (banknotes, IOUs)
• equity (stock)
• derivatives (futures and options)

14. I T ’ S A
C O M M O D I T Y
• The US Commodity Futures
Trading Commission (CFTC)
declared in 2015 that Bitcoin
is covered by the
Commodity Exchange Act.
• “The definition of a
‘commodity’ is broad. Bitcoin
and other virtual currencies
are encompassed in the
definition and properly
defined as commodities.”

15. B L O C K C H A I N S

16. W H AT I S A
B L O C K C H A I N ?
• A blockchain is quite simply
any open, cryptographic,
decentralised ledger.
• The ledger is public and
decentralised, and since
anyone can check past,
present and proposed
transactions, there is
increased reliability in the
system.

17. W H AT I S A B L O C K C H A I N ?

18. B L O C K C H A I N
F U T U R E
• Verify banking
transactions.
• Verify bets.
• Verify music uses to give
royalties to artists real
time.
• Identify a work owner.
• Verify contracts.

19. C H A R A C T E R I S T I C S
• Proof of Work. Reward for running the program to verify
transactions.
• Authentication. This is the main function of a blockchain, the
implementation must be designed to validate transactions
securely and unequivocally.
• Decentralization. The blockchain must be decentralized, so
copies of the entire ledger cannot be held centrally. This
presents a few technical problems, such as the increasingly
unmanageable size of the blockchain as more transactions
accumulate.

20. C A N A B L O C K C H A I N
B E U S E D T O C O N D U C T
A C O N T R A C T ?
• Yes, if the parties can express
properly offer and acceptance
(and consideration), and other
formalities according to
national law.
• Art 9 E-commerce Directive
2000/31/EC: “Member States
shall ensure that their legal
system allows contracts to be
concluded by electronic
means.”

21. H O W E V E R …

22. C R I M E A N D F R A U D

23. FAV O U R E D C U R R E N C Y O F T H E D A R K
S I D E

24. H O W E V E R …

25. D A R K N E T

26. D A R K N E T

27. D A R K N E T

28. U L B R I C H T A N D S I L K R O A D

29. H O W E V E R

30. A H I S T O RY O F
F R A U D A N D
H E I S T S
• Allinvain 25k BTC theft
(June 2011).
• 78k MyBitcoin theft (July
2011).
• Bitcoin Savings and Trust
ponzi scheme (2011–2012),
est. 263024 BTC.
• http://bit.ly/2s6aSmV

31. M T G O X
• Former Magic The Gathering card exchange outfit run by
Mark Karpeles, fugitive from French authorities.
• At some point MtGox handled 90% of all BTC transactions
• MtGox reported in February 2014 that it may have lost
nearly $500m (£300m) worth of BTC
• Filed for bankruptcy protection in Japan and US
• Karpeles refuses to attend hearings, should be in jail

32. D E C E N T R A L I Z E D A U T O N O M O U S
O R G A N I Z AT I O N ( D A O )

33. D A O “ T H E F T ”
• DAO operates a pool of millions of USD worth in Ether
(ETH).
• Only those participating in contract verification can
withdraw funds according to terms of participation.
• On June 17 2016, a bug in the code allowed malicious
party to syphon funds from common pool (estimated
3.6m ETH, about $50 million USD at the time).
• Hard fork from developers “turned back time”.

34. R E G U L AT I O N

35. P R I C E H I S T O RY C H A R T

36. P R I C E H I S T O RY ( U S D )
• $0.08 August 2010
• $1.00 February 2011
• $10.11 June 2011
• $1242 November 2013 (first bubble)
• $2899 June 11 2017
• $2351 June 15 2017

37. S H O U L D W E ?

38. S O M E P R O B L E M S W I T H B I T C O I N
• Hoarding
• Deflation
• Completely dependent on intermediaries
• Unregulated markets attract fraudsters and hackers
• Susceptible to hacking attacks
• You lose it, it’s gone forever, no recourse, no appeals

39. N E E D F O R R E G U L AT I O N
• Regardless of Bitcoin’s legality, there is a lot of money
changing hands.
• Exchanges need to be regulated as financial
institutions
• Taking money, giving credit and keeping accounts is a
highly regulated endeavour in Europe (and elsewhere).
• History of fraud and exchanges going bust.

40. R E G U L AT I O N S T R AT E G I E S
• (1) ‘Virtual sovereigns’: virtual currency providers will serve as regulators by
enforcing the terms of their contracts with users to prevent cyber-fraud and
ensure proper behaviour.
• (2) Prohibition: governments could try to prohibit the use of Bitcoin.
• (3) Selective Prohibition: government minimise the real-world impact of
virtual currencies by banning the sale of real-world goods for virtual currency.
• (4) ‘Real-World Assisted Virtual Currency Self-Governance’: governments
provide support for mechanisms whereby users of virtual currencies can
agree upon and enforce their own ‘community standards’ and rules of
conduct.

41. W I L L T H E R E B E
R E G U L AT I O N ?
• No will to regulate at the
moment.
• Governments aiming to
ensure it is covered for tax
purposes.
• Many central bank
authorities have issued
warnings about Bitcoin and
crytpocurrencies.

42. E U R O P E A N
PA R L I A M E N T
B R I E F I N G 2 0 1 4
• “Due to the anonymity
embedded in the system
Bitcoin has the potential
to be used for money
laundering and tax
evasion. However,
research so far shows
this potential has not yet
been taken up on a
significant scale.”

43. S A P I N R E P O R T I N F R A N C E ( 2 0 1 4 )
1. Limit anonymity by making it mandatory for intermediaries and
exchanges to require proof of identity upon opening an account.
2. Clarify the taxation of virtual currencies with the publication of a
set of instructions for consumers and regulators.
3. Propose a European-wide approach to Value Added Tax (VAT).
4. Propose, after discussion with industry, to cap payments in virtual
currencies, similar to existing caps on cash payments.
5. Regulate at European level platforms that exchange virtual
currencies against the official currency.

44. E U R O P E A N
B A N K I N G
A U T H O R I T Y ( 2 0 1 5 )
• “VCs are not legal tender, which
means the following features are
not fulfilled: (a) mandatory
acceptance, i.e. that the creditor
of a payment obligation cannot
refuse currency unless the parties
have agreed on other means of
payment; (b) acceptance at full
face value, i.e. the monetary value
is equal to the amount indicated;
and (c) that the currency has the
power to discharge debtors from
their payment obligations.”

45. U S S E C U R I T I E S A N D E X C H A N G E
C O M M I S S I O N ( S E C )
• SEC looked at creation of a derivatives market for
BTC.
• Report includes scathing indictment of BTC’s stability.
• The SEC concluded that the combination of volatility
and lack of regulatory oversight make the proposed
creation of a derivatives market a risky endeavour that
it cannot support, although it opens the door for a
future examination of this decision.

46. S O M E O T H E R R E G U L AT O RY R E S P O N S E S
• China banned their banks paying new money to their
exchanges, stifling the market and severely reducing
its implementation.
• US authorities issued guidelines that BTC exchanges
should comply with money laundering regulations.
• HMRC has detailed BTC status for tax purposes.
• Authorities have expressed concern, and mostly
adopted “wait and see” strategy.

47. C O N C L U D I N G …

48. @ T E C H N O L L A M A
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