3.01  The present chapter examines the consequences of cryptocurrencies for international and public law conceptions of money.¹

3.02  As a matter of approach, it is necessary at the outset to consider prevailing legal theories of money and, thereafter, to consider the extent to which cryptocurrencies either conform to or depart from such theories.

3.03  As might be expected, technological advances and the advent of cryptocurrencies such as Bitcoin, Ethereum, Litecoin, and many others pose direct challenges to longstanding canons of monetary law.

3.04  The present chapter will therefore begin with a brief examination of current theories of money. Thereafter, the status of cryptocurrencies will be considered (p. 34) against the backdrop of those theories. This will be followed by a review of the implications of such currencies in the public and international law contexts.

3.05  Both international and national conceptions of money have generally been built on the assumptions that (i) the issue of physical money is the exclusive prerogative of the issuing State, and (ii) even money that is of a scriptural² or electronic nature will be expressed in the national unit of account. These assumptions are longstanding and essentially continue to hold good even in the context of monetary unions, where a single currency is shared by a group of States.³

3.06  Equally, because the creation of a monetary system was seen as a State monopoly, it necessarily followed that the State controlled (i) the medium of exchange, (ii) the unit of account,⁴ and (iii) the monetary store of value.⁵ It also necessarily followed that the State’s control over its monetary system allowed it to determine its own monetary and exchange rate policies. The criteria just formulated represent the State theory of money which may perhaps be regarded as the dominant theory at present.⁶ The theory was first expounded with clarity by GF Knapp in his Staatliche Theorie des Geldes.⁷

3.07  However, whilst the State theory of money currently holds sway, it does not completely dominate the theoretical landscape. As its name suggests, the competing, Societary theory of money focuses its approach to money on the conduct of society as a whole. Anything that in practice functions as a medium of exchange must be regarded as ‘money’, even though it lacks the legal underpinning required by the State theory.⁸ This may accord with an economist’s approach to (p. 35) money but—from a legal perspective—the theory obviously lacks the certainty and clarity that lawyers are said to crave. Yet the Societary theory has a respectable history. In 1871 an Austrian economist, Carl Menger, published his Grundsatze der Volkwirtschaftslehre (Principles of Economics). Menger considers that the custom and practice of markets created a means of exchange that guided economies beyond pure barter. Thus, he notes, cattle were effectively an early means of exchange. Whilst a buyer of cattle may not necessarily have required them for use as cattle, he could be reasonably confident that others would accept them as a means of exchange for goods or assets that he did require. Thus, society was creating its own means of payment, without reference to any wider legal framework. Whilst this approach cannot be fully followed through without reservations or exceptions, the writer would argue that (i) the Societary theory of money provides a convincing description of the historical origins of money and society’s recognition of the need for a means of exchange, but (ii) modern legal and regulatory developments effectively mean that the Societary theory has now been supplanted by the State theory. It is perhaps unsurprising that the State theory retains its dominance. For lawyers, it is reassuring that the State’s constitutional infrastructure provides the Grundnorm for the monetary system. For governments and central banks, the theory settles monetary authority firmly within their own spheres of authority.

3.08  That said, and given that further reference will be made to the Societary theory at a later stage, it is necessary to make an observation as to the legal content of the Societary theory. The notion that society can, through its practices and customs, create a means of exchange necessarily connotes that the tokens concerned achieve a substantial level of general acceptance within the community concerned—how, otherwise can it legitimately constitute a means of exchange? The challenges posed by this threshold will be considered below.

3.09  In order to pursue the discussion, it now becomes necessary to provide a working definition of a cryptocurrency for present purposes. A cybercurrency or virtual currency has been described as:

a digital representation of value that can be digitally traded and functions as (i) a medium of exchange and/or (ii) a unit of account and/or (iii) a store of value, but does not have legal tender status (i.e., when tendered to a creditor as a valid and legal means of payment) in any jurisdiction. It is not issued or guaranteed by any jurisdiction, and fulfils the above functions only by agreement with the community of users of the virtual currency . …⁹

(p. 36) The key point of distinction with national currencies is therefore the lack of legal tender status for cryptocurrencies,¹⁰ with the result that cryptocurrencies serve as money only by agreement among the contracting parties.¹¹ If one adheres to the State theory of money in its fullest rigour, then cryptocurrencies can never be ‘money’ because they lack the necessary origins within the legislation and the machinery of the State.

3.10  This definition is to some extent mirrored in a report on virtual currencies issued by the European Central Bank in 2012, which notes that ‘a virtual currency is 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’.¹² In 2015, the ECB adopted a revised definition, referring to virtual currencies as ‘a digital representation of value, not issued by a central bank, a credit institution or e-money institution, which in some circumstances can be used as an alternative to money’. In common with the definition given in paragraph 3.05 above, the ECB also states that ‘the ECB does not regard virtual currencies, such as Bitcoin, as full forms of money as defined in economic literature. Virtual currency is also not money or currency from a legal perspective’.¹³

3.11  It should be noted that the materials discussed above predate the decision of the Court of Justice in a case on Bitcoin in the context of the EU’s VAT Directive,¹⁴ where the Court noted that Bitcoin ‘is neither a security conferring a property right nor a security of a comparable nature …’. To the contrary, ‘the Bitcoin virtual currency has no other purpose than to be a means of payment and … it is accepted for that purpose by certain operators’. On that basis, it was held that transactions effected through a Bitcoin/traditional currency exchange were ‘transactions concerning currency, bank notes and coins used as legal tender’ within the terms of an applicable exemption from value added tax. For this purpose, Bitcoin as a means of payment was equated with other currencies, since it served no other purpose. Given the language employed in the VAT exemption, it seems to be fairly clear that the Court of Justice regarded Bitcoin as equivalent to ‘money’, and other commentators have expressed a similar conclusion.¹⁵ The decision is (p. 37) clearly of significant interest in the present context, but (i) one of the indicia of ‘money’ is that it is generally accepted as means of payment, and (ii) whilst the judgment considers the acceptance of Bitcoin, it does not discuss whether Bitcoin is generally accepted for these purposes. From a purely monetary law perspective, this must be regarded as a flaw in the judgement, and, as a result, it is submitted that this decision does not detract from the views that have been discussed above.

3.12  By way of summary, it may be observed that:

1. (a)  cryptocurrencies plainly do not constitute ‘money’ within the State theory, since they lack the necessary foundation and origin as the unit of account within the legal system of a country; and

2. (b)  likewise, cryptocurrencies do not constitute ‘money’ within the Societary theory, since there is no indication that they enjoy the necessary level of general acceptance within a given community.¹⁶

3.13  Accordingly, whether one subscribes to the State theory or the Societary theory, the monetary law outcome for cryptocurrencies is the same in each case.

3.14  As has been shown above, the Societary theory explains the origins of money, whilst the State theory is more appropriate in the context of modern monetary frameworks. It must therefore be accepted that a massive growth in the use and acceptance of cyber-currencies might prompt a reconsideration of the definition of ‘money’ itself. However, matters are not yet close to that stage.

3.15  The above paragraphs provide a sufficient description of cryptocurrencies for present purposes. Subject to the issues that arose in the VAT Directive case, they also confirm an official-level view that cryptocurrencies are not ‘money’ within the traditional legal sense¹⁷ and—despite the contrary indicators from the Court of Justice—it is suggested that this view is correct. So how can cryptocurrencies affect international or public law approaches to money? And what are the practical consequences of cryptocurrencies in these specific areas of law?

3.16  As a general consideration, it may be said that public international law recognizes the concept of money as a creature and creation of a national legal system.¹⁸ (p. 38) Perhaps as a consequence of that position, international law does not seem to have had the occasion or opportunity to develop a self-standing definition of ‘money’. International law commentators refer to the definitions and theories of money noted in paragraphs 3.05–3.08 above and do not appear to suggest that any refinements are necessary when money is considered within the framework of public international law.¹⁹ This approach would appear to be correct and, for the reasons already given,²⁰ it must follow that cryptocurrencies are not ‘money’, whether viewed from the perspective of a domestic legal system or through the prism of international law. It is therefore possible to conclude that the creation of cryptocurrencies should not have any consequences for national or international legal conceptions of money.²¹

3.17  But what of the concept of monetary sovereignty, as distinct from money alone? Most countries create and issue their own national currencies. Whilst it is true that currencies such as the euro have been established by treaty between a number of States, the currency only came into existence through an exercise of national sovereignty within each individual member State (that is to say, through the ratification of the treaty concerned). Whilst the Articles of Agreement of the International Monetary Fund pre-suppose the existence of national monetary sovereignty,²² they do not explicitly state, define, or acknowledge the principle,²³ nor do they attempt any definition of ‘currency’ or ‘money’.²⁴ The most often cited authority for the existence of national monetary sovereignty is the 1929 judgment of the Permanent Court of International Justice in the Serbian Loans case, where it is noted that ‘It is indeed a generally accepted principle that a state is entitled to regulate its own currency’.²⁵ The available materials are relatively sparse, although (p. 39) there seems to be no doubt about the general principle of national monetary sovereignty.²⁶

3.18  At a domestic level, courts have recognized the sovereignty of other nations with respect to their national currencies and, correspondingly, have recognized an obligation to prevent the counterfeiting of foreign currencies within their own borders. This duty has been most directly recognized by domestic decisions in the United States²⁷ and in Australia.²⁸ The issue arose for consideration in the English courts in the nineteenth century, although the case was not a direct instance of counterfeiting and the decision is largely (although not exclusively) based on considerations of private law.²⁹ Nevertheless, and to this limited extent, it may be said that national monetary sovereignty is not merely a right of the issuing State but also that the recognition of the right represents an obligation of other States.³⁰ But, whilst recognition of monetary sovereignty sets the background to the present discussion, it is of only limited assistance in determining the consequences of cryptocurrencies in international law. This must necessarily be the case. The issue of a traditional currency is a quintessentially sovereign act which is capable of recognition and consequences under international law. In contrast, the creation of a cryptocurrency is a private or commercial act by individuals who are not representing the State in that endeavour.³¹ This view is reinforced by the fact that a cryptocurrency has no ‘nationality’ as such—transactions in cryptocurrencies can be initiated from a computer anywhere in the world, at any time. So what are the consequences of cryptocurrencies for public international law? Given (p. 40) that obligations under international law fall primarily on States themselves, it is difficult to identify the content of any particular obligations with reference to cryptocurrencies. But it may be possible to make a few general observations.

3.19  First of all, and aside from the duty to prevent counterfeiting, States do not owe any customary international law obligations with respect to the protection of other countries’ monetary systems.³² Consequently, if a State felt that its monetary or financial system was threatened by the increasing use of cryptocurrencies,³³ it would have no legal right to call upon other States to suppress the creation or use of the cryptocurrencies concerned. This position is reinforced by the decentralized and anonymous nature of cryptocurrencies, which means that it is very difficult to attach any form of territorial or national responsibilities to this phenomenon. It is necessary to enter one reservation to this analysis, however unlikely it may be in practice. If a party present in country A sought to use or promote cryptocurrencies in a manner that was deliberately designed to undermine the economic or financial system in country B, then country B may have an international right to call upon country A to suppress that activity. This view flows not from specific considerations of monetary law but from ‘every State’s obligation not to allow knowingly its territory to be used for acts contrary to the rights of other States’.³⁴ As stated, it is difficult to imagine that this issue will arise in practical terms.

3.20  Secondly, it is conceivable (if unlikely) that a State may seek to fulfil an international financial obligation by tendering payment in a cryptocurrency. This could arise in two alternative situations:

1. (a)  A cryptocurrency could be identified as the money of account for payment under a treaty. This would depend upon the terms of the treaty itself and it seems inherently unlikely that there would be an express or inferred agreement to accept payments through this medium;

2. (b)  A tribunal could find that a cryptocurrency was the appropriate medium for the compensation of an international wrong. This would in turn depend upon the claimant State having incurred expenditure or loss in that cryptocurrency. Again, as matters stand at present, this seems to be an inherently unlikely situation.

3.21  Thirdly, Bitcoin may amount to a new species of ‘property’ that is entitled to a degree of recognition and protection under international law. Most notably, cryptocurrencies clearly have some value as a means of exchange, and, therefore, (p. 41) they must be treated as some form of property or possession.³⁵ In this context, it is necessary to reproduce Article 1 of the First Protocol to the European Convention on Human Rights in full:³⁶

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by the law and the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

3.22  If national authorities find it necessary to limit or restrict the use of cryptocurrencies in any way,³⁷ then it is conceivable that the compatibility of those measures with Article 1 may have to be considered by the courts. In line with general principles, the relevant measures would of course have to be examined to ensure that they are proportionate to the desired objective. Beyond that, however, a court must be likely to find that measures to preserve financial stability and to prevent money laundering will satisfy the ‘general interest’ test, and the second of Article 1 specifically contemplates laws designed to ensure the payment of taxes. Furthermore, the fact that a cryptocurrency may lose some of its value as an incidental consequence of governmental action would not appear to involve an infringement of Article 1.³⁸

3.23  Although inevitably subject to exceptions and reservations, it will be apparent from this brief discussion that virtual currencies have limited impact from the perspective of public international law. Indeed, even in the context of traditional currencies, customary international law adopts a relatively passive role in the monetary sphere. It recognizes national monetary sovereignty but does little to regulate the exercise of that sovereign power.³⁹ In short, public international law does not prohibit or limit the creation of virtual currencies, but, equally, it does (p. 42) nothing to promote or enhance these developments. This is more especially the case because—thus far—virtual currencies have been promoted within the private sector, which is less amenable to the general reach of public international law.

3.24  In contrast, cryptocurrencies may have a greater influence in the domestic monetary sphere. Both the existence of cryptocurrencies and their use as a medium of exchange challenge the accepted State monopoly power over the currency. The central bank’s influence over the wider financial system and over interest rates and monetary conditions depends in part upon its ability to broaden or limit access to credit, as well as the cost of that credit. This power is undermined if equivalent monetary value is available outside the control of the central bank.

3.25  It is, therefore, perhaps unsurprising that both the nature of cryptocurrencies and their classification as ‘money’ have provoked much more debate at a domestic level. For example, in the United Kingdom, the Financial Markets Law Committee has stated that there is ‘strong support [for] the view that virtual currencies which have become a medium of exchange and which are capable of passing in currency should, in their legal aspect, be viewed as money’.⁴⁰ Others, however, have taken the firm view that virtual currencies are not to be regarded as money in any real sense.⁴¹

3.26  But the present section is about the impact of cryptocurrencies in the specific sphere of public law. To the extent to which public law is concerned with the relationship between individuals and the State, this expression may be taken primarily to comprise criminal law, including legislation that provides sanctions for contravention of laws governing the banking and financial system.⁴² To the extent to which public law deals with the functions and the institutions of the State, then, clearly, the central bank, with its responsibilities for financial stability and (p. 43) monetary policy, will be at the heart of the discussion. These two subjects will be considered in turn.

3.27  In terms of the criminal law, the status of cryptocurrencies may arise in various ways. For example:

1. (a)  Is a cryptocurrency capable of forming the subject matter of a conviction for theft or fraud?

2. (b)  Can the use or transfer of a cryptocurrency form the basis of a charge for a money laundering offence?

3. (c)  Are transactions involving cryptocurrencies subject to a requirement for authorization or permission from a financial market regulator?

3.28  In terms of a charge for theft, the alleged offence must relate to ‘property’ which is defined to include ‘ … money and all other property, real or personal, including things in action and other intangible property . . .’.⁴³ For reasons given earlier, a cryptocurrency should not be seen as ‘money’ for these purposes and, consequently, a misappropriation of a cryptocurrency could not ground a theft charge under the ‘money’ heading.

3.29  It may be thought that this does not greatly matter, because the same charge can be based on the theft of ‘… other property … including things in action and other intangible property’. In this context:

1. (a)  on purely pragmatic grounds, it is difficult to categorize a cryptocurrency as a ‘thing in action’ (ie an asset that is only enforceable by legal action), for it is very difficult to identify who would be the defendant in such an action. A cryptocurrency does not, of itself, represent a legal claim against any person;⁴⁴

2. (b)  it is perhaps more attractive to view a cryptocurrency as a ‘thing in possession’ (ie something that can be transferred and exchanged for goods or other items), since that reflects their use in practice. However, since cybercurrencies are not capable of physical possession, it seems that this approach would not be available;⁴⁵ and

3. (p. 44) (c)  in the absence of any other option, cryptocurrencies should be regarded as ‘other intangible property’ for the purposes of the 1968 Act.⁴⁶ In this respect, it may be noted that the expression ‘… other intangible property …’ has been given an expansive definition by the courts. The prosecution in AG for Hong Kong v Nai-Keung⁴⁷ concerned the theft of a transferable export quota, which did not, of itself, confer a right to export goods but did entitle the holder to apply for the formal licence that was necessary for that purpose. The quota did not, of itself, create legally enforceable rights, and did not amount to a thing in action. However, the quota was found to be ‘other intangible property’ within the statutory definition. Having regard to their value as an asset class, this decision would appear to justify the view that cryptocurrencies should themselves be treated as ‘other intangible property’ for these purposes.⁴⁸ This view is reinforced by the tendency of the English courts to treat official licences and permissions as a form of property even though they are in effect a form of statutory concession.⁴⁹

3.30  Turning now to the offence of fraud, an individual may be guilty of this offence if he commits fraud through false representation, through a failure to disclose information or through an abuse of his position.⁵⁰ In each case, it is necessary to demonstrate that the defendant intended either (i) to make a gain for himself or another person or (ii) to inflict a loss on another person.⁵¹ For these purposes, the expressions ‘gain’ and ‘loss’ ‘… extend only to gain or loss in money or other property …’.⁵² In view of the earlier conclusion that cryptocurrencies are not money, and given that the 2006 Act does not include a specific definition of that term, it must follow that a fraudulent act resulting in the acquisition of a cryptocurrency would not be an offence under the 2006 Act in so far as it relates to money. However, the fraudulent activity will still be an offence under that Act because (i) property for these purposes ‘ … means any property, whether real or personal (including things in action and other intangible property) …’ and (ii) a (p. 45) cryptocurrency would be intangible property for these purposes,⁵³ even though it would not be a thing in action.⁵⁴

3.31  From this brief analysis, it would appear to follow that cryptocurrencies will not be money for the purposes of offences involving theft or fraud, but that the dishonest appropriation or acquisition of cryptocurrencies might constitute an offence under the relevant legislation since they will fall within the wider definition of ‘property’. This is consistent with the views expressed earlier, to the effect that for public law purposes, cryptocurrencies should be viewed as a species of property, rather than as money.

3.32  The United Kingdom’s criminal law framework to counteract money laundering is to be found in the Proceeds of Crime Act 2002. The core offences include (i) concealing criminal property,⁵⁵ becoming involved in arrangements for the acquisition or use of criminal property,⁵⁶ and (iii) acquiring, using, or possessing criminal property.⁵⁷

3.33  Although these offences are to be found under the heading ‘Money Laundering’ in Part 7 of the 2002 Act, the offences themselves are framed in wider terms, and they refer to the use or possession of, or arrangements involving, criminal property. For these purposes, ‘property’ is to be regarded as ‘criminal property’ ‘if it constitutes a person’s benefit from criminal conduct or it represents such a benefit (in whole or in part and whether directly or indirectly)’.⁵⁸ In its turn, ‘property’ is also widely defined to include ‘all forms of property wherever situate and includes (i) money, (ii) all forms of property, real or personal, heritable or moveable and (iii) things in action and other intangible or incorporeal property’.⁵⁹ For reasons noted earlier, cryptocurrencies are neither money nor things in action.⁶⁰ However, the broader part of the definition refers to all forms of property. It is difficult to place cryptocurrencies into the appropriate legal ‘box’ but it is likely that they would be treated as a form of ‘property’ because it is plain that (i) they can be transferred in return for other assets albeit perhaps in limited contexts, and (ii) they have a value in terms of currencies and commodities. It follows that (p. 46) cryptocurrencies can be a form of ‘property’ for the purposes of the 2002 Act.⁶¹ However, they do not thereby become a form of ‘money’ for those purposes.

3.34  Inevitably, legislation affecting the financial markets will contain numerous references to ‘money’. The potential complexities of this legislation in the context of cryptocurrencies can be illustrated by a few examples.

3.35  First of all, it is necessary to consider the application of the Electronic Money Regulations 2011 to cryptocurrencies.⁶² Given that the regulatory regime in the field of electronic money was designed to cater for technological developments, it is tempting to assume that cryptocurrencies will be ‘electronic money’ for the purposes of the 2011 Regulations.

3.36  However, closer examination of the 2011 Regulations reveals that this is not the case. Relevant provisions include the following:

1. (a)  an entity that wishes to issue electronic money must seek authorization from the Financial Conduct Authority in order to carry on that business;⁶³

2. (b)  for these purposes, ‘electronic money’ means ‘electronically … stored monetary value as represented by a claim on the electronic money issuer which (a) is issued on receipt of funds for the purpose of making payment transactions [and] (b) is accepted by a person other than the electronic money issuer’;

3. (c)  cryptocurrencies do not fit within the ‘electronic money’ definition because they do not represent a ‘claim’ on an electronic money issuer. Indeed, for such currencies, there is no ‘issuer’ in the accepted meaning of that expression;

4. (d)  equally, cryptocurrencies are not issued ‘against a receipt of funds’. Rather, they are ‘mined’, or generated through the resolution of mathematical algorithms; and

5. (e)  it follows that arrangements involving a direct holding of a cryptocurrency by the owner will fall outside the scope of the 2011 Regulations.⁶⁴

3.37  There does, however, remain the question of the application of the 2011 Regulations to the market infrastructure such as coin exchanges and electronic (p. 47) wallet providers. In this respect, wallets and exchanges may hold both fiat currencies and cryptocurrencies for their customers. The fiat currencies may be held for the purposes of facilitating the purchase of cryptocurrencies when the holder believes the moment to be opportune. At present the 2011 Regulations would apply to the fiat currency balances. However, they would not apply to the cryptocurrency balances because they do not represent money or monetary value for the purposes of those Regulations. Although the owner may be said to have a ‘claim’ against the exchange, this does not amount to a claim against the ‘issuer’ of the cryptocurrency. In addition, a wallet is simply a means of storing the customer’s key and does not create a claim against any person.⁶⁵

3.38  Given that cryptocurrencies are intended to constitute a new medium of payment for the discharge of obligations, it is likewise tempting to assume that activities involving such payments will fall within scope of the Payment Services Regulations 2017.⁶⁶

3.39  The list of regulated payment services is set out in Schedule 1 to the 2017 Regulations. Without seeking to go through these items in depth, the main payment services for which regulatory permission from the Financial Conduct Authority⁶⁷ is required include the following:

1. (a)  services involving the payment or withdrawal of ‘cash’ into or from a payment account (that is, an account used in order to effect ‘payment transactions’);

2. (b)  the execution of ‘payment transactions’;

3. (c)  the issue of ‘payment instruments’ with a view to effecting ‘payment transactions’; and

4. (d)  ‘money remittance’ services.

3.40  Leaving aside for the moment the ‘money remittance’ service, it is apparent that most of the core payment services turn on the existence of a ‘payment transaction’ which is defined as a transaction involving the placing, transfer or withdrawal of ‘funds’. In its turn, the expression ‘funds’ as defined to mean ‘ … banknotes and coins, scriptural money and electronic money … ’.⁶⁸ In this respect:

1. (a)  the expression ‘banknotes and coins’ clearly refers to money issued in a physical form, and thus cannot extend to cryptocurrencies;

2. (p. 48) (b)  the term ‘scriptural money’ refers to funds credited to a bank account, and, once again, this clearly cannot extend to cryptocurrencies that are held outside the main financial system;

3. (c)  cryptocurrencies are not electronic money for reasons that have already been explained;⁶⁹ and

4. (d)  since cryptocurrencies are therefore not ‘funds’ for the purposes of the 2017 Regulations, it must follow that transfers involving a cryptocurrency cannot amount to a ‘payment transaction’ for the purposes of any of the payment services outlined in paragraph 3.39 (a)–(c) above.

3.41  Turning now to money remittance services, ‘money remittance’ is defined⁷⁰ as ‘a service for the transmission of money (or any representation of monetary value) … where (a) funds are received from a payer for the sole purpose of transferring a corresponding amount to a payee … or (b) funds are received on behalf of, and made available to, the payee’. For the reasons given earlier, a transfer of a cryptocurrency is not a ‘transmission of money’ for these purposes, although there may be a more delicate argument about whether it represents a ‘transmission of … monetary value’. However, the issue falls away when it is recognized that the effect of a money remittance transaction must involve the transfer of ‘funds’ to the payee. Because cryptocurrencies are not ‘funds’, the result is that a transfer of cryptocurrencies is not a ‘money remittance service’ for the purposes of the 2017 Regulations.

3.42  These views are reinforced by various statements issued by the FCA, to the effect that, when intended for use as a means of exchange, Bitcoin and other cryptocurrencies are not an ‘investment’ for the purposes of the Financial Services and Markets Act 2000 and, as a result, such assets fall outside the United Kingdom’s regulatory framework for the protection of investors in securities and financial instruments.⁷¹

3.43  It must, however, be said that courts in the United States have been confronted with similar issues and have not always arrived at similar conclusions. In State of Florida v Espinoza,⁷² the defendant was accused of unlawfully selling Bitcoin on the basis that this involved the conduct of a money service business through (p. 49) the sale of payment instruments without the requisite licence. For these purposes, a ‘payment instrument’ was defined as ‘a check, draft, warrant, money order, travellers check, electronic instrument or other instrument, payment of money or monetary value, whether or not negotiable’.⁷³ In reliance on a release by the Internal Revenue Service, the court held that (i) Bitcoin was to be regarded as property rather than as money and (ii) as a result, it did not fall within any of the monetary expressions used in the definition of ‘payment instrument’. Consequently, the defendant was not guilty of the offence of operating an unlicensed money service business.⁷⁴ It was understood that the prosecution was to appeal this decision, but the status is not known. At all events, Florida subsequently took steps to reverse the effect of the Espinoza decision by amending its anti-money laundering legislation.⁷⁵ In contrast, in US v Murgio,⁷⁶ the US District Court for the Southern District of New York held that Bitcoin could be used as a means of payment for goods and services and, thus, constituted ‘funds’ or ‘monetary value’ within the scope of the corresponding legislative provisions. Departing from the decision in Espinoza, the court in Murgio declared that ‘there is no plausible interpretation of monetary value or payment instruments. … that would place Bitcoin outside the statute’s ambit’. This conclusion did, however, depend upon the court’s ability to characterize Bitcoin as ‘money’ because it was ‘something generally accepted as a medium of exchange, a measure of value or a medium of payment …’. For reasons given earlier, it is very doubtful that any cryptocurrency passes the general acceptance test, at least at present. Given that each of these cases involved serious criminal offences, there may be scope for the argument that Espinoza was correctly decided, and that Murgio involved a degree of judicial interpretative overreach. But that said, the preponderance of US case law appears to favour the view that cryptocurrencies should be treated as ‘money’ for the purposes of relevant criminal or penal statutes.⁷⁷ A bankruptcy court decision (p. 50) that impliedly treated Bitcoin as property or a commodity (rather than money) seems to be a minority view.⁷⁸

3.44  Perhaps the most obvious challenge posed by cryptocurrencies is their possible growth to a stage at which they could effectively operate as a form of parallel currency and, hence, emerge as a challenger to the national unit of account.

3.45  Central banks are naturally unaccustomed to innovations that erode their own monopoly over the monetary system. But how could the increased use of cryptocurrencies affect the activities and functions of central banks? This, to some extent, will depend on the details of the central bank’s mandate, but the key areas of concern are likely to include financial stability and monetary policy. These two aspects are considered below by reference to the legislation that governs the Bank of England.

3.46  To what extent do cryptocurrencies pose a threat to financial stability? So far as the United Kingdom is concerned, the Bank of England concluded in 2014 that cryptocurrencies do not pose any threat to financial stability and that, hence, no action was necessary to restrict their use. It reached this conclusion on the bases that (i) no more than 20,000 people in the United Kingdom held cryptocurrencies, (ii) only 300 transactions per day were executed by such individuals, and (iii) cryptocurrencies represented only 0.003 per cent of broad money balances.⁷⁹ The Bank’s views on this subject appear to be broadly unchanged at the time of writing. In its evidence to the Treasury Select Committee on Digital Currencies (May 2018), the Bank noted that:

1. (a)  cryptocurrencies are unlikely to replace commonly used payment systems because (i) in terms of their relationship to traditional currencies, they are much too volatile to function as a reliable store of value, (ii) they are not widely accepted as a means of payment, and (iii) as a result, cryptocurrencies are not being used as a unit of account; and

2. (b)  cryptocurrencies do not pose a material threat to financial stability because (i) their use in the United Kingdom for payment purposes is minimal, (ii) UK financial institutions have limited exposure to the cryptocurrency business (p. 51) area, and (iii) there are limited linkages between the cryptocurrency sphere and the UK financial system.⁸⁰

3.47  However, the nature of cryptocurrencies is such that any potential threats are by no means merely a domestic concern. As a result, this issue has been on the agenda in various international fora during recent times. Perhaps, most notably, the Finance Ministers’ and Central Bank Governors’ Communiqué from the G20 Summit held in Buenos Aires on 19–20 March 2018 noted⁸¹ that ‘technological innovation, including that underlying crypto-assets has the potential to improve the efficiency and inclusiveness of the financial system … Crypto-assets do, however, raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering, and terrorist financing. Crypto-assets lack the key attributes of sovereign currencies. At some point they could have financial stability implications’. The Communiqué then notes that existing standards relating to anti–money laundering and counter-terrorism should be applied equally to cryptocurrencies, and calls for positive steps to implement that position. Notably, the Communiqué does not specifically refer to the regulatory challenges arising from the fact that cryptocurrencies are of an essentially private nature and operate outside the recognized financial system, although that feature is perhaps implicit in the commentary.

3.48  These challenges are to some extent considered in a letter from the Chairman of the Financial Services Board that was delivered as part of the preparation for the G20 meeting.⁸² Whilst that letter concludes that crypto-currencies are not at present a threat to financial stability, largely because (i) their value is small when viewed against the wider financial markets, (ii) they are not ready substitutes for national currencies and (iii) as a result, there is limited inter-connectedness between cryptocurrencies and the financial markets as a whole. This assessment, however, could change if the use of cryptocurrencies were to expand significantly, because this would inevitably result in a greater degree of connection with the financial markets. A collapse of the cryptocurrency market would then have the capacity to affect financial stability by causing a lack of public confidence.

3.49  The materials discussed above, therefore, tend to the view that cryptocurrencies are not now a threat to financial stability, but this situation could change, and, thus, the matter needs to be kept under review.

(p. 52) 3.50  But this relatively relaxed view by no means enjoys universal support. In particular, the General Manager of the Bank for International Settlements has stated⁸³ that there is already a strong case for regulatory intervention in the cryptocurrency sphere. A number of forceful points were made in support of this proposition. In particular:

1. (a)  money ‘is an indispensable social connection backed by an accountable institution within the State that enjoys public trust’.⁸⁴ This form of institutional back-up is clearly lacking in the case of cryptocurrencies;

2. (b)  confidence in a monetary and financial system is created through strict regulation and supervision and through central bank oversight of that system;⁸⁵

3. (c)  money laundering, tax evasion, and other illegal activities apart, the enthusiasm for cryptocurrencies is a form of speculative mania, rather than a developed form of electronic payment system. They also pose risks to investors and consumers. All of these risk factors justify policy intervention;⁸⁶ and

4. (d)  finally, in a veiled criticism of central banks, it is noted that they do not think that there are any systemic issues because of (i) the relatively small scale of cryptocurrencies and (ii) their limited interconnectedness with the wider financial system. However, if central banks and other authorities fail to act pre-emptively, then cryptocurrencies may gradually become more closely connected to the wider financial system and, hence, become a threat to its stability.⁸⁷

3.51  There thus appears to be a measure of agreement that cryptocurrencies could potentially pose a threat to financial stability, but there is a divergence as to the scale of the probability and the point of time at which the issue should be tackled. It is not really open to a legal commentator to determine the existence of such a threat or the proper timing of any market intervention that may become necessary. However, the writer can consider the relevant legislation and the powers that are available to the Bank of England, should intervention be contemplated.

3.52  What is the nature of the legal instruments available to the Bank of England to deal with these threats? Since the 2008 financial crisis, it has been an objective of the Bank of England ‘to protect and enhance the stability of the financial system of the United Kingdom’. For these purposes, the Bank must work with other relevant bodies, including the Treasury and the FCA,⁸⁸ and, to that end, there is (p. 53) a Financial Policy Committee of the Bank.⁸⁹ The Committee is required to contribute to the achievement of the financial stability objective.⁹⁰ The Committee is empowered to give directives to the Prudential Regulation Authority⁹¹ requiring it to exercise its powers so as to achieve a particular macro-economic objective, and the regulator is required to implement that direction.⁹² ‘Macro-prudential measures’ are measures prescribed as such by the Treasury,⁹³ and thus far such measures have included issues relating to the real estate market⁹⁴ and bank capital/leverage ratios.⁹⁵ It may therefore be that the necessary statutory powers exist that would enable the regulators to counter any threats posed by cryptocurrencies. It, however, would be necessary for the Treasury to introduce a statutory instrument determining that cryptocurrencies posed a threat to financial stability and describing the measures that were required to counteract that threat.

3.53  Of course, possession of the necessary powers is one thing; the exercise of those powers is quite another. If, at some point, the Bank of England believes that cryptocurrencies have become a potential threat, what is the nature of the measures that it could take to counteract that threat? The scope and extent of those powers would be determined by the necessary macro-prudential order to be issued by the Treasury. However, possible measures could include the following:

1. (a)  a power to control the engagement of cryptocurrencies with the conventional financial system by restricting the ability of cryptocurrency exchanges to access accounts and other services within the traditional sector;

2. (b)  a power to prohibit banks from holding or exchanging cryptocurrencies; and

3. (c)  a restriction or limit on the provision of banking services to corporate customers who were themselves deemed to be exposed to excessive holdings of cryptocurrencies (ie so as to limit the exposure of the banking system to customers that themselves may suffer financial problems in the event of a cryptocurrency collapse).

3.54  None of the suggested measures would amount to an outright ban on the use of cryptocurrencies. It may be difficult to justify a complete ban, because this may be seen as a deprivation of property, which would be unlawful under the terms of the Human Rights Act 1998 and Article 1 of the First Protocol to the European (p. 54) Convention on Human Rights.⁹⁶ However, the measures suggested above would have the effect of limiting cryptocurrencies to their original purpose—namely, that of serving solely as a means of exchange among the members of the community willing to accept it. Whilst more limited measures of this nature may likewise be open to challenge under the terms of the 1998 Act, it is suggested that the measures would be valid because (i) the United Kingdom needs to protect the stability of its financial system and (ii) the proposed restrictions would amount to a limited, legitimate and proportionate response to any threats posed to the United Kingdom’s currency and financial system. In addition, it is suggested that such measures would fall within the exception to Article 1, which allows States ‘to enforce such laws as it deems necessary to control the use of property in accordance with the general interest’. The stability of the national currency and financial system must surely be an issue that satisfies the general interest test.

3.55  Monetary policy is traditionally taken to refer to a macroeconomic policy dictated by the central bank. It includes management of interest rates and the supply of money in the national economy. Adjustments to monetary policy may thus affect levels of inflation, consumption, and growth. Changes in interest rates will generally feed directly into the banking system, as banks will correspondingly adjust the deposit and loan rates that they offer to their own customers. More broadly—but less directly—changes in monetary policy may affect asset prices and the exchange rate for the currency concerned.

3.56  Changes in monetary policy thus have immediate and direct effects, and may have consequences for the wider economy. The effectiveness of monetary policy, however, does pre-suppose the monopoly of the central bank over the issue of the nation’s currency. If cryptocurrencies have become a significant means of exchange for transactions in the country concerned, then the effect and the transmission of monetary policy will necessarily be diluted.⁹⁷

3.57  These points become more important when one considers the detail of the Bank of England’s role in the sphere of monetary policy. In this respect, the objectives of the Bank of England in relation to monetary policy are (i) to maintain price stability⁹⁸ and (ii) subject to that, to support the economic policies of the Government (including policies for growth and employment).⁹⁹ Since the maintenance of price stability would in turn depend upon the transmission of monetary policy into the broader economy, the Bank’s influence over price stability (p. 55) could be attenuated through the increasing use of cryptocurrencies, which would respond only indirectly to policy changes. In such a situation, monetary policy and financial stability would run hand in hand, and, as a result, it is suggested that the proper response would be through the implementation of macroeconomic measures described in paragraphs 3.53 and 3.54.

3.58  It is a truism that the law is always playing catch-up with developments in society in general and in technology in particular. This is especially the case in the context of cryptocurrencies, and, in due course, their status and treatment will perhaps become clearer as a result of new legislation, regulatory developments, or judicial decisions. Consequently, and whilst the views expressed in this chapter reflect the writer’s own position, it cannot be denied that there is considerable scope for debate and disagreement on these issues.

3.59  That said, the following conclusions can be drawn from the discussion in this chapter:

1. (a)  public international law does not have an independent or self-standing conception of ‘money’. It merely recognizes that States have the sovereign right to issue a currency, and refers to national currencies as a unit of account for settlement of international obligations. In other words, public international law effectively defers to domestic legal systems in the specifically monetary sphere. The creation of cryptocurrencies thus does not affect international legal perceptions of money;

2. (b)  however, cryptocurrencies do represent a new asset class, or species of property or possession. They therefore attract a right of protection under international instruments such as the European Convention on Human Rights;

3. (c)  in view of their status as property, cryptocurrencies can form the subject matter of civil proceedings (eg on the basis of non-delivery) or criminal proceedings (eg on the basis that they have been transferred as a result of theft or fraud);

4. (d)  on the other hand, given that cryptocurrencies are not ‘money’ in the strict sense, they may fall outside the scope of national legislation dealing with banking, payments, and similar services. As has been shown, however, this will always depend upon close scrutiny of the particular legislation at issue;

5. (e)  the increasing use of cryptocurrencies could potentially pose a threat to financial stability and the conduct of monetary policy; and

6. (f)  because cryptocurrencies rank as a species of property, central banks and regulators must take care that any financial stability measures taken to counteract cryptocurrencies do not unjustifiably interfere with proprietary rights. This, of course, may complicate any regulatory steps that are felt to be necessary.

(p. 56)