The Committee on the Internal Market and Consumer Protection convened recently to provide its opinion on virtual currencies for the Committee on Economic and Monetary Affairs. Opinions of this committee reflected some of the benefits and risks associated with the technology and offered potential regulatory and guideline advice for what it described as an industry and technology in a nascent state that is not being built on existing infrastructure. The document provided had a positive view of the possibilities of the technology and the key points have been included or summarised.
Outlining some of the benefits of cryptocurrencies, the committee highlighted some of the potential benefits associated with digital currencies and the underlying technologies for consumers, businesses, charities and the economy, which included greater speed and efficiency and reduced costs in making payments and transfers, with a particular focus on global trade – with the technology being the only way besides cash to facilitate instant trade. It was noted that it also had the potential for promoting financial inclusion and facilitating access to funding and financial resources for the business sector and SMEs; indeed, it was discussed that they have already positively contributed to, and facilitated, micropayments for online purchases of goods.
Bearing this in mind, the committee stressed the importance of developing a level European playing field to allow the potential of DLTs to be realised and developed, in order to allow them to be used in numerous fields and in a range of industries and services, such as smart contracts, crypto-equity crowdfunding and dispute mediation services, particularly in the financial and juridical sectors. It also encouraged applying the technology to other fields to enjoy similar benefits.
Whilst the benefits were pointed out, the potential dangers of the technology were also put forward. One such example was the risk of cryptocurrencies being used for criminal activities, including the financing of terrorism, money laundering, tax evasion and tax fraud, as well as other potential illegal activities and challenges. However, it was noted that there is actually little evidence that it has been widely used to fund criminal activity and that there is little difference, or possibly even less risk, between virtual currency and fiat cash.
Similarly noted was the danger to cryptocurrency users from illegal activities and challenges, such as scams, stealing of digital currency, cybercrime, hacking, malfunctioning of software/hardware, fraud and fraudulent schemes, false pretences or misrepresentations. It was asked that the Commission would ensure safeguards were put in place to combat this.
On a larger scale, as they are not a national or foreign currency, it was posited that if used as an alternative to fiat currencies, digital currencies could pose potential risks to the financial system in in areas such as regulation and market surveillance and security, which could rise as cryptocurrency adoption increases.
The variation in exchange rates of cryptocurrencies was shown in both a positive and negative light. On one hand, cryptocurrencies have given financial security to avoid depressed interest rates or economic instability; on the other hand, the value can drastically fall and there is no mitigating system to support users when wallets or exchange platforms fail. There are ways to mitigate this, by using methods such as having underlying assets.
The committee recommended consumer protection when using cryptocurrencies, prominently in terms of cybersecurity, algorithms used, contact persons and contact details in case of queries or problems, easily understood terms and conditions, including a clear statement of the risks, and the fact that value of digital currencies are not necessarily guaranteed by any bank or country.
The Commission also suggested developing a strategy to identifying the benefits and risks of digital currencies and the underlying technologies and potential longer-term policy responses, while taking into account the need to keep the Single Market, the principle of better regulation, and the need to promote financial and technological innovation in order to keep the EU attractive as a location for the research, development and operation of these technologies, with constant vigilance paid to the development. To this end it suggested that the Commission set up a task force to carry this out.
A holistic approach to cryptocurrencies was encouraged, with all sectors being encouraged to explore use of the technology; however, it was noted that despite some initial inroads into regulation, there was a vast gap in which to put in place effective frameworks to regulate digital currencies without stifling innovation and growth. In the interest of consumer awareness, transparency and trust it was advised that the Commission develop guidelines to guarantee that correct, clear and complete information is provided for existing and future users. This was suggested to be done by working with the companies and particular note was made of complying with ‘anti-money laundering’ and ‘countering the financing of terrorism’ requirements specified by international standards to any form of virtual currency exchange.
It is worth noting that some of the advice and mitigation factors, such as having a cryptocurrency backed by assets or having exchanges and digital currency comply with KYC/AML laws have already begun with certain cryptocurrencies although these remain in the minority at the moment. However, the overall tone of the committee was positive towards the use of virtual currency and blockchain technology and it suggests that the EU will back their use and be a potential location for companies wishing to develop the technology further.